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Saturday
Oct152011

I Love it When a [Trading] Plan Comes Together!

As a trader, there is nothing more fulfilling than watching a trading plan play out exactly as you designed it. As an educator, it is equally exciting to watch a student plan a trade and then watch that plan unfold, step by step, as the student artfully executes it. Let me take you step by step through a recent trade by one of our students at Market Geometry:

During a live session a few Monday’s ago, we drew out the following map of the 240 minute $USDAUD [the Australian Dollar against the U.S. Dollar]:

We began by noting and marking the ‘Sunday Gap Rip’. When markets first began trading literally 24 hours a day, from Sunday afternoon until Friday afternoon, gaps became less and less common occurrences. But the recent high volatility in the markets have begun spinning more and  more gaps into the picture – and the traders not experienced enough to remember how to deal with them have to do their homework to understand the implications of gaps and how to deal with them.

One of the ways I have found to help traders think about open gaps is the ‘Gap Rip’. Imagine printing out a chart and ripping it down the middle, separating price into two discontinuous sections: You have two charts of the same commodity or currency but they are no longer connected. When a market Gaps open and the Gap remains open, this is exactly what has happened: the Price action was so violent it disconnected the current action from the prior price action.

The first Open Gap lower on the chart occurred on a Sunday opening and it not only disconnected the current action from the prior price action, it broke below prior minor Swing Lows to the left. At that point, we added a red Major down sloping Median Line and its Parallels to give us the Probable Path of Price. We then noted that after heading lower, price climbed back to retest the Open Gap area but failed to climb higher to test the red down sloping Upper Parallel.

When price broke back below the Gap Zone with a Wide Range Bar, we added a green down sloping inside Median Line and its Parallels that seemed to be doing a much better job interacting with price action. Three bars later marked the end of trading on Friday. When trading resumed on Sunday afternoon, price Gapped open lower once again, and the Gap remained open, literally ripping the price action from the prior week away from the unfolding price action of the upcoming week. These are signs of a violent move lower-the sellers have a lot to sell and they are pressing to sell before price slips further away from them!

The last three bars deal with the price action on Monday, when we were hosting our live mid-day Mentoring session. If you look above at the first open gap, I marked the timing of the horizontal consolidation with a dotted magenta line – and then transferred it down to the current opening bar from Sunday night. This dotted bar serves to remind me that price consolidated for that amount of time above, at the prior Open Gap, before beginning its violent move lower. I put it in place now because one of the Newtonian Laws we use over and over, as stated in the Emerald Tablet, ‘As above, so below’, generally comes into play in these situations [For every action, there is an equal and opposite reaction]. I will watch closely as price unfolds and I literally expect a violent reaction as price reaches the end of the magenta dotted timing bar.

As I pointed my feelings about this timing bar and its relationship to the ‘Gap Rip’ to the members attending the live session, I also circled the confluence formed by the red down sloping Median Line and the green down sloping Outer Parallel –and remarked that the area of confluence [or Energy Point] coincided with the end of the timing bar, and the Energy Point would hit around Friday. I told everyone it should be interesting to watch how price played out between now [that Monday] and Friday. If it formed a mature structure with some horizontal consolidation, I would expect there might be a great opportunity to short this market Friday if price had not significantly violated the Open Gap area. I finished marking out the chart and saved it in my charting program, so we could revisit it later in the week to see how price had unfolded. We also put this chart on alert as a part of everyone’s homework for the week.

As it turned out, we did revisit this chart on Friday, though it was on everyone’s homework alert. But let’s see what one student did with the simple map I drew on Monday as Friday approached:

Though we did not revisit the potential trade set up on Friday, at least one of our students did her homework: As Friday approached, she entered her limit sell order at 1.0370 in the Australian Dollar with a 41 pip initial stop loss order. She noted on her chart that price had consolidated in a horizontal fashion all week and there was selling pressure at the Open Gap area all week long. She placed her stop loss order above that selling pressure at the same time she placed her limit sell order and waited patiently as Thursday turned into Friday – she was letting price catch up with the price action. And when Friday came around, she was rewarded with a fill in her limit sell order. She noted on her chart that she was planning on holding the position over the weekend. She also marked several potential Profit Objectives with purple horizontal lines, just below 1.02, around 1.01 and the last at 0.9925. Any of these objectives if reached would give her a solid risk reward ratio – at minimum, well over four to one using a 41 pip stop.

