Born in 1962, Monroe Trout is a hedge fund manager, expert in quantitative analysis, with pattern recognition backed by statistical analysis.

 

MONROE TROUT TRADING TIPS

 

■ The successful trader

A successful trader is rational, analytical, able to control emotions, practical, and profit-oriented.

 

■ Make sure you have the edge

Know what your edge is. Have rigid risk control rules. Basically, when you get down to it, to make money, you need to have an edge and employ good money management. Good money management alone isn't going to increase your edge at all. If your system isn't any good, you're still going to lose money, no matter how effective your money management rules are. But if you have an approach that makes money, then money management can make the difference between success and failure.

 

■ Trading the "magnet effect" of round numbers

I believe markets almost always get to the round number. Therefore, the best place to get in is before that number is reached and play what I call the "magnet effect." For example, I might buy the stock index markets when the Dow is at 2,950, looking for it to go to 3,000. When the market gets close to 3,000, things get more difficult. When that happens, I like to have everybody in the trading room get on the phone with a different broker and listen to the noise level on the floor. How excited does it sound down there? What size trades are hitting the market? If it doesn't sound that loud and order sizes are small, then I'll start dumping our position because the market is probably going to fall off. On the other hand, if it sounds crazy and there are large orders being transacted, I'll tend to hold the position.

 

 

■ Three books for new traders

We give our new traders three books when they start: your first book, The Complete Guide to the Futures Markets [Jack D. Schwager, John Wiley & Sons, 1984], The Handbook of Futures Markets, by Perry Kaufman [John Wiley & Sons, 1984], and The Commodity Futures Game: Who Wins? Who Loses? Why? by Richard J. Tewles and Frank J. Jones [McGraw-Hill, 1987].

 

■ The liquidity pattern that holds in almost every market

The most liquid period is the opening. Liquidity starts falling off pretty quickly after the opening. The second most liquid time of day is close. Trading volume typically forms a U-shaped curve throughout the day. There's a lot of liquidity right at the opening, it then falls off, reaching a nadir at midday, and then it starts to climb back up, reaching a secondary peak on the close. Generally speaking, this pattern holds in almost every market. It's actually pretty amazing.

 

■ There is no random walk

The markets are clearly not a random walk. The markets are not even efficient because that assumption implies you can’t make an above-average return.

 

■ Moving averages and indicators

Moving averages are useful. They’ll work if you watch your risk management. I believe you can make an above-average return by using moving averages if you’re smart about it. Fibonacci retracements, Gann angles, RSI, stochastics – I haven’t found anything there for any of these indicators.

 

■ Succesful trading is a full-time job

To trade successfully you have to do it full-time. I allow myself ten vacation days a year, but I never take them. I firmly believe that for every good thing in life, there’s a price you have to pay.

 

Money Management Trading Tips

 

■ Risk-control methodology to deal with all scenarios

A risk control methodology must be prepared to deal with situations that statistically might seem nearly impossible because they're not.

 

■ How to place stops

People like to put stops right above the high and below the low of the previous day. Traders should avoid putting stops in obvious places. For example, rather than placing a stop 1 tick above yesterday's high, put it either 10 ticks below the high so you're out before all that action happens, or 10 ticks above the high because maybe the stops won't bring the market up that far. If you're going to use stops, it's probably best not to put them at the typical spots. Nothing is going to be 100 percent foolproof, but that's a generally wise concept.

-If I want the price to move toward a certain level, I may put in a stop and then cancel the order once the market gets close. I do stuff like that frequently. Actually, I did it today. It worked today, but sometimes it backfires, and you find yourself the proud owner of some bonds you don't want.

 

■ Determining the maximum monthly position size and accepted loss

One of my risk management rules is that if we lose more than 1.5 percent of our total equity on a given trade we get out. If we're down 4 percent on a single day, we close out all positions and wait until the next day to get into anything again. We have also a maximum loss point of 10 percent per month. If we ever lost that amount, we'd exit all our positions and wait until the start of the next month to begin trading again. We also have a fourth risk management rule: At the beginning of each month, I determine the maximum position size that I'm willing to take in each market, and I don't exceed that limit, regardless of how bullish or bearish I get. This rule keeps me in check.

 

 

■ Monroe Trout

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Main source: Hedge Fund Market Wizards: How Winning Traders Win, by Jack D. Schwager, 2012

 

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