Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
What happens To The Global Economy If Oil Collapses Below $40 – Part II - 15th Nov 19
America’s Exceptionalism’s Non-intervention Slide to Conquest, Empire - and Socialism - 15th Nov 19
Five Gold Charts to Contemplate as We Prepare for the New Year - 15th Nov 19
Best Gaming CPU Nov 2019 - Budget, Mid and High End PC System Processors - 15th Nov 19
Lend Money Without A Credit Check — Is That Possible? - 15th Nov 19
Gold and Silver Capitulation Time - 14th Nov 19
The Case for a Silver Price Rally - 14th Nov 19
What Happens To The Global Economy If the Oil Price Collapses Below $40 - 14th Nov 19
7 days of Free FX + Crypto Forecasts -- Join in - 14th Nov 19
How to Use Price Cycles and Profit as a Swing Trader – SPX, Bonds, Gold, Nat Gas - 13th Nov 19
Morrisons Throwing Thousands of Bonus More Points at Big Spend Shoppers - JACKPOT! - 13th Nov 19
What to Do NOW in Case of a Future Banking System Breakdown - 13th Nov 19
Why China is likely to remain the ‘world’s factory’ for some time to come - 13th Nov 19
Gold Price Breaks Down, Waving Good-bye to the 2019 Rally - 12th Nov 19
Fed Can't See the Bubbles Through the Lather - 12th Nov 19
Double 11 Record Sales Signal Strength of Chinese Consumption - 12th Nov 19
Welcome to the Zombie-land Of Oil, Gold and Stocks Investing – Part II - 12th Nov 19
Gold Retest Coming - 12th Nov 19
New Evidence Futures Markets Are Built for Manipulation - 12th Nov 19
Next 5 Year Future Proof Gaming PC Build Spec November 2019 - Ryzen 9 3900x, RTX 2080Ti... - 12th Nov 19
Gold and Silver - The Two Horsemen - 11th Nov 19
Towards a Diverging BRIC Future - 11th Nov 19
Welcome to the Zombie-land Of Stock Market Investing - 11th Nov 19
Illiquidity & Gold And Silver In The End Game - 11th Nov 19
Key Things You Need to Know When Starting a Business - 11th Nov 19
Stock Market Cycles Peaking - 11th Nov 19
Avoid Emotional Investing in Cryptocurrency - 11th Nov 19
Australian Lithium Mines NOT Viable at Current Prices - 10th Nov 19
The 10 Highest Paying Jobs In Oil & Gas - 10th Nov 19
World's Major Gold Miners Target Copper Porphyries - 10th Nov 19
AMAZON NOVEMBER 2019 BARGAIN PRICES - WD My Book 8TB External Drive for £126 - 10th Nov 19
Gold & Silver to Head Dramatically Higher, Mirroring Palladium - 9th Nov 19
How Do YOU Know the Direction of a Market's Larger Trend? - 9th Nov 19
BEST Amazon SMART Scale To Aid Weight Loss for Christmas 2019 - 9th Nov 19
Why Every Investor Should Invest in Water - 8th Nov 19
Wait… Was That a Bullish Silver Reversal? - 8th Nov 19
Gold, Silver and Copper The 3 Metallic Amigos and the Macro Message - 8th Nov 19
Is China locking up Indonesian Nickel? - 8th Nov 19

Market Oracle FREE Newsletter

How To Buy Gold For $3 An Ounce

Why The Small System Trader Fails

InvestorEducation / Learn to Trade Jan 10, 2010 - 10:19 AM GMT

By: Charles_Maley

InvestorEducation

Best Financial Markets Analysis ArticleWisdom is meaningless until your own experience has given it meaning and there is wisdom in the selection of wisdom – BERGEN EVANS Author and Professor

Those of you that follow this blog know that I am a big fan of a definitive trading plan. Having a plan however, does not equate to success, there are still limitations. One limitation is the small account. Unfortunately, the small account has many more obstacles to overcome to be successful than the large account. Let’s take a look at why that is the case.


