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Neal: Even though you're a system trader, I noticed that in a recent trade you exited a position early before your trailing 12-day stop was hit. Could you elaborate? |
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C.V.: I have found a trailing 12-day high/low stop to be very effective trading intermediate-length trends, which typically end with a consolidation period. Several years ago, I realized that under special circumstances, such as a blowout top, the 12-day stop left too much money on the table or resulted in excessive volatility in my account. I therefore developed an analysis of circumstances where a combination of increasing (or decreasing) price plus increasing volatility made it likely that an extreme top (or bottom) was forming. Historical testing showed that it was possible to identify such circumstances often enough to make it worthwhile to incorporate an exit strategy based on the analysis into my systems. The objective is not to pick an exact top or bottom, but to exit prior to the excessive volatility that often accompanies market extremes. |
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Neal: If you look at the various steps in trading, order entry, money management, trade exit, and choosing the correct market, how would you rank them in terms of performance? |
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C.V.: Choosing the markets to be traded is crucial. You must trade liquid markets to trade successfully. Such markets exhibit consistency over time. They are also less risky. An illiquid market such as orange juice can have limit moves for three or four days in a row. The only highly liquid market I do not trade is the S&P. There are two reasons for this: First, I consider the stock market itself a vehicle for long-term investment measured in years, rather than speculation measured in months. Second, the S&P does not trade like any other liquid futures market. I find more correlation between the trading characteristics of corn and T-bonds than between T-bonds and the S&P. Of course, when I started trading, the S&P margin was around $12,000. Since I consider margin the minimum risk on a trade, that |
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