More Money Management for Trend Following

“When any trader makes a decision to buy or sell (short), they must also decide at that time how many shares or contracts to buy or sell — the order form on every brokerage page has a blank spot where the size of the order is specified. The essence of risk management is making a logical decision about how much to buy or sell when you fill in this blank. This decision determines the risk of the trade. Accept too much risk and you increase the odds that you will go bust; take too little risk and you will not be rewarded in sufficient quantity to beat the transaction costs and the overhead of your efforts. Good money management practice is about finding the sweet spot between these undesirable extremes. on a per-trade basis.”
Gibbons Burke

Money management is the crucial concept for all traders and investors. But, mainstream press never writes of its importance. The author below, for example, simply opines a feel good market view. Nothing he says could help you make a dollar.

TurtleTrader editorial comments are bold.

“How to Weather the Tech Stock Storm”, by SCOTT HERHOLD at Mercury News:

With an avalanche of earnings reports, the stock market last week demonstrated almost perfect schizophrenia. The semiconductor equipment people confessed to woes. But Intel exceeded expectations. EBay thrived. Microsoft stumbled. Sun bounced [TurtleTrader® comment: His point? The market always changes, he states the obvious. Volatility is nothing new. Prepare for it].

The market climbed. The market fell. But mostly, the market shuffled sideways. Was it all sound and fury signifying nothing? And where does an investor go from here? Is this the time to jump in ahead of a potential rally later this year? Or is it a time for caution? [TurtleTrader® comment: You need a plan ahead of time]

Some of the people I trust have thrown up their hands and decided, at least as long ago as last spring, to take a year off from owning tech stocks. Much like scavengers pawing through the embers of a fire, they plan to revisit the terrain next year to see what remains [TurtleTrader® comment: This is no plan].

This is a tempting point of view. It has definition. But things can change rapidly. So if you’re still paying attention and your wounds from 2000 have more or less cauterized, here are some of the factors you must be thinking about: Remember just who’s playing this game. You may remember the television commercial that shows a short, fat guy who dreams of playing pro basketball and dunking the ball past the NBA stars. In a lot of ways, that guy illustrates the plight of the individual investor in today’s market. The volatility of the market last week was driven largely by hedge funds and other institutional investors, who move quickly in and out of stocks, often covering their positions by taking out options like puts and calls [TurtleTrader® comment: Markets move for a variety of reasons, identifying why is a waste of effort, concentrate on how you react within a strategy].

Friday was the day that options settled. And that caused fierce jockeying to take advantage of earnings news.

Everyone in the market is playing the same game, says Harvey Baraban, a San Francisco stock market trader and educator. It’s very nervous, scared money. But it’s also very large and very aggressive. [TurtleTrader® comment: Why is money emotional, people are emotional, money has no feelings] Memo to investors: If you think you can beat the pros at this short-term game, you can probably outdunk Shaquille O’Neal as well. You’ve got a healthy fantasy life. At the same time, the absence of individual investors makes it harder to restart the market [TurtleTrader® comment: Markets don’t stop or need to be re-started, they move, have a system that takes advantage of moves]. Keep an eye on the longer term [TurtleTrader® comment: Finally, some truth].

Yes, this means paying attention to the overall economy, which is still delivering dismal news. Every other day, the other shoe drops, says David Gold, a venture capitalist with Indosuez Ventures in Menlo Park. I think we have a centipede or millipede crawling across with so many shoes dropping. The key equation is capital spending, which has been put on virtual hold at many companies. That in turn has caused piles of unused inventory. But capital spending is not uniform across the board — and some sectors do better than others [TurtleTrader® comment: More fundamental data useless to a trader trying to make money in the market].

An interesting study was done recently by Techtel, an Emeryville research firm that tracks the real tech demands of companies. (A real need describes what a company really uses, not what a salesman has persuaded them to commit to. If a company has bought 1,000 Oracle software seats but uses only 500, real demand is the 500). The good news here is that demand, after falling sharply at the end of 2000, shows signs of flattening out or even strengthening, particularly in areas like mid-range servers and storage area networks. The bad news: Soft spots exist with PCs and database software. We don’t see overall demand going up, says Michael Kelly, Techtel’s chairman. We see it as basically flat.

But he adds: Flat is good. [TurtleTrader® comment: Flat is good for no one]

Memo to investors here: It’s worth making distinctions amid tech stocks. The Techtel study would suggest that certain outsourcing companies — including IBM and EDS — are better positioned for revival than, say, a PC maker like Dell or a database software supplier like Oracle. Sun is stronger in higher-end servers than in mid-range machines. Keep watching the charts. We’re not talking about astrology here — though given the market’s performance over the past year, we might just as well. But there are some technical patterns that are worth thinking about.

Essentially, the market has been on a downward slide for the past 16 months [TurtleTrader® comment: Yes, we know]. Yes, there was a major bounce after the market hit a low in early April. But the current market is testing those lows once again. The technicians say a strong surge upward will probably reverse that longer-term downward trend.

So when will that happen? [TurtleTrader® comment: No one knows. If you even attempt a prediction you will likely lose money. Trend Following trading, for example, never predicts, it reacts to market movement telling you how much to buy or sell at a given time] One cautiously optimistic view comes from WitSoundview’s technical strategist, Arnold Berman, who has studied the number of confessions — or preannouncements of earnings disappointments — among tech companies.

Partly because investors are used to bad news, disappointing results no longer pack the wallop they once did. Berman says the stock of the typical preannouncing company declined only 9 percent in the second quarter — compared with 26 percent last year. The overall picture on technology remains negative, Berman writes. If we argued differently, we’d be like the TV weatherman who tells his viewers it’s not raining when a glance out the window shows it’s pouring. However, a good weather forecaster doesn’t predict rain for tomorrow just because it’s raining today.

Memo to investors: Be cautious, yes. But don’t be blind. Sometime the clouds will part [TurtleTrader® comment: An article that says almost nothing. A great example of the financial press helping no one].

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