Let’s see how the trade looked after the weekend:

Price Gapped open lower again on Sunday night by 50 pips. On Monday morning, she took a partial profit on one half of the position at 1.0180, booking 190 pips. As price climbed back out of the hole early Tuesday, she entered an order to sell back out the half she had taken profits on at 1.0302, with an initial stop loss of 1.0333 [a stop loss of 31 pips] and was filled on her limit sell order quickly. It is important to note that she is treating this second entry as a separate order, with its own stop loss. Though it is not apparent on this chart, she moved to a break even stop loss order on the open half of her first trade. She is now playing with the market’s money, and even if she is stopped out of both of the current open positions, she will make money on this idea and the two positions combined. She framed her trade and as price unfolded, she adapted it to the market conditions, taking profits on one half and then reinstating the full position at a better price. She is continuing to use the Open Gap to show here where the selling pressure remains – that is the key to the original trade as well as the secondary entry at 1.0302.

Let’s take a look at how the trade progressed on Tuesday and Wednesday:

Take a close look at this last chart and read her comments as the trades unfold. She started with a carefully framed trade, looking to reach a potential four to one risk reward ratio. Bu taking partial profits and then re-entering at the Open Gap resistance area, she was able to successfully adjust her plan as price unfolded after price opened on Sunday afternoon.

Here are the profit objectives she planned and achieved:

  1. 1.0180, on one half of the position, netting her 190 pips, reached on 9/19/2011 at 10 am.
  2. 1.0150, on one half of the position, netting her 220 pips, reached on 9/21/2011 at 2:30 pm.
  3. 1.0088, on the one half she re-entered, netting her 214 pips, reached on 9/21/2011 at 2:30 pm.

Her total risk on this position was 113 pips total and her total profit for this position was 624 pips. This gave her a total achieved risk reward ratio of better than five to one, better than her originally planned risk reward ratio of four to one.

As she did her post analysis of this trade on her last chart, note that she chided herself what she considered a mistake: She believed price would test the prior low [‘look to the Left and be Right’] and her original order was to take profits on her entire position at 1.0090 but the anxiety of holding the position made her change her plan and take half off at 1.0150 – but all in all, this trade was a planned well and executed well. She had very logical entry points and did a wonderful job collapsing her risk, moving her initial stop loss entry to break even as soon as price moved well below her entry level and then finding logical areas to leave her limit buy orders to lock in profits.

We stress the importance of planning your trade before entering your trade and then trading the plan you have made. If you wish to trade like a professional trader, you have to learn to think, manage and execute like a professional trader. Our upcoming seminar, Building a Professional Trade Plan, will focus on this extremely important topic, taking you step by step through all the essentials a solid trade plan needs if you wish to be consistently profitable. 

Let’s use this trade to highlight one last important thought about trading: Some have tried to paint Market Geometry, our web site, as giving ‘endless education’ but giving no live analysis or signals. First, we are proud to offer ‘endless education’; there is no better compliment in my mind. Second, the results of our students speak for the results of our efforts to teach traders to be consistently profitable using what they have learned from us to find and enter their own trades in any market, on any time frame. We teach live, we use live charts, we point out potential trade areas in advance, as diagrammed in the trade above – we just don’t hold ourselves out as a ‘chat room’ that is there to call out mindless trades. Let’s compare the results of this single trade with an entire month’s results from a ‘chat room’ style web site.

