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meant that I should not trade the S&P, using a 3% risk criteria per trade, until I had approximately $400,000 in my account. The e-mini S&P contract has reduced risk per contract to more manageable proportions. Even so, with a current margin requirement of approximately $3300, you would need over $100,000 in your account to trade one e-mini contract. Once the markets have been selected, there are three parameters to be considered: trade entry, trade exit, and risk management. Trading literature focuses to a large extent on trade entry. Pick up any issue of Stocks and Commodities and you will find at least one article on trade entry. Invariably, trade entry is predicated on getting aboard a trend at an early stage. My opinion is that trade entry contributes about 20% to trading success. Whether you enter a trend on a breakout or a moving average crossover or a more exotic approach is not important. What is important is to trade with the trend. When the train is moving, you should be on board. |
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Neal: How would you rate exit? |
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C.V.: I would weight trade exit strategy's contribution to success at 30%. The most crucial time in a trade is the two-week period following entry. If the trade is going your way, you don't have to worry. If the trade moves against you, however, you must face the question: Where do I get out? Many traders do not like to take a loss, but losses are part of trading. The important point is to minimize the loss. Referring to the Kelly formula I described above, the ratio of average win to average loss is just as important as the winning percentage. I have found the concept of maximum adverse excursion, which was developed by John Sweeney, to be very useful. He has written about it in Stocks and Commodities as well as in several books. In essence, he says to test how far a trade can move against you before it becomes a loser. Trade entry and exit together account for 50% of trading success. The other 50%the single most important factoris risk management. There's an old saying in trading: If you don't control your risk, they'll carry you out. Many traders start- |
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