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Todays is : Thursday, 09 September 2010

Money Management - Part 2

Written by Stockalyzer
Part 1 discussed three equity models: total equity, core equity, and reduced total equity. It also discussed four money management models: 1) the one unit per so much equity; 2) the leverage model; 3) the percent margin model; and 4) the percent volatility model. The four models can be combined with each of the equity models to produce 12 different money management models - even more if you combine them or add creative money management. Model 5 - Percent Risk When you enter a position, it is essential to know that point at which you would get out in order to preserve your capital. This is your “risk.” It’s your worst case loss - except for slippage and a runaway market going against you. One of the most common money management systems involves controlling position size as a function of this risk. Let’s look at an example of how this money management model works. Suppose you want to buy gold at $830 per ounce. Your system suggests that if gold drops as low as $820, you need to get out. Thus, your worst case risk per gold contract is 10 points times $100/point or $1.000. You have a $50,000 account. You want to limit your total risk on your gold position to 2.5% of that equity or $1,250. If you divide your $1,000 risk per contract into your total allowable risk of $1,250, you get 1.25 contracts. Thus, your money management using model 5 will only allow you to purchase one contract. Suppose that you get a signal to sell short corn the same day. Gold is still at $830 an ounce, so your account with the open position is still worth $50.000. You still have $1,250 in allowable risk for your corn position based upon the total equity model. Lets say that corn is at $4.93, and you decide that your maximum acceptable risk would be to allow corn to move against you by 5 cents to $4.98. Your 5 cents of allowable risk (times 5,000 bushels per contract) translates into a risk of $250 per contract. If you divide $250 into $1,250, you get 5 contracts. Thus, you can sell short 5 corn contracts within your money management paradigm. In these examples, we’ve used a total equity model to calculate our risk, where total equity refers to the cash value of the account plus the value of all open positions. In contrast, lets see what would happen if we used a core equity calculation of risk. In the core equity model, the risk involved in open positions is subtracted from the cash value when those positions are opened and only the remaining cash value is used in subsequent calculations. First, we purchased a gold contract and our total risk exposure in that contract was $1,000. In the core equity model, our new core equity is $1,000 less. Thus, we only have $49,000 left on which to base the risk for our next position in corn. Since our money management allows us to risk 2.5% of this core equity, we can risk $1225.
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Money Management - Part 1

Written by Stockalyzer
You was a little shocked over what had happened in the market over the last three weeks - you had lost 70% of your account value. You are shaken, but still convinced that you could make the money back! After all, you had been up almost 200% before the market withered you down, you still have $4,500 left in your account. Sounds familiar? What advice would you give to a trader in this situation? Your advice should be, “get out of the market immediately. You don’t have enough money to trade speculatively.” However, the average person is usually trying to make a big killing in the market, thinking that he or she can turn a $5,000 to $10,000 account into a million dollars in less than a year. While this sort of feat is possible, the chances of ruin for anyone who attempts it is almost certain. Experiment was done with a forty Ph.D.s. with a background in statistics or trading. The forty doctorates were given a computer game to trade. They started with $10,000 and were given a 100 trials in a game in which they would win 60% of the time. When they won, they won the amount of money they risked in that trial. When they lost, they lost the amount of money they risked for that trial. This is a much better game than you’ll ever find in Las Vegas. Yet guess how many of the Ph.D’s had made money at the end of 100 trials? When the results were tabulated, only two of them made money. The other 38 lost money. Imagine that! 95% of them lost money playing a game in which the odds of winning were better than any game in Las Vegas. Why? The reason they lost was their adoption of the gambler’s fallacy and the resulting poor money management.
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Cramer's 'Playing Defense' Rules (from CNBC)

Written by CNBC
Cramer's 'Playing Defense' Rules was broadcast live on CNBC Monday August 4th, 2008 Forget about making money. Sometimes holding on to what you have is much more important. That was the focus for Monday’s show. Cramer offered up 25 rules that will keep you from losing your hard-earned cash when the market’s at its worst. Remember: Plan for the downside, and let the upside will take care of itself. The best way to do that is by following these important tips. 1. Diversify. Cramer’s not afraid to be a nag about this one. If you spread out your risk, you’re less likely to lose large amounts the money. So never keep more than 20% of your portfolio in a stock or a sector. This isn’t rocket science. Just think back to all those people overinvested in tech stocks in 2000. 2. Buy and sell slowly on wide scales. You don’t ever want to get in or out of an entire position all at once. Looking to buy a few shares of your new favorite stock? Then do so in increments as it increases in price. That way you don’t buy it all at the top. The same goes for selling. Take at least some profits when you’ve made some gains. Then scale out of it as the price comes down. This is especially true, Cramer said, for names like Apple or Research in Motion that fluctuate wildly. There’s rarely a time when you won’t get the chance to buy lower or sell higher.
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Understanding Level 2 and Market Makers

Written by Stockalyzer

Market data includes various pricing information (such as the most recently traded price), and various volume information (such as the number of contracts that were most recently traded). Market data is available in two different levels, with level 1 providing the basic trading information, and level 2 providing some additional trading information.

Level 1 Market Data

Level 1 market data provides all of the trading information that most day traders need, including the following :

Bid Price - The highest price that a trader is willing to pay to buy a contract (or share). This is the price that will be received for any market orders to sell a contract.
Bid Size - The number of contracts (or shares) that are available at the bid price. When this number of contracts have been traded, the bid price will move down to the next highest price.
Ask Price - The lowest price that a trader is willing to accept to sell a contract (or share). This is the price that will be received for any market orders to buy a contract.
Ask Size - The number of contracts (or shares) that are available at the ask price. When this number of contracts have been traded, the ask price will move up to the next lowest price.
Last Price - The most recently traded price. This is also known as the closing price, if it is the last price traded in the trading session (i.e. trading day).
Last Size - The number of contracts (or shares) that were most recently traded.

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