Mark Boucher

But there are also stocks, like GICOF or ANF, or HMC or others that have PE’s below their current or expected growth rate. Many of these in this environment are turnaround situations (ANF and HMC). Others to watch now are Israeli tech stocks, which are still undervalued and have excellent growth potential. There’s not doubt that it’s tougher to find value here – but if you keep your criteria of looking for PE that’s at a discount to expected growth you can still find many good candidates that are making new highs and runaway price action. These are the ones to concentrate on

Actually I think it is good – you must do the work within yourself to master this most important aspect of trading. No magic wand will do it for you.

What we do is keep a constant series of 6-levels of risk checks on our portfolio and positions on a daily basis. I suggest you watch individual position risk, sector risk, diversification, and total portfolio risk very closely. Never risk more than 2% on one position. Try not to let a sector grow to more than 33%-40% of your portfolio allocation. Diversify among at least 3 unrelated sectors and always have at least 3 different asset classes in your portfolio. Finally make sure that if you were stopped out of absolutely everything in your portfolio that you would take no more than a 20% hit.

So the first screen is that the market is yelling strong trend at you.

Next I look at other variables to see if a vehicle has what I like to call “fuel”. Fuel is the elements necessary for the strong trend to continue. I like stocks where earnings are growing at 25% or more and EPS rank is above 80. I like institutional holdings to be growing from a low level of under 10 ideally. I like low debt and a good business that looks to me like it will grow strongly in the future. I like decent value, where a stock is priced at a PE that is less than its expected growth rate.

I also look at other models. Lots of technicals, like volume accumulation and stock price action patterns. But also things like liquidity and interest rate movements in that country. Macro-economic fundamentals. Industry and sector outlooks. Valuation for that market as a whole.

We like to have as many of these factors as possible come together and point to big potential in a vehicle that is displaying very strong relative strength and very strong runaway technicals so that the market is merely confirming what looks like very strong underlying potential.

Be very selective! And look at a broad array of asset classes. We’ve been lucky to have the most lucrative bull market in history over the last 15 years in stocks. Some day this too will pass. The traders that can and have also been looking at currencies, global bonds, commodities, and other asset classes will always be able to find runaway trends to exploit. Those fixated on stocks may someday feel like the gold-bugs of the early 1980’s – they were stuck on something that just drifted lower.

Mark has been the manager of the Midas Trust Fund, Cayman Islands, since 1992. In 1998, his fund was ranked number one in the world by Nelson’s World’s Best Money Managers for its five-year annual compounded rate of return of 26.6%. He also is the author of the highly-acclaimed book “The Hedge Fund Edge: Maximum Profit/Minimum Risk Global Trend Trading Strategies” (1998, John Wiley & Sons). His indicator lists appear every night on tradingmarkets.COM’s Hedge Fund Managers Corner section Mark began trading at age 16, and paid for much of his education at the University of California at Berkeley with his profits. Upon graduation, he day traded for a while before founding Investment Research Associates to finance research on stock, bond, and currency trading systems. He joined forces with Fortunet, Inc. in 1986, where he developed models for hedging and trading bonds, currencies, futures, and stocks.

In 1989, the results of his research were published in the Fortunet Trading Course. While with Fortunet, Mr. Boucher also applied this research to designing institutional products, such as a hedging model on over $1 billion of debt exposure for Mead, a Fortune 500 company.

Today, Mark will kick off the forum discussing risk control. To ask a question, simply type it in and hit the “Submit Question” bar–that’s all there is to it. You also can create a short subject heading for your question in the title space (it helps if you do). Past questions appear in the left-hand portion of your screen for easy browsing.

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It is important to have tested your stop rules on a very very long period of historical data (we go back to the 1870’s) so that you can develop rules that are robust enough to hold up in nearly any market environment.

The simplist approach is to be 80/20 long in a fairly clearly bullish environment. Be 50/50 in an uncertain environment. And be either net short or in other asset classes in a clear bear market.

Around these basic parameters let the market tell you how to adjust based on the signals you get long or short from following runaway stocks with fuel. When you find for instance that you’ve been getting daily up signals but your models are not uniformly bullish (today’s environ- ment for us) then let your longs go half way to where they’d be if you were bullish and then pull back on taking new signals until all your longs are in a position where your trailing stops have locked in profits on all of them. Then you can add more longs if the market continues to generate buy candidate trades until you’ve added another 6% or so risk to original capital. Stop again until trailing stops lock in profits. Etc.

