Larry,

First, I wanted to thank you for of the great information you provide in this forum and your newsletter.

I am currently trying do develop some money management guidelines, as you have preached its importance. I appreciate the suggestions you provide and am anxious to hear more on the subject. I have also ordered Van Tharp’s book. However, I am confused by your statements about not risking more than one or two percent of your capital on any one trade. Should this rule still apply to positions that directly follow the COT report? It seems that you suggest (which makes perfect sense to me) to have a larger position in SPY or QQQ that just sits there until the COT report shows an opposite market direction. Is this a bad idea?

Thanks again for all of your help.

Brett

Brett,

I think the confusion may be one of time frames. I talk about and operate it various time frames, and I know that it’s not always clear as to what time frame I’m referring to. I use different time frames as a way to diversify, reduce my risk, and as a money management tool. For example, I may be long the market in longer time frame and short the market in a shorter time frame.

But you have it exactly right. When the commercials flip from being net short to net long or vice versa, I commit most of my liquid assets to the direction that the COT report is indicating as the right direction. And, yes, that capital is largely in SPY, QQQ and the LEAPS associated with them. And I don’t touch it until the commercials flip again. The only thing that I may do with longer term positions is maybe write some call options or something against part of my positions when I think the market may be going through a consolidation phase.

But I also always designate part of my liquid capital to shorter term time frames. I don’t really like to distinguish between investing and trading because I don’t think that there is a bright line that separates the two. But most people would consider what I do in the short term as trading. Also, I designate part of my capital to non-directional option strategies like straddles, for example. Again, it’s another way I have of diversifying, because a straddle has nothing to do with the COT report.

So when I talk about risking one or two percent, I’m talking about short term “trading” activities and not the presumably longer term approach that is required in following the smart money. I’m glad you gave me a chance to try to clear that up. I can see how it would be confusing.

Larry

Thanks for clearing that up, Larry. Once again, your response is helpful.

Larry, do you set any stop losses on your long positions or just let them ride with the COT report??

Fred,

I have my portfolio diversified by time frames. The long-term part of it is strictly following COT report signals. I don’t use stop loss orders for that.

However, I have my short-term trading where I may have an entirely different position. For example, if I think the market is declining in the short-term, but the smart money is still net long, I may go short in the trading portion, while I’m still long in the long-term portion. I definitely use stop loss orders for my short-term trading.

I, also, protect my long-term profits by occasionally writing options against part of my long positions. And then I have my delta neutral strategies that have nothing to do with market direction – straddles, for example.

Finally I have my long gold position which is usually not correlated with the direction of the stock market. So I have several ways to manage my risk and still profit from COT signals.

There are a lot of ways to practice effective money management. Basically, I do it by diversifying by time frames, by asset classes, and by strategies.

Larry