Before I begin this rate of return analysis, let me state up front I am not taking these results from one of what I consider to be a ‘shady’ website, one that misrepresents their results. I am using their results because they are stated relatively clearly, their numbers seem to be accurate and the results they show on their web site look quite impressive. Here are their results for the same month our student made her Australian Dollar trade: 

According to their risk disclaimer, subscribers must have a minimum of $200,000 in their account and this amount will be fully margined; at minimum, they trade two full size Gold futures contracts and two Silver futures contracts at all times. Here are there results for the month:

On $200,000 worth of margined positions, they made a gross profit of $73,060 – This looks like a very handsome profit, indeed! In their disclaimer at the bottom of the page, in smaller print, they note they are currently in a drawdown of $42,300 from that profit and are apparently still holding the open position. According to my calculations, that leaves them with a net profit of $30,760 for the month, based on $200,000 of margin. But let’s assume they finished the month with their entire $73,060 intact.

Now let’s see how our student’s single trade, lasting about three trading days, holds up to their month of trading. To compare ‘apples with apples’, we will normalize the leverage used by adjusting the amount of contracts she used when entering her planning and executing her trades to match their leverage:

To make the math easier, we’ll convert her trades from cash Forex to CME Australian Dollar futures contracts. Each Australian Dollar future requires she put up a minimum margin of $2,363. If she used the maximum $200,000 as margin, she would be able to trade $200,000/$2363 = 84 contracts. Since she made 660 ticks, she would have netted a profit of over $554,000 on her $200,000 account in three trading days [a simple rate of return of over 750 percent]. Now stop for a moment and look at these numbers, please. Are they possible? Yes. Are they repeatable over time? No.

If you used maximum leverage on your account, as many ‘chat sites’ and ‘trade touting’ sites show in their flashy numbers, when you hit a losing streak, you will quickly lose all the money in your account and more.

Let’s assume a more conservative stance: The web site we referred to stated they traded at minimum two Gold contracts and two Silver contracts. Because of a recent margin hike by the CME Group in August, it would take $72,700 in margin to trade two Gold futures contracts and two Silver futures contracts. If our trader had used $72,700 in margin, she would have been able to trade 30 Australian Dollar futures contracts and she would have netted $198,000 in profits before brokerage, compared with their stated net maximum profits for the month of $73,060.

But are those numbers realistic and sustainable: Of course not! Our trader would have made over 270 percent on her over-leveraged account but any run of losers would quickly wipe her account out. These numbers are unrealistic and not sustainable.

We teach traders to be consistently profitable. We want them to learn their craft and then be around for years to come, as their accounts grow at a sustainable pace. Let’s look at a ‘sustainable’ rate of return. If our trader had $200,000 cash in her account and traded 8 contracts, using a total maximum margin of $18,904, she would have used less than ten percent of her account on a margined basis and she would have netted over $52,000 on her three day trade. She would have realized a 26 percent simple rate of return. These numbers are more realistic – and had she taken a loss, she would not have lost her trading account; had she been stopped out at her initial Stop Loss order, she would have lost $3,280 – roughly 1.6 percent of her account.

But let’s look at her trade using an even more conservative approach: What if she used no leverage in her trading, simply trading $200,000 unleveraged in the cash Forex markets? If she sold $200,000 worth of Australian Dollars at 1.066 and bought them back at 1.000, she would have made a net profit of $13,200. On a single trade that lasted three days, she would have netted a simple 6.6 percent rate of return. Is this realistic? This is absolutely a realistic rate of return, though I would caution everyone, including her, that the best traders in the world lose at least 1/3 of the time, so solid money management is extremely important, even when you are trading using low or no leverage. Top money managers average 15 to 35 percent rate of returns, not 200 or 300 percent.

The key to becoming a consistently profitable trader is to begin with a solid trade plan, based on quality money management principles. Only take trades with good risk reward ratios [I suggest three to one or better as a starting place for most traders] and set a maximum stop loss you are willing to take on any trade and never take a trade requiring a larger stop loss. Last, once you plan your trade, keep that trade plan in front of you and follow it religiously. ‘Plan your trade and trade your trade’.

