Larry and anyone else,
Because I'v lost a good bit in the last few days, I've looked again at my risk, this time in a different way. I had, before decided that I'll risk no more than 1% of capital per trade. Well I've got 13 open positions and 11% of capital at risk. That's not bad, but I'm finding that it's not evenly distributed by idea.
17% of the total risk represents my idea that silver will rise:
50% in 1 position that gold will rise
23% in 3 positions that silver will rise
3.5% in one positions that the market will fall longterm
13% in 4 positions that the rsi5 system works
and
3.7% one 3 long term long shots.
So I'm concerned that I've let my ideas get unbalanced. I'm thinking of decreasing my exposure to gold, but every time I almost decide to do it I look at the chart and think I'm crazy to do it. The stock is nearing the end of a period of lower highs and higher lows on falling volume and I believe it's going to break to the upside in no more than 2 weeks. I've rode this position down for months with the firm belief that gold will rise and I'll feel like an idiot if I dump it and watch it break out in the next few days.
I'd appreciate outside opinions. And by the way, it's really helped to write this post. I've rewritten it a couple of times as some of my thoughts cleared (maybe you couldn't tell they cleared, but they have by comparison).
Thanks,
h

Let me preface my comments by letting you know that I have been only actively trading for less than a year. Before that it was pretty much just but and hold a few stocks.

I'm thinking of decreasing my exposure to gold, but every time I almost decide to do it I look at the chart and think I'm crazy to do it. The stock is nearing the end of a period of lower highs and higher lows on falling volume and I believe it's going to break to the upside in no more than 2 weeks. I've rode this position down for months with the firm belief that gold will rise and I'll feel like an idiot if I dump it and watch it break out in the next few days.

I know the feeling. It reminds me of when I played the 3-digit daily lottery game in college. I used to always play the same number. I was afraid to stop playing it because I thought my number would be drawn as soon as I quit playing it.

I felt this was with gold a few months ago. I made a few bucks with gold and loss a few bucks. In the short term I have found it frustrating. I have not had a gold position in the past six weeks. I've told myself that if I do get back in it will be in the form of a LEAP or another long term strategy.

I've also lost some money lately on options following the 5 day RSI method. Mainly my losses are due to poor money management. I let them drop too much or started out with too high a position. However, my COT positions have been offsetting those loses nicely.

I'm not sure if I've answered any of your questions but I wanted to know that you are not the only one struggling with those issues.

Dave

Dave,
I appreciate your comments. It was my loss on RSI5 options that lead to my analysis. I had felt quite good about my gold position before I sat down and did it (in fact I actually had much more at risk because it was such a long term play I didn't have a stop and my cost was about 1/5 of my current capital).
My COT money in annother account is doing nicely too.
Thanks,
h

I just have some general observations for no one in particular…

1. I used to wonder why so little has been written on money management and the psychology of trading/investing. But since starting the SMR and interacting with people on this forum I think I understand why. First of all, it’s very difficult to communicate money management and psychology with the written word. I know because I’ve tried. The other thing is there just isn’t very much demand for it. Everyone assumes that the key to profits lies in methodology or ability to predict the future. Nothing could be further from the truth.

2. Your No. 1 goal should be to preserve your capital. There in an infinite number of opportunities in the stock market. But they won’t amount to a hill of beans unless you preserve capital. On the other hand, if you do preserve capital and if you persevere and if you’re disciplined, you almost can’t lose. Unfortunately, only a small percentage of people are able to do that.

3. The COT is off to a very good start this time, as it has been many times in the past. I don’t know if this one is going to turn out to be profitable or not, but so far it couldn’t be more timely. But I’ll bet you dollars to donuts that only a fraction of the people who participated in the last COT signal are participating in this one. Why? Because the last one of any length was a loser. And if this one turns out to be a big winner, they will line up to participate in the next one. That’s just the way it works. No wonder why most people lose.

4. Gold and silver are very difficult to trade. The stocks are very thin and don’t lend themselves very well to technical analysis. That’s a key reason why, for the most part, I don’t trade the metal or the stocks. To me they’re insurance policies. And I never heard of anyone trading their insurance policies.

