Chuck Le Beau's System Traders Club
Feb 23, 1999

Bulletin #22


TAKE CONTROL

In my mind, control is an important issue that has a great deal to do with
understanding the process of trading and doing it successfully. There many
parts of the trading process where exercising control is relatively easy and
other parts of the process where control is much more difficult. For
example, the entry into a trade is a point where we are very much in
control. We set the conditions and the market must meet our conditions or
we will simply refuse to participate. This is clearly the point in the
trading process where we can exercise maximum control.

I can recall attending some lectures many years ago by George Lane (of
stochastic indicator fame) when he revealed to the audience a list of items
that he wanted to see before he entered a trade. His pre-entry checklist
had twenty-seven conditions on it. Being a skeptic of complex trading
strategies I don't recall what any of these twenty seven items were except
I'm sure at least one of them was the stochastic indicator. At the point of
carefully reviewing his checklist George was very much in control of the
situation and if the market didn't do exactly what he wanted he didn't
trade.

As I often point out in my lectures, entries are the easy part of trading.
This is because each of us has maximum control at this point. We can
exercise as much or as little control as we like. George Lane can require
every one of his twenty-seven criteria and I can require my usual two setups
and a trigger condition. However the control situation changes drastically
once we enter the trade. Our ability to control all the elements of the
trade now becomes much more difficult and far from absolute. Once we enter
a futures trade we know that we must exit that trade within a limited period
of time or we are going to be in trouble because the contract will expire.
Even stock traders who don't need to be concerned about expiring contracts
must exit their positions correctly if they wish to maximize their profits.

Exits are much more difficult than entries because we can not simply reverse
the entry process and require that the market do thus and such. Once we are
in the trade George Lane and I can both throw our lists out the window
because we can no longer dictate our terms to the market. The market is now
in control and we must be prepared to react to whatever the market does.
The market can do anything it wants once we have entered our trade and we
can be assured that the market doesn't care what conditions might be on our
list or what our preferences might be. Once we enter the trade we are at
the mercy of the market the market operates according to its own list and
that list of possibilities is much larger than George Lane's meager list of
twenty-seven items. The market's options are limitless. It can do anything
it wants whenever it wants and somehow we must be prepared to deal with it.
Where is our control now?

As we hold our trade we must be prepared for big moves against us and big
moves in our favor. (Surprisingly the big moves against us are much easier
to deal with than the moves in our favor. We will talk more about this in
just a minute.) Among the market's limitless possibilities are gaps,
reversals, limit moves, whipsaws, and perhaps worst of all, boring sideways
action that makes us wish we were trading something else. The market may
present us with inside days, outside days, reversal days, key reversal days,
high volume days, low volume days, expanding ranges, contracting ranges,
acceleration, and deceleration. We can be faced with days that are so big
that the chart looks like a propeller on the end of a stick or days that are
so small they just look like dots.

Because we have to be prepared for all this and more, it should be no wonder
that our exit strategies are often much more complex than our entry
strategies. We need to have solutions ready for any problem the market
might send our way. As I mentioned earlier, the losses are rarely the
problem because we can control those by simply setting a loss point and
closing out the trade if the loss point is hit. Here again we are facing an
issue of control and it is comforting to know that we do have a great deal
of control over our losses. If we want to design a system where the average
loss is $487.50 it wouldn't be difficult. We can absolutely control the
size of our losses and we must be certain that we do.

All of our exit strategies have to be carefully planned to be certain that
we control what can be controlled. First we must recognize and understand
what can be controlled and then we must make certain that we exercise
whatever control we have. It may be comforting to know that we can strictly
control losses but it is extremely discomforting to realize that we have
very little control of our profits. If we have a $500 profit, how do we
make it become a $1000 profit? Unfortunately holding on to the trade longer
gives us no assurance that we will eventually have a $1,000 profit.

In this instance we have very little control but let's see what we can do
with the control that we do have. Although the amount of profits can not be
controlled in the sense of our somehow forcing them to be larger, they can
be controlled in the sense that we don't have to let them become smaller or
turn into losses. Those of you who have purchased any of our systems will
appreciate that locking in open profits at various levels is important to
the success of our trading strategies. You will notice that in the "25 X
25" Bond System (free on the web site) we use a very tight channel to help
lock in profits after twenty-five days or after five Average True Ranges of
profit. We can't control the market and force it to give us five ATRs of
profit, but if it does we can make sure that we keep most of it. Protecting
our open profits is definitely within our control.

When conceptualizing a new trading system and when going through the design
and testing routine, be alert to issues of control. Look for what you can
control and make sure that you are controlling it to your benefit. Look at
what you can not control and as a minimum have some plan that will minimize
any possible damage. Thinking about control will make you a better trader
and implementing control will make your systems trade better.


We have received numerous requests for a summary of the 1998 System
Performance data. Here it is. We apologize for the delay.

Summary of trades closed out in 1998 (Cumulative data is since 1988. $100
per trade deducted for slippage and commissions)

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT
LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT
REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN
EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF
ANY, OF CERTAIN MARKET FACTORS SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING
PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH
THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT
WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Bond 25 X 25 Gained$3,725.00
Bond Big Dipper Gained$4,800.00
Bond Little Dipper Gained$6,060.00
Bond Serendipity Gained$937.50
Bond Sidewinder Lost($1,387.50)
Bond Phoenix Gained$17,818.75

Combined Bond Systems $31,953.75

7 - 11 YenGained $2,825.00
First Sword YenGained $17,000.00
Combined Yen Systems $19,825.00

Wildcat Crude OilLost ($1,110.00)

All Systems Combined $50,658.75

Want more details? The 1998 trade by trade results for all of the systems
have been posted on the web site.

Got to http://traderclub.com/systems.htm

You can download the trade by trade reports for all of our systems in text
format.

Go to http://traderclub.com/files/tbyt.exe

We are also in the process of updating our cumulative performance data on
the SYSTEMS pages so that it will reflect data through 1998.


C0MING ATTRACTIONS

We are hard at work finishing the final documentation on a new S&P trading
system. You should be receiving an announcement about the new system in the
next few days.


Good luck and good trading.


Chuck
mailto:[email protected]
http://www.traderclub.com