If you are interested in learning more about what we teach, how we teach professional traders to be better traders and non-professional traders how to be become consistently profitable, come visit us at Market Geometry. And if you want to learn how professional traders plan their trades, we’re hosting a seminar October 22nd via the internet. You can see all the details by clicking here.

Tuesday
Oct042011

Building a Professional Trade Plan

Timothy Morge and Shane Blankenship will be hosting ‘Building a Professional Trade Plan’, the first in a series of Seminars focused on teaching you to ‘Treat Your Trading Like a Business’ on October 22nd, at 12 pm MST [-7 GMT].

Tim and Shane have personally coached hundreds of professional and novice traders. Those that have excelled all had the following few things in common: The ability to keep an up to date and accurate Trading Plan, solid Risk Management skills and detailed Trading Journals.

Some of the topics covered in the ‘Building a Professional Trading Plan’ seminar will include:

•    The importance of trading with a plan
•    The Philosophy behind a successful Trading Plan
•    The what, how and why of Trading Plans
•    How to turn your thoughts, step by step, into a Trading Plan
•    What Professional Traders Include in their Trading Plans
•    Risk Management
•    The Beginning of a Trade Plan: Beginning to use Excel for your Plan
•    Building simple but powerful metrics that are a must in your Trading Plan
•    Record keeping of those metrics


Each attendee will get access to copies of the Trade Plan examples we build during the session. Additional examples may also be available for download after the session.

Approximately six to eight weeks after the seminar, each attendee will get a DVD of the seminar. Shipping and handling anywhere in the world for attendees is free.

The price for the ‘Building a Professional Trade Plan seminar’ is $749.00, including a full length DVD, copies of the Trade Plan examples and shipping and handling anywhere in the world.

You can sign up and pay for the first in this important series of seminars here

If you are unable to attend the live seminar, sign up and we’ll send a copy of the DVD and give you access to copies of the Trade Plan examples we build during the session. Additional examples may also be available for download after the session.

Remember, this is the first in a series of seminars that will teach you to think and act like professional traders act and think when planning and executing their trades. We will do our best to help you become more consistently profitable – but you must put in the time and effort.

Saturday
Jul242010

The Ultimate Risk Management Tool: Equivalent Risk

I was asked earlier this year by several elementary schools to teach the basic of trading to their gifted students; one of the students happened to be my eleven-year-old son, Sean. The students competed in anational stock trading contest that ran from mid-January through late-April. The students could only be long stocks and each school had a team (since these were only the extremely gifted students at each school, the groups were small—three or four students per team, on average). I taught them a simple charting methodology (I called it “crayon drawing” because it was based on market structure and simple lines—no indicators were used—though the use of strict money management was featured prominently each time we met. I refused to give them trade ideas, nor would I tell them where and when to get out, profit, or loss. I would point them, using questions, to a line of reasoning that would allow them to find the answers they needed themselves. I am proud to say that three groups I helped all finished in the top ten in the country. The two in Illinois finished third and fifth, and the school system in Arizona—where I now live—has not yet given me permission to release any information more specific, but the Arizona team finished in the top ten as well.)

My first impression? We should have ten- and eleven-year-olds manage our retirement money! The three groups averaged a 12.4% non-annualized increase in the value of their trading account over that short period of time, using no leverage and only being able to be long stocks. They set their maximum risk to no more than 20% of their account on open positions, though they never approached this level of risk. One of the main tenets in my own trading, and one of the things I insist upon when I mentor other professionals is that stops are always in place the moment a position is put on, as well as logical profit targets. I taught this to the students and they practiced it religiously.

What made these students take to trading so quickly and seemingly easily? My slogan is “Master Your Tools, Master Yourself.” I believe mastering yourself and your emotions about positions and money (greed and fear, the “need” to make money) is the most difficult part of trading. I try to build simple tools to help take these emotions out of most traders’ minds, but at this young age, though the students are truly enthusiastic, they are generally not burdened by these emotions. They have no house payments and all the other burdens so many adults have when they first begin to learn to trade. These young adults also have a “clean slate.” They have not been bombarded with the unrealistic and even fraudulent claims so many vendors use when trying to sell their trading books, courses, or software. To these students, this is just another skill, like long division or expository writing, which they have to master, though I dare say the students I helped seemed a bit more
enthusiastic about learning to trade than learning long division!