5. The P&F/RSI system is an experiment. For the most part, let me be the guinea pig. I can afford it and I’ll report back to you as I learn new things. If you want to trade them on a small basis that’s fine. But keep in mind it is very much in the development stage.

Larry

Here's an observation on gold and silver. Gold is making lower highs and lower lows. If you have a winning trade say you bought Nem at around $24 why sell a winning trade let it run. If however your trying to get into gold right now I would wait until I saw a reversal in that trend. Silver on the other hand is making higer highs and higher lows. If we get a correction it will be interesting to see if it holds above the $6.50 level. I have noticed that PAAS seems to hit a brick wall around $18.50 even though silver is still rising. CDE is also having trouble with the $7.50 level.

Gary

Larry,
I appreciate your comments. Can you say something about risk allocation then even if it's hard to get across.
h

Howard,

I think I did in a previous SMR, but I’ll be happy to give you my model again. An example is the best I can do…

50% to 70% - COT
10% - Precious Metals
20% to 40% - Other

The “Other” could be anything. It could be energy, P&F/RSI signals, special situations that come along, etc. It’s just important that it has nothing to do with COT positions.

Now consider the probable risk with such a model. Historically, the maximum drawdown for COT is about 20%. If you have 60% of your portfolio dedicated to COT signals the your drawdown would be 12%.

Precious metals – if NEM or PAAS went down 50%, it would have a 5% negative impact on the portfolio. Believe me, you’ll still do a lot better than those who are trying to trade it.

Other – it depends on what it is, but if you have only 30% allocated to something else then you would have to do awfully poorly for it to have a major negative impact on the entire portfolio.

The only way you could get hurt is if everything did poorly. If your entire portfolio ever declined by 20%, then my suggestion would be to liquidate everything, regroup, and then consider a reallocation. You can think a lot better if everything is in cash. It’s easy to come back from being 20% down. But if you let it get down 30% or 40% or more, it’s difficult to recover.

All during the time from July when the COT went short and the market kept going up, I was never down more than 5% at the most. So when people were acting like something was really wrong, I never could see what the big deal was.

A word about options. Properly used, a long call or put position should serve as a substitute for the underlying stock. For example, if you would normally buy 500 shares of the underlying stock, then you should buy 5 calls (or puts). Done that way, it’s no more risky than trading the stock. The way people get themselves in trouble with options is they go crazy with the leverage. They may be a 100 share stock trader but they trade 10 options (the equivalent of 1000 shares). That’s almost a sure way to lose.

The above is an example of what I’m talking about.

Larry

Larry,
Yes I remember that SMR. I guess I'm asking about the mechanics rather than the diversification.

For instance do you apply your current account equity only to new positions or do you liquidate positions if, through draw down of the account, they now account for more risk than you planned.

If you pick, let's say 1% per trade to risk, do you set a limit on what percentage to have at risk at any one time. For instance, theoretically, one could afford to put on 10 contracts of a $1 option and consider the whole amount as the risk. This would allow almost 100 different positions, but that seems rediculous. Is there a number like 20% that one might set as the maximum at risk: 20 positions at 1% or 10 positions at 2%.

Would you diversify the risk in the same percentages as the equity. For instance, all my silver positions are risk free. I would count them towards the 10-20% of equity in precious metals, but should I have 10-20% of my risk in precious metals.

I'm not sure if I'm asking these right. It may be something simple I'm just missing.
Thanks,
h

hope you don't mind me jumping in here...

sounds to me like you're asking about "portfolio heat." if you have 10 stocks with 2% of core equity at risk PER STOCK, you have 20% portfolio heat - (10 x 2 = 20).

i don't know that there is any "right" way to do this but - i try to NEVER have more than 20% heat - usually around 10-12% only. you're "core" is your "out of pocket" money. that's what you want to protect. if you lose that you have to go back and get a job

i won't risk much of my core - however, when i get into profits, i'll risk THAT money, sometimes 100% of it! that may seem crazy but... that's how i do it.

i figure if your system is sound and NONE of your core is at risk - GO FOR IT!! especially if you trade more than one system - diversity helps.

