This Week’s Battle Plan

4:30 am – Alarm goes off

4:30:10 – Shut off alarm

4:30:45 – Turn on Bloomberg TV or CNBC to see what the futures did
overnight

4:31:00 – Loud Yell – “F–k!!!

A Typical Morning In The Kaltbaum Household

4:30 am – Alarm goes off

4:30:10 – Shut off alarm

4:30:45 – Turn on Bloomberg TV or CNBC to see what the futures did
overnight

4:31:00 – Loud Yell – “YEEEHHAAAWWW!!!!

I have been thinking a great deal about our interview
with Nelson Freeburg (part 1 was published yesterday). As I stated
in the interview, Nelson is amongst the best systems developers and
researchers in the country. There are many others who are very good,
but I believe Nelson has an advantage over most. His advantage is, he
has gotten to consult for and work with some of the biggest and best
money managers in the country. He has had the opportunity to see first
hand over the past two decades why certain money managers succeed and
how they do it. From his knowledge, we can learn.

I’ve been lucky enough to meet a few of the same people as Nelson.
And, Nelson’s insights on the topic, presented as he was interviewed,
further confirmed my own cursory observations…that the gunslingers
in this business are sexy and exciting as hell to watch when they are
on, but in the long-run they usually blow out. The ones who are
boring, the ones who make tiny incremental gains, but do it
month-after-month and year-after-year, are the ones who create
long-term wealth not only for themselves but for their investors. Not
vice versa.

Some traders are comfortable moving their accounts around
10-20%/month. You may be one of them. You understand the risk and you
live with that risk. Others may be taking that type of risk and really
not truly understand the consequences. For them, it is only a matter
of time before they will be blindsided and their account will get hit
hard. It happens when the “bad tail” hits (think bell
curve…you’ll understand better why I call it the “bad
tail”). The bad tail occurs when you have your signals put
together an unsustainable string of profitability for multiple months
as the CVR signals did in the spring and summer of 2000. And then the
string is broken with buy signals the night before 9/11. But then, it
hopefully does what a good methodology should do. It makes it back up,
and as in this example, fairly quickly. It eventually balances out.
But, it’s the degree of volatility along the way which can cause the
damage.

The Key

The key here, as Nelson teaches us, is position size. Being long or
short five S&P futures contracts the night before 9/11 in a
$250,000 account is going to look and feel very different than being
long or short 1-2 E-mini contracts. Risk and reward tied into one. The
gains and losses will be far different based upon your position size.
Five contracts can make you a lot of money based upon your capital if
you are right. It can also wipe you out if you are wrong. In my
opinion, and I suspect I’m talking for both Nelson and Mark Boucher,
you should never allow one position to do this to you.

Some Ideas

There are four components to lessening your risk as you trade. These
four components are:

1. Position size

2. Stop placement

3. Trading non-correlated markets

4. Adjusting for the daily volatility of the underlying security or
market you are trading

There’s a lot going on and coming up which may be of interest to you:

1. Dr. Paul Ruggieri is back. His biotechnology column was very
popular when he wrote for us a few years ago. Professional and family
responsibilities took him away from the site but he has now returned.
His first few columns have given us some good insights into the new
drugs potentially coming into the marketplace. In fact, one of his stocks
mentioned (BMRN) rose nearly 50% after they received good news
from the FDA. Investing/trading in biotechnology stocks is not for the
faint of heart but when you are right, the rewards can be great. Keep
an eye out for Paul’s piece, as he publishes it when he feels he has
something which may be of interest to all of us.

2. Our After-market coverage now goes deeper. We’re bringing on
two hedge fund managers to write for us in the afternoon. The first
gentleman, a former fund manager for a major bank, will help us focus
on nightly global economic events and the short-term trading
opportunities they create for us each day. His piece will launch in a
week and will be published Monday through Thursday. The second piece
we are adding will be published twice a week and will be written by a
hedge fund manager who is a long-time TradingMarkets member. This
gentleman combines much of the daily analysis and research you see
from our commentators with his own methodology. His piece will begin
later this week and run every Monday and Thursday.

3. Chris Tyler, who was a Market Maker for seven years, has
just released the first of his Three-Part Training Module Series.
Triangles can be a simple way to trade but there are just too many of
them to know which are best. Chris has five strategies to identify the
triangles that have, what he believes to be, the highest odds for
succeeding. If you would like more details on this, click
here.

4. You can now get my Weekly Battle Plan every night as I’ve
expanded my nightly trading service. Details can be found here.

5. One of our members, Selwyn Gishen, is in the midst of publishing
a five-part series for us on trading. Selwyn is successful
professional trader who has been trading since 1986. He has a very
different style (Zen-like) in his approach to the markets and his
insights are valuable to all of us. If you’d like to read what Selwyn
has to say, you can find part one here.
Also, we hope to create an open discussion with everyone later this
month based upon Selwyn’s ideas. This open discussion will be a chance
for all the members of TradingMarkets to share ideas based upon
Selwyn’s work.

6. Don Miller will be be doing a five-day live trading seminar via
the internet in the first week of March. More details will be
placed on the site later this week. Don is only allowing 20 traders to
attend (first come, first served) and the cost is $2500 for the entire
week of learning (plus Don will beholding a Saturday half day session
for those who want to work with him another day). If you’d like more
details, call Brice Wightman at 888.484.8220 x242.

Summary

Risk control is a little understood, but key component, to successful
money management and successful trading. Proper entry and exit
strategies with an edge are essential and from there it become a risk
control game. We touched on this in this week’s column and with part 1
of Nelson’s interview. Next week we’ll go even deeper.