The Wisdom of Stanley Kroll

In writing Friday about CAO's failure to stop out I got to reading Stanley Kroll's The Professional Commodity Trader looking for a quote about taking stops. I remember something to the effect that if you are going to stop out it is always better to do it sooner rather than later. I couldn't find it but I ran across his rules for trade entry and exit.

I. On Initiating a Position
Trade in the direction of the major tend, against the minor trend. For example if the major trend is clearly up, trade the market from the long side, or not at all, buying when:
a. the minor trend has turned down, and
b. prices are "digging" into support, and
c. the market has made a 35-50 percent retracement of the previous up leg.
If the major trend is clearly down trade the market from the short side, or not at all, selling when:
a. the minor trend has turned up, and
b. prices have advanced into overhead resistance, and
c. the market has made a 35-50 percent retracement of the previous down leg.

II. On Closing Out a Position
a. At a profit. Liquidate one-third of the position at a logical (chart) price objective into overhead resistance (for a long position) or into underlying support (for a short position).*
b. At a loss. There are, basically, three approaches:

1. Enter and arbitrary "money" stop-loss; e.g., 40-50 percent of the margin deposit.
2. Enter a chart-point stop-loss; i.e., to close out the position when the major trend reverses against your position - not when the minor trend reverses (that's just the point where you should be initiating the position, not closing it out).
3. Maintain the position until you are convinced that you are wrong (the major trend has reversed against you) and then close out on the first technical correction.**
   

* Following this first liquidation, be alert to reinstate the position, or even 1.5 times the liquidated position, on a subsequent technical correction, as outlined in the above discussion, "On Initiating the Position."

** There are substantial dangers to this particular approach, which will be discussed later in the chapter

That is trading in a nutshell. I absolutely love the footnoted "substantial dangers". Stanley does one of the best jobs I have seen of discussing trading cliches from the perspective of a trader's day-to-day decisions. He treats his own rules the same way. Rules are easy to learn and easy to apply when trades are completed but their correct place at each moment in time is pretty murky.

I will post a follow up later discussing the current state of interest rates in the context of these rules.

The Professional Commodity Trader by Stanley Kroll is available at Amazon.