-ja

Thanks ja,
Heat's a cool concept.
Seriously do you plan how you distribute the heat among your trading ideas or systems or do you add positions you like until you get to 20%. When you're at 20%, I assume if you like something you don't have a position in you'd evaluate to see if you can unload heat in order to afford it. That right?
Thanks,
h

well... there's "what you should do" then there's "what i do."

with indie stocks - i keep my bet size so low that i can usually afford to have more than 10 positions going at any given time. and yes, if i'm holding a dog and i find another stock i like better i close one and buy (or short) the new one.

i don't care too much about sector diversity - maybe i should, but i don't. i do try to have a balanced portfolio - longs to shorts. i try to go into each weekend 1:1.

my biggest single holding is my profund fund that follows the COT strat #4. i do NOT use a stop/loss on this - (call me mr. vegas). i do not hedge this holding. i guess i just have enough confidence in this strategy that i'm willing to ride it. that's just me.

for really good advice - go to:
http://www.originalturtles.org/

i got that site from someone contributing to THIS forum. i downloaded the book (33 pages) and got some great ideas about "units as a measure of risk" on page 16. these concepts are from richard dennis (a real market wizard). the book is free and short and great!

the idea of portfolio heat i read about from van tharp in his "special report on money management" - i believe HE got the concept from ed sekoyta (both men, wizards!) if you want THAT book go to www.iitm.com - it's not free - but really good.

i hope this helps.

-ja

Thanks,
I'm glad you steal from the best. I too try not to have an original thought. Other peoples are more time tested. I'll download the book.
h

Ja,
Thanks for pointing me to the turle's book. I'd love to hear how your are applying N and units to stocks. N I can understand, but what are you using for $/point? 1? If it's 1, then a unit is 1% of account/N. I like the idea of a volatility adjusted risk. And how are you implimenting the idea of correlated markets? Sector? Index?
Thanks again. I look forward to hearing how you do this.
h

H…

as I said earlier; there's "what you should do" then there's "what i do."

I already had a money mgmt system in place BEFORE I read the turtle’s book – I mentioned it because I tho’t it was good and it was free.

personally - I don’t worry about sector diversity. I achieve diversity across different trading strategies. some are short-term, some long-term, some are income oriented, most are momentum plays, some are trend-following, one anticipates. I don’t trade all of them all at the same time… I “read” the market and select a couple (or 3) to trade and I focus on them.

I hedge positions either with stops or with options or with “pairs” (a highly correlated stock that I’ll short against my long or visa versa). I mentioned that I like to go into each weekend 100% hedged – but I meant for my short-term holdings – my cot “bear” profound is UNhedged.

also, I try to bet less than 1% per trade tho’ sometimes I’ll get up to 1.5%. by keeping my bet size small I can have several holdings and still stay below 20% heat.

I’m always looking for clever ways to ADD to winning positions without overly risking my core or profits.

I too like the volatility adjusted risk concept – I SOMETIMES use 1.5 Average True Range’s to set my stops but usually I just look at a stock’s chart to determine “support” or “resistance” and place my stops just outside the congestion area (i.e. I DON’T want my stop to get hit).

that’s a lot of answer to a brief question and I know I didn’t address everything you asked about. the bottom line is, I don’t use the turtle money mgmt system exactly. I use a mish-mash of stuff I learned from van tharp’s book and my own belief-system/comfort-zone stuff. I just want to find something that works for me. small bet size, low portfolio heat, diversity thru several strategies… that’s what I can trade. so… that’s what I do.

I hope I said SOMEthing that’s helpful.

-ja

p.s. If you love trading, you’ll find a way to be successful

Ja,
thanks. I too have been using the chart to set stops. The big thing I haven't been doing is watching the heat. That's a great concept that I've already added to my strategy. I'm going to look into the turtle system to calculate size. I'll go back to my winning an losing trades and see what would have worked.
thanks again,
h