My son really enjoyed the experience. Those of you who follow my writings here at MarketGeometry.com, MedianLine.com and the presentations I give at The Traders Expos may know that Sean has been helping me update my hand-drawn charts for several years, and has spotted several incredible opportunities that I managed for him (his sharp eyes and charting abilities led to a nice short crude oil position just above $146 a barrel and a nice long position at $35 a barrel). It's safe to say that his college fund is ready to go!

As soon as school was out this year, I got an unexpected request from him: He asked me when I started to learn about trading. Regular readers here or people who follow my writings on my Web pages know that I was extremely lucky to have an older brother who loved to speculate in the commodity markets. His interest in trading and a family friend who owned a large scrap yard in Chicago and traded to hedge his cash metals holdings led to me learning about charting and trading at Sean's age. Once I repeated the story to Sean, he immediately asked me if he could trade an account like I did when I was his age. To be honest, I felt I owed him the same opportunity that my brother gave me, so I offered him this opportunity:

  • He will trade a simulated account for a minimum of six months, though depending on the results and his ability to master essential skills, the trial may go longer.
  • He may pass; he may fail. As I tell all my students, the profession of “trader” is not stamped on your birth certificate. The key, in my opinion, is whether he can master himself.
  • If he passes the simulated account successfully, I will fund a small trading account with a $2,000 maximum stop out on the entire account, which is exactly how my brother started me out in commodities.

He's in the middle of his first simulated trade, and he came rushing into my office during one of my live mid-day mentoring sessions to tell me he got filled on his entry, so several hundred people are now watching the results of his trade live as he moves the stop orders closer. He is nicely profitable in this first trade and about to enter his first stop profit order today after the market closes.

But besides successful simulated trading, he has to learn and master what I consider to be important tools that will give him an edge in the marketplace. For example, over the weekend, we were updating weekly commodity futures charts and cash forex charts. Of course, I never saw the question coming: “Dad, can I trade futures and forex in my simulated account?” I thought about limiting him to stocks, but I teach everyone that the repeatable patterns you should be looking for and researching come in all markets and in all time frames. Since he is in middle school, I wouldn't let him focus on short-term trading, but I decided not to limit him to just stocks.

That opened a whole new set of tools and techniques for him to learn, but I like teaching and I have all the tools pre-built for my own trading. If he was going to trade stocks, futures, and forex, one of the first things I needed him to learn was the concept of equivalent risk. Even if he only traded stocks, this is a very important concept that very few traders understand or utilize. So let's dig into this topic using some simplified examples I put together for people who have only a basic understanding of spreadsheets. (Like most people, I use Microsoft Excel.)

Many retail traders trade in blocks, meaning that they always buy 100, or 1,000, or 10,000 shares of whatever they are trading. If it goes up, they make money, and if it goes down, they lose money. But is always trading the same amount of shares exposing their account to the same risk each time they take a trade? Maybe a simple image will make the flaw easy to spot:

 

This trader always buys or sells 10,000 shares of whatever he is interested in, regardless of price or the volatility of the stock. This trader is trading the same number of shares each time he trades, but he is not exposing his capital to equivalent risk.

The first thing that jumps out at most people when I say the trader is not exposing his account to equivalent risk is the difference in price between the two stocks. Ten thousand shares of Apple (AAPL) was worth about $2.5 million US dollars when this was written. Ten thousand shares of Archer Daniels Midland (ADM) was worth about $260,000 US dollars. The trader would obviously have much more capital invested in 10,000 shares of AAPL compared to 10,000 shares of ADM. But that's easily fixed, right? What if the trader simply did the math so he invested in an equal face value of each stock? Let's take a look:

Let's do the math. One thousand shares of Apple was worth about $250,000, and 9,600 shares of ADM was worth about $249,600. Now that the trader is initially investing a similar amount of money in each stock, is he exposing his account to equivalent risk?

