Millionaire TradersQ: Do you have a mental limit to how many times you will add
into a trade? When you just say, “That’s it. It’s a one-way market,
I’m getting out. I have to cut my losses.”
A: You know, a lot of people ask me that, a lot of traders around
here ask me that. I don’t look at it that way. If we have an average
of an 11-point swing in the ER [a daily move from low to high
in the Russell 2000 of 110 ticks], everyday you know you might
be able to take a point and a half or two and be fine. But if we
have a 20-point normal range, you might get three point shake
outs and you need to trade accordingly. If you simply trade by hard
and fast scientific-type rules, eventually the market will take your
money.
Q: Could you explain that a little more? Let’s say the average
trading range in the Russell 500 is 10 points, just using 10 as an
equal number. If you’re using stop losses of a point and half that
are within the noise level, you’ll just get stopped out continuously.
Is that what you’re saying?
A: What I’m saying is if a spread goes against me a point, or
point and quarter, I may add to it there, and do very well on the
trade. What I’m saying is there are some markets where we had an
average range of about 18 or 19 points a day like this summer, in
which case, a point and a quarter or point and a half stop probably
won’t work.
Q: So when you have this massive range expansion, and obviously
you never know that it’s going to occur, you never know you’re in
the midst of hurricane until everything swirls around you. What
kind of risk control do you apply to yourself? Do you have a hard-
and-fast rule? Or is it always matter of feel?
A: I think it’s always a matter of feel for me.