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Market Skill-Builder
Financial Markets & Financial Software The Skill-Builder for Financial Trading - Financial Training Software.

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Trading / Investing based on Technical Analysis

To summarise:

• Look at the Long-Term Charts to identify major support and resistance-levels.

• Look at the Medium-Term Chart to determine the current trend, trade in line with it so long as a reversal is not indicated by the pattern of highs and lows, and / or direction of "drift", and / or changes in momentum / volatility.

• Look at the Short-Term Chart for additional clues relating to the way the market is acting (volatility, momentum and drift in particular).

• Always sell tests of Major Resistance / buy tests of Major support.

• Expect the current trend to continue unless a counter-trend move is stronger than the previous "with-trend" move (in which case, place orders to reverse on a re-test of support / resistance with a stop beyond the next level of resistance to the presumed new trend)
  

• All positions should be protected by stops: placed in the market if you are a small / medium-sized player. Maybe some points will occasionally be scalped from you on the fills, but that is much better than getting out of a fast market ten minutes late.
  

  The closer the market is to the support / resistance beyond which the stop is to be placed, the larger the position which can be taken.

Position-Sizing: Medium / large accounts.

I recommend that no more than 1% of capital be risked on an individual trade (entry-price to initial stop). This relatively conservative policy ensures survival in the face of either a sudden massive adverse move or an extended series of "Nickel & Dime" losses. This limit can be increased (say to 2.5%) if only one position is carried at a time.

Aggressive traders (many of whom fail to survive) risk much more: remember that if a draw-down of 50% is suffered the trader then has to gain 100% on his remaining capital to get back to where he started. Minimising losses is much more important than maximising profits.

The position-size to take (assuming a policy which precludes adding to positions) is therefore: 1% - 2.5% of capital / $ per single-contract point / no of points to stop.

Position-Sizing: Small accounts.

With commission and slippage realistically costing +/- $50 / trade, how can someone with a limited starting capital of say $5,000 enter this game since $100 - $250 stops are not realistic ?

Stop trading (fire your money-manager) if somewhere between 33 and 50% (decide in advance) of your risk capital is lost - you/he are incompetent !

The answer is to approach the problem slightly differently, but still in a disciplined and business-like fashion, as follows:

• Don't start trading until you have saved a minimum of $10,000. Yes, I know that an account can be opened with $5,000 and that people have gone from less than that to millions in the past - but don't count on it (many are called but few are chosen) . . . so step 1 - Save $10,000.

• Plan to add to the account every month from additional savings: preferably $1,000 ($500 minimum). If you can't do that, you will almost certainly not trade successfully (too much pressure).

• Trade one position at a time with $500 - $1,000 stops.

• Stop trading any time the equity of the account falls below $5,000. Re-start only when it has been replenished to $10,000.

• Continue the regular investment until the equity in the account reaches at least $25,000.

• Plan to start withdrawing (say) 10% of net new equity every month after the account has reached $100,000.

• They will not be wiped-out (remember, the average life of a retail futures account is six months).

• They will benefit from the enforced trading-pauses (if any) to re-gain their mental equilibrium and refine their techniques.

• The discipline of regarding the enterprise as a business into which a regular investment is being made until it is successful enough to start paying dividends is conducive to development of the type of systematic approach which is vital to success.