There are many ways to measure volatility; none are perfect and some are extremely complicated. For this exercise, I used a very rough measurement of the Average True Range (ATR), which is an average of the daily high minus the daily low, adjusted for market gaps. This measurement is available on all charting packages, and although it is a very basic measurement, it's a starting point (I do not use the ATR in my own position sizing and money management calculations, but as I said, none of these measurements are perfect and this exercise is meant as a starting point.)

It's easy to compare the volatility of these two stocks: Simply take the average true range and divide it by the price of the stock. By this measurement, Apple has an ATR volatility measurement of 0.0344 and ADM has an ATR volatility measurement of 0.0230. If you've seen charts of these two stocks, it shouldn't surprise you that Apple is a more volatile stock. But adjusting just the amount of cash you invest in each stock so that you have invested an equal amount of cash doesn't reflect the differences in the volatility of the two stocks. And if we add instruments like exchange traded funds (ETFs) and futures and cash forex to the things we might trade, the volatility becomes extremely important, though most retail traders don't understand they are not accounting for the different volatility of the instruments they trade, nor do they change their position sizes according to the volatility. Let's look at a series of simple Excel spreadsheet examples that will show you how to get started measuring the volatility of the instruments you are trading and how to compare them—and then enter into positions that expose your account to similar, if not equivalent risk.

Let's start out with an Excel spreadsheet and a handful of popular instruments: Apple Computer [a stock],  GLD [The ETF for Gold], SPY [basically a closed-end mutual fund that allows you to buy and sell the stocks that make up the S&P 500 Index in one simple trade--it preceded the ETFs of today but functions about the same way], the CME E Mini 500 S&P Futures [the most popular stock index future traded in the United States, it basically mirrors the cash S&P 500 Index] and the Comex Gold Futures [the most popular futures contract based on the price of cash Gold listed on a United States Exchange].

Let's take this diverse list of instruments and examine different ways we might try to get to the point where we are exposing our account to similar if not equivalent risk when we take a position in any of these instruments. Let me re-state the idea: When we take a trade in Apple computer, we want to expose our capital to the same amount of risk when we take a position in Gold futures several days later.

Some of you may still be wondering why we want to try to expose our account to similar risks each time we take a trade: If you have a wonderful day or week trading Apple Computer and then have a losing trade in Gold Futures, if you are using equivalent risk and a good risk/reward ratio [the importance of which I have written about many, many times], you should still have a very nice profit when you net the outcomes of the two trades.

We've already discussed this and the obvious conclusion is that the price of the instrument does not necessarily relate to its value, especially when comparing it to other instruments. Let's keep building our spreadsheet.

Now we add our first measure of the volatility of each of the instruments we are going to compare. There are many ways to measure volatility and many ways to use these different measurements. For example, a very short-term trader may not be interested in knowing that there are occasionally 'out of character' spikes in price in the instrument he or she trades every five or ten years on weekly bars because they are focused on five minute bars [These events are called 'Black Swan' events and although most people believe these events occur about once every 100 years, the measurements simply predict  that in the case of normally distributed data, roughly 1 in 22 observations will differ by twice the standard deviation or more from the mean, and 1 in 370 will deviate by three times the standard deviation. They are of much greater interest to portfolio managers or traders that hold positions over long periods of time. I use a longer term approach to calculating my measurement of risk and volatility, so I do take into consideration these 'third deviation' moves.].

But for this exercise, using a 20 period average true range is a good start for our volatility measurement of each vehicle. Begin with this measurement and you can always choose to replace it after you work with it for some time and learn about other methods and their strengths and weaknesses.