Most commodity futures have underlying collateral value in the tens or hundreds of thousands of dollars. A gold contract for example is worth $113,000 today and crude oil is $82,000. When you add low margin requirements and increased volatility into the equation, you have a recipe for small speculation disaster.

So, what makes the larger account fair better in the long run?

Well, to name a few reasons, large accounts can afford to trade virtually any opportunity, at any time. There are 75 to 100 or so liquid commodity markets worldwide, and should buy or sell opportunities emerge, a large account can easily afford the margin and risk to trade them all. In addition, they can scale into and out of positions. This is in stark contrast to the small account where prudence dictates only having exposure in a limited number of markets with one contract.

Also, large accounts are not restricted from trading contracts whose volatility is relatively high. For example, a gold trade today with a 5% cash stop would translate into over $5600.00. That happens to be a little over one half of 1% of a million dollar account, yet over 11% of a 50K account.

Now, the devils advocate would say that “I wouldn’t use such a wide stop”, but it’s necessary to use expanded stops in expanded volatility to avoid being stopped out by “noise”. Also, as the contract becomes more valuable, the risk to trade it increases. Gold is not $400.00 anymore it’s $1130.00 per ounce. A 10% move now is close to three times the dollar risk of $400.00 gold.

To stay with the gold example, we run an in-house volatility filter that is currently suggesting that gold has $1238.00 of daily noise (around 12 dollars). So, if you are trading gold and would like to be “outside the noise”, 3 standard deviations would suggest a stop at $3714.00 (around 37 dollars). Even this wider stop does not insure anything, as we all know markets frequently make 3+ standard deviation moves on a routine basis.

So, in a nut shell the 50k account trading gold would have to risk close to 7.5% of his account (per trade) to hopefully stay in the game of trading gold. Good luck with that.

So, how can we trade a smaller account that has the probability of success equal to the large account?

One approach we have explored, and now successfully trade, is the concept of building a model that employs multiple systems, and multiple markets, along with an effective filtering process and risk management controls.

Let’s elaborate.

The process of running multiple systems over many markets will generate a fair amount of trades (like the large account). The filtering process, and the risk controls however, allowed us to filter down the many trades to a few “higher probability” trades. Since the small account cannot take on all the trades, it is the next best approach. This strategy attempts to identify a limited percentile of all the markets it tracks as being the best candidates, using a systematic process to select the few that the small account can handle in terms of volatility and risk.

The portfolio selection process is dynamic as opposed to static (like the small account). This means that from day to day the basket of markets we would trade can change due to strength, weakness and/or volatility changes. We feel this keeps our trades limited to only those markets with the best risk adjusted potential. This allows us to evaluate a very large portfolio (like the large account) while still keeping the number of trades and margin requirements very low to address the small account.

Monitoring a very large portfolio is critically important because if you initially limit yourself to a predetermined small portfolio, how do you know that those markets will be the best markets in the future? (Hindsight bias portfolio selection is a form of curve fitting and is a major downfall of many traders). If an exceptional opportunity develops in a market outside of your predetermined portfolio wouldn’t you want to take advantage of it? By trading with this type of strategy you don’t arbitrarily rule out any market that may perform well in the future and you have eliminated the tendency to pick a portfolio based merely on past performance (curve fit) considerations.

Charles Maley
www.viewpointsofacommoditytrader.com
Charles has been in the financial arena since 1980. Charles is a Partner of Angus Jackson Partners, Inc. where he is currently building a track record trading the concepts that has taken thirty years to learn. He uses multiple trading systems to trade over 65 markets with multiple risk management strategies. More importantly he manages the programs in the “Real World”, adjusting for the surprises of inevitable change and random events. Charles keeps a Blog on the concepts, observations, and intuitions that can help all traders become better traders.

© 2010 Copyright Charles Maley - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules