Education Hub Defensive Conservative Investment Style
Review of the method
The conservative strategy is simple. For the futures trader, it involves trading in one contract of the given market or 100 shares (round lot) of a stock. Many traders have asked me if I recommend options as a substitute for a position in futures or stocks. My answer is no. The problem with options is that the price executions are often very poor, liquidity is often what accounts for poor price JWPR004-09 JWPR004-Bernstein February 9, Char Count= 0 PMF: Follow-through: executions and they lose time value. Instead, I advise trading the PMF method for futures, futures spreads, and/or stocks. The conservative trader has three choices when using the PMF method. Here are the choices and their pros and cons:
Place a profit-taking order at PT1. The good news is that you often make a profit because PT1 is frequently hit. The bad news is that if the market keeps moving in the given direction, you will leave a lot of money on the table. The worse news is that you may make as many as 10 small profits in a row but, take my word for it, you could give it all back plus more on one losing trade. I do not recommend this strategy.
When PT1 is hit, change your stop-loss to breakeven (i.e., the price at which you entered). See the seasonal Lessons 2 and 3 or a more thorough description of the breakeven stop. The good news is that you are giving the market plenty of room to reach PT2 or even better levels. The bad news is that you may get stopped out at breakeven many times. And this will make you mad. Unfortunately, as a one-contract trader, you do not have a choice. If you trade PMF in stocks, you could split your 100 shares into three units and use the aggressive strategy described below.
The best strategy for conservative traders is to place a stop-loss at breakeven when PT1 is hit and then to use the TS (trailing stop) procedure when PT2 has been hit (see trailing stop procedures below)
This follow-through method requires you to trade in units of two. If you trade futures, then you will trade 2, 4, 6, 8, contracts. If you trade stocks, then you will trade 200, 400, 600, and 800, and shares. You will exit your positions as follows
After entering your position, you will place a profit-taking order at PT1 to exit ∼HF (high frequency) of your position
When PT1 is hit, you raise your stop-loss breakeven on the remaining ∼HF of your position
When PT2 is hit you will begin to trail a stop at 50 percent.
If a trade produces an open profit of twice PT2 implements a 75 percent trailing stop.
This follow-through method requires you to trade in units of three. If you trade futures you’ll trade either 3, 6, or 9, contracts. If you trade stocks, then you will trade 300, 600, and 900, shares. You will exit your positions as follows:
- After entering your position, you will place a profit-taking order at PT1 on one-third of your position. 2. When PT1 is hit, you will raise your stop-loss breakeven on one-third of your position with a stop-loss that locks in 50 percent of your profit on another one-third of your position.
- When PT2 is hit you will exit another one-third of your position unless stopped out.
- When PT2 is hit and you have closed out one-third of your position, you will trail a stop on the remaining one-third of the position.
- If a trade produces an open profit of twice PT2, implement a 75 percent trailing stop.
The aggressive strategy allows you to make a profit, to trail a stop, and hold a position for the bigger move should it occurs. The moderate strategy also allows for this possibility. The conservative strategy can also allow you to ride a trade past PT1 and PT2; however, you will not be able to enjoy the benefits of taking some profits. It would be an “all or nothing” strategy for the conservative trader. As you can imagine, this is anathema to the small trader who is intent on taking profits as often as possible.
If you use the conservative strategy, you fare better in the long run than if you trade for the bigger moves. Naturally, the decision is yours. But I think you substantially increase your odds of success by going after the big moves rather than the small moves.