Basically you’re using models as a guide and signals as a guide and your letting the action of stocks in your portfolio tell you when you can add exposure without increasing risk to original capital.

Short-term traders go to intra-day charts and look for a flag within a flag. This is a half-hourly flag pattern just after a breakout of the weekly flag that allows you get on board a potentially long-term trade with risk that is based on half-hourly bars. If you get a good runup take half profits and then move your stops to break even and let it ride for all its worth – using daily chart ops levels. In this way short-term traders can profit from longer term patterns intermingled with short-term patterns that are used to cut risk to very low levels. This is how you can get ten-to-one reward to risk trades in a matter of weeks. The key is that short-term traders are patient in waiting for exceptional opportunities where the short-term patterns align with a trade that has long-term profit potential.

You then let the market tell you when to adjust stops on that position until it becomes greater than 33%-40% of your portfolio. Only then do you let the dictates of diversification force you to lighten up on the position because of the size of the position. Until this happens you are letting the market action determine your stops.

Mark has been the manager of the Midas Trust Fund, Cayman Islands, since 1992. In 1998, his fund was ranked number one in the world by Nelson’s World’s Best Money Managers for its five-year annual compounded rate of return of 26.6%. He also is the author of the highly-acclaimed book “The Hedge Fund Edge: Maximum Profit/Minimum Risk Global Trend Trading Strategies” (1998, John Wiley & Sons). His indicator lists appear every night on tradingmarkets.COM’s Hedge Fund Managers Corner section Mark began trading at age 16, and paid for much of his education at the University of California at Berkeley with his profits. Upon graduation, he day traded for a while before founding Investment Research Associates to finance research on stock, bond, and currency trading systems. He joined forces with Fortunet, Inc. in 1986, where he developed models for hedging and trading bonds, currencies, futures, and stocks.

In 1989, the results of his research were published in the Fortunet Trading Course. While with Fortunet, Mr. Boucher also applied this research to designing institutional products, such as a hedging model on over $1 billion of debt exposure for Mead, a Fortune 500 company.

Today, Mark will kick off the forum discussing risk control. To ask a question, simply type it in and hit the “Submit Question” bar–that’s all there is to it. You also can create a short subject heading for your question in the title space (it helps if you do). Past questions appear in the left-hand portion of your screen for easy browsing.

This is a moderated forum, so we ask that you respect the other guests and our featured speaker. We try to get as many questions as we can, so please be patient. Shortly after the forum is completed, it will be archived and available for review.

The most useful indicators I know of are relative strength and runaway price action combined with pattern recognition. These are really all you need and provide about 70% of the best input.

For longs look for strong relative strength vehicles that display runaway market patterns and give nice flag-type entry pattern consolidations.

Opposite for shorts.

Then I allocate less to shorter term daily patterns. And half that on intra-day trading opportunities.

What you find is that if you operate on multiple time frames you get fewer surprises and less portfolio risk and you also get improved perspective.

However it is difficult mentally to operate on multiple time frames. Traders have a tendancy to over emphasize the shortest term time frame they’re looking at. The opposite should be the case. Remember to only look at daily and weekly charts for your main positions and that daily and intra-day charts are only useful for short-term trading.

For reactions the answer is a bit more complex, but generally the pattern itself defines where your ops is.

However I also have a friend who lost one eye. He can drive with one eye I tried it, and I did OK. But I wouldn’t want to drive with one eye shut. That would just be using fewer of the resources God gave me. Same with technicals and fundamentals. Find everything on the planet that works well and combine them all!

I size my trade to 2% risk. I place my stop based on the charts. The stock goes up and now is worth 5% of my portfolio at risk. Are you saying that you would keep your original stop if the chart doesn’t show any new exit areas, thus risking 5% of the portfolio?

Now the stock moves up 3 points to 13 so that if it dropped back down to 8 your equity would drop 5%. Until the chart tells us to move the stop that is correct. The important point is that it is different to protect a profit than it is to protect “original capital”. Be vigilant in protecting original capital, but not as tight with profits as long as a stock is running up in your favor. When the stock makes a six pivot you can move your stops up to break even. Or if there is some exogenous event that makes you concerned you could also move your stop up to break even in this situation for at least 1/2 of the position.

But in general I would not move the stop until the market signaled it.

IGNORE THE PREVIOUS QUESTION WITH TITLE OF “BCLAY.”

MARK ETZKORN

Good bye!

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