What’s the best thing to talk about when the market is firing on all cylinders? Recessions, of...
It’s All About Trade Management
06/01/2011 10:37 am EST
Professional and retail traders can now access innovative tools to better manage their trades. Linda Raschke comments, and tells why trade management is often more critical than trade entry.
All the tools available to traders these days are very sophisticated. Things that weren't even available five or ten years ago—or only to professional traders, maybe—and now are available to the retail public.
Our guest today is Linda Raschke to talk about some of those tools and how we can implement them in our money management. So Linda, talk about some things that you think traders aren't using enough but are available to them today to manage their trades.
Well, we do a lot of research on trade management functions, and honestly, you can take a random entry and add a correct trade management strategy and turn it into a profitable strategy. If you did it a hundred times, you'll have a positive expectation.
Whereas, if you take an entry—a well-thought-out entry—and add a random exit structure to it, you'll implode the system.
So really, the emphasis needs to be on the trade management functions: How you're exiting, what your initial risk is, if you're managing the trade, if you're going to play for a target or trail a stop. That really is going to make or break your bottom line, much more so than the entries, in my opinion.
Although, with that said, initial trade location is important because that's going to determine our position sizing. If you have tighter risk point, you can put on more contracts.
So some of the tools that are available to us now that weren't really available to us a couple years ago: Naturally, with the execution platforms, I think just about all of them have the availability to do OCOs (one cancels the other), bracket orders, and trail stops.
So, for example, you can make sure that when you put in your order, you have an initial stop, and then as price moves up N number of ticks, your stop will pull up N number of ticks. So that's foundation. They're a very good departure point.
Why that's important is because a lot of times, I find that traders get distracted; they're inattentive to their positions once they're on because they've already used up so much energy focusing on getting the position on that they're easily caught off guard if there's a sharp reversal or something like that. So at least it's a safety net working for you.
With that said, I think that you can take it to another level. I know that we have this now on the Photon platform all automated; I'm sure that other platforms will, too. I'm not familiar with all of them out there, but the technology is certainly there where you can put in your trade, put in an initial stop, then if it moves X number of units your stop is pulled up to break even, and then if it moves a little bit more, it will start to trail a relatively tight stop so that the moment there's giveback, it's going to take you out. But you're giving it some initial room to start working in the beginning.
NEXT: Put the Power of New Technology to Work for You|pagebreak|
So it's a complex algorithm, but you don't have to do anything except hit the button to enter. Now it makes the game fun.
As humans, we're really limited by discretionary resources. It's almost a limited amount that we can do, or set-ups or markets to follow. So now at least you can turn it into more of a numbers game. You can do more trades, you can follow more markets, you can find the good spots, but then let the trailing stops or these money management algorithms take over. I think that's really exciting.
People don't realize what the technology can do, what the programming can do.
Lastly, it's really important also because the speed with which the markets reverse and trade. You've got other algos out there working for high-frequency trading, and you'll see things executed. I'll see things executed on my platform before I'll see them trade on the screen or on the chart. It's just that fast.
So the big boys have all these high-frequency algorithms that they work constantly, all the time. These are available to you, too.
Even the entry algorithms, iceberg orders—although it's probably not something that a retail person is going to be as interested in using—they're available, and you don't have to have your own server, you don't have to have your own black box. It's point and click and then let the machine take over.
You mention position sizing. Can you also then tell the software “If it reaches this price, take half off” and that sort of thing?
Oh, absolutely, absolutely. Again, on my platform that I use, I have a complex…you can scale out and say I want to exit on a fixed target for this piece and I want a trail stop on this piece.
We even have algorithms where it'll add. Where if it's a breakout and it starts running, it'll buy, buy, buy, and add in smaller units and start trailing stops on each of those.
So in other words, a breakout trade that's working, you're actually doing an initial little pyramid and getting bigger. If it doesn't work and it's a false breakout, you're not going to get real big; you'll get stopped out and it'll be a small loss.
So if you have studied Martingales or anti-Martingales, or all different kinds of concepts of money betting strategies, you can use these now in your trading. It's cool, it makes it fun.
Related Articles on STRATEGIES
One sector that has treated us right is the small cap stocks, which we recommended towards the end o...
The market has been remarkably resilient; most U.S. companies are doing well, and the S&P 500 ap...
Aging economic recoveries and bull markets carry special risk for anyone who is too easily enamored ...