Long Term Secrets To Short-Term Trading

 

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Figure 15.5 uses a $500 stop, then a $1,500 stop and finally a $6,000 stop. There are some huge 
differences here we need to explore. Keep in mind this is the exact same system, all that's changed is the 
amount of risk we are willing to accept as determined by the stop. 
Figure 15.5 S&P system with $500 stop. 
With a $500 stop the system actually loses money, $41,750 to be specific! Our accuracy at 2 6 percent on 
the 510 trades suggests this is certainly not a very good system. 
Or is it? The next tabulation shown in Figure 15.6 reflects the same system, that is the exact same buy 
and sell entry rules, but uses a stop loss of $1,500. What a difference the stop makes! The accuracy screams 
up to 56 percent and we turn a losing system into a winner taking profits from a negative $41,750 to a positive 
$116,880, close to a $160,000 change. Gee whillikers, could there be something to this stop loss stuff after 
all? 
Our next test of the system is to use a $5,000 stop. Does this improve the performance? Well, yes and no. 
It does make more money netting $269,525 and the accuracy gets boosted up to 70 percent. But we pay for it. 
Notice in Figure 15.7 how the largest losing trade gets bumped up to $5,920 as opposed to $2,045 with a 
$1,500 stop. Worse yet, the average losing trade was $1,263 with a $1,500 stop and rises to $1,661 as the risk

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amount increases while the average winning trade at a $1,500 stop is $1,371 and only increases to $1,477 as 
the stop backs off. 
Figure 15.7 Same S&P system with $6,000 stop. 

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The problem is that when you get tagged with the larger stop you can drop too much of your bankroll, 
$6,045, on just one trade. This is a critical point. If you don't want to risk more than 5 percent of your account 
on any one trade on a $100,000 account you can trade only one contract with the $6,000 stop, while the 
$1,500 stop allows you to trade two contracts which effectively doubles the profits on your $100,000 account. 
This may not sound like much but when you use my money management formula the results are dramatically 
different. 
The lesson you have learned, I hope, is that dollar stops are far more effective than the whirling dervishes 
of technical analysis. 

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Chapter 16 
Closing Comments 
I have shared a lot of my life with you in these pages and most all of U-hat little I know about the 
markets. And, while this book is my gospel of trading. it should not be your gospel. You need to implement 
what I have that works for you, twist it around, come up with better ideas and new approaches, but the 
basis I have presented here is sound, workable trading material. 
In this chapter, I wrap this all up with some comments on how to use my material, or anyone else's: 
This is not a black-and-white business.