To do any calculations, we'll need to know both the current price of the instruments but also, the value of one dollar in a stock [of course, one dollar in the United States is worth one Dollar] or one point when trading futures [one point refers to a move from 1075.00 to 1076.00 in the E Mini S&P futures; it refers to the move from 1250.00 to 1251.00 in the Gold Futures]. These values are assigned by the exchanges.

I NEVER trade without entering an initial stop loss order into the market at the same time I enter my entry order; I want my capital protected at all times. I have a maximum size stop loss I use based on my research of the a combination of the volatility of the instrument, as well as how far each instrument can trade past market structure roughly 80 percent of the time and still return to the major trend. Some people feel this is a redundant measure of volatility, but it is a number that relates to my own willingness to risk a certain maximum amount of capital for each instrument, based on its trading characteristics--do not confuse this with the average true range, for instance. I add the size and value of my maximum stop loss for each instrument I trade so I can compare what I am risking.

Now let's start building the calculations that will allow us to compare risk! I'll begin by assuming we are trading 10,000 shares of stock each time we make a trade or 10,000 futures contract. Let's see how that works out numerically.

Just glancing quickly at the row marked 'Dollar Risk on Position' should be an eye opener for those of you that always trade the same number of shares each time you trade different stocks or trade the same number of futures each time you trade different futures. For example, if you trade 10,000 shares of Apple, using the ATR method, you are risking $86,000 if you bought the high and sold the low of the day as projected by the ATR [this assumes you are not using stop loss orders to limit your risk or that your stop loss order is larger than the ATR projected move for the day]; if you traded 10,000 shares of the ETF GLD, you would be risking $20.000. These risks are not equivalent and it gets even more striking if we compare the risk associated with taking a position of 10,000 shares of Apple stock and 10,000 E Mini S&P futures: You'd be risking $86,000 on the Apple position and $9,000,000 on the E Mini S&P futures position - that's an incredible difference in risk!

I'm not suggesting the majority of traders or even a few traders are out there trading 10,000 shares of Apple stock and making the assumption that they are taking the same risk when trading 10,000 E Mini S&P futures. But I am suggesting that the majority of traders have not done an exercise like this and really don't have any idea how the risk on each instrument they trade compares. And it is something each trader needs to know if they trade multiple instruments.

So let's build a new set of calculations and see if we can come with something that approaches 'Equal Risk' for each instrument we trade, each time we take a position.

By taking the ATR of an instrument and multiplying it by its Dollar value or One Point Value and the maximum stop loss I am willing to use for that particular instrument, we can easily generate a standard measurement of risk for each instrument; we can then use that standard risk measurement to compare the 'riskiness' of one instrument as it compares to others.

Are there other ways to measure the risk of an instrument? Yes. This is meant as a beginning example and is actually quite useful, as simplistic as it is, but feel free to explore and use other measures of risk or volatility.

Now let's build a table around this standard risk measurement and see if we can work our way to actual equivalent risks across these instruments.

By using the standard risk measurement, we are now able to use a simple formulae to come up with similar or 'equivalent risks' when taking positions in any of these instruments. This table assumes that the standard position used to determine the position size in any of the other instruments is based on 10,000 shares of Apple, but you could easily change the number of shares or even change the standard from apple computer to any instrument [for example, I use U.S. 30 Day Treasury Bills as my 'standard unit' and compare the riskiness of all other instruments to 30 Day T-Bills].

Note I purposely shared the Excel formulas when making calculations; and as I have said several times, this worksheet is meant as a starting point for each of you. To get a real feel for the relatively volatility of the instruments you trade, I urge you to re-create this spreadsheet, with the instruments you actually trade - or you can simply use the instruments I have used and practice your excel skills. But if you have the ability to get the current 20 day ATR for each instrument, when you create your own copy, use the current ATR and don't forget to use your own maximum stop loss sizes!

I hope you find this exercise interesting. Many of you may have never thought of looking at your position sizes using this type of tool - give it a try! Some of you may have better tools for comparing the volatility of instruments - If so, please feel free to drop me an email and share your thoughts, questions and criticisms.

I wish you all good trading.