Can the British Pound Forecast the UK Election?

After a good up month in April for the British Pound, some pundits are calling for weakness, and attributing this to the probability that post the UK’s May 7 election, formation of a coalition government is likely.

This virtual eventuality has been in the news for at least a couple of months. If it were so bearish, one would think it would have become a factor much sooner than six days before the election.

Despite the prospect of a coalition government, a coalition led by Cameron versus Miliband is not the same thing. The Economist endorsed Cameron notwithstanding some drawbacks, such as a possible alliance with anti-EU UKIP. It looks like his leadership, even so, would be better for the UK economically than one led by Miliband, whose cumulative redistributionist ideas could scare away high earners and entrepreneurs.

It’s been said that explanations are always after the fact. Let’s see what the British Pound/US Dollar is saying for itself.

The rise in value of the pound from April 13 to 29 has the characteristic of being driven by over exuberance. There are many opens that jumped higher than the previous day’s close, or if not, opened only a hair below. This looks like typical short-term emotionality.

The high of this move, 1.54969 failed to overcome that of more than two months earlier, 1.5512, so it’s not as if we’re talking about a major bull market here. Indeed all the bullish excitement has been about one up month, April. This overhyped month, though it had a reasonably large open-close range, failed to close over March’s open.

Technically charts show what’s called a piercing pattern, versus, an engulfing line. So though April “pierced” March’s armor, March was not engulfed. Clearly then this dampens April’s importance.

April was number 10 in a 10 month decline, and only the second to be an up month (the other was February). April made lows not seen since July 2010. The price low triggered a very mild oversold signal, but it’s not unusual for this to happen and be followed by a bit of a bounce.

Negating the importance of this is that overbought April, at least so far, has not been confirmed by and up closing May (again so far). The fact that May’s been down decreases the significance of the oversold signal, and even more so emphasizes a lack of disparity between negative momentum and negative trend.

The weekly is setting up a bearish pattern called a Harami star. A close below about 1.50, which is last week’s open-close midpoint, and the high for the week prior, would call for expectations to clearly look lower.

Indeed last week’s high was well above both its open and close. This means that prices tried very hard to climb up, fell right back down, in this case, to just below the where prices started the week.

Monthly and Weekly Candlesticks


All markets have corrections, and often it’s expected that these will be of particular magnitudes. Here, another bearish factor is that the price decline smashed through the 38 percent retracement, and would now be expected to decline at least to about 1.503ish to meet next major retracement of 50 percent.

Bottom line is that the British Pound can’t tell us who will be the next Prime Minister, or whether a coalition must be formed, but it is telling us that it’s not feeling very well right now.

There have only been a few down days so far this month, and the down move may prove only corrective, but if we see a close below $1.50ish, then a retest of April’s low might become increasingly likely.

Charts created using TradeStation. ©TradeStation Technologies, Inc. 2001-2014. All rights reserved. No investment or trading advice, recommendation or opinions are being given or intended.

Celebrating the U.S. Submarine Service 115th Anniversary
Celebrating the U.S. Submarine Service 115th Anniversary

On tax day, ironically, I was asked to comment on a number of issues relating to entrepreneurship, and the pros and cons in a range of areas – what was lost and what was gained.

As those of you who have been following my writing know, I don’t like to look at life in terms of “losses”. I always say that if looked at negatively, life can appear, especially as the last of my parent’s generation die off, and complements come with the additional proviso “for your age”, all about losses.

My comments about the challenges of being an entrepreneur come after 23 years of hard won success. So all the “pain and suffering” of the early years have faded in memory as I now have achieved the goals to which I aspired – mostly having to do with freedom and independence – as well as the financial and professional success which were the vehicles of that hoped for self-directed life.

Some inquire as to whether all the “dues” were worthwhile. I say of course. We all err sometimes, but the key is that my life including the stumbles has led me to where I am today.

Here are the five areas on which I was asked to comment:

Your Sense of Security

There’s a key difference between being secure and feeling secure. Until starting my business I operated in the corporate world. It’s easy to feel secure when you’ve got a paycheck regularly coming and you’re doing well professionally. I focused on work and the paychecks came in.

Ultimately a corporation’s top priorities don’t include your security. The first corporation for which I worked became obsolete and then went bankrupt. I had left years before, but many of my former colleagues who were lifers forfeited late career and retirement expectations. The chemical company and major oil company for whom I worked went through at least two mergers. I lived through one, and that was enough. The money center bank for which I worked went through two mergers. I left during the first one – mergers often involve changes in corporate culture, not to mention hierarchical battles. I don’t like mergers, so I quit. I took a consulting assignment with a large OPEC producer, and a year after that started my own company.

Somewhere along the line I decided to take my life into my own hands. Even though, at times, I felt quite insecure, in the long run, taking responsibility for my own security has meant I could give it the priority I chose. So, as I near what used to seem like an ancient age, I’m secure enough to retire if I want and live in the manner to which I’ve become accustomed. That’s real security.

The tradeoff: Losing an illusory security and gaining a hard-won, bespoke security of my own making.


As for sleep, that’s one of the few things that you get to do when you start your own business. Aside from the necessities of life, what I did when I first got started was work. I used to say, “When I am awake, I am working.” This “work all the time” life lasted about 10 years. Since then, I’ve worked from home, and worked fewer hours over the years, focusing on high-level issues instead of grunt work. Even though those early years seemed to last forever, I’ve had lots of time to do work I really enjoy, teach, research, comment on the markets, and write.

The tradeoff:  Short-term sacrifice for longer-term gratification.


What I did during my leisure time in the early years was addressed in the paragraph above (sleep). After paying my dues, though, provided I don’t get myself overcommitted (which can be a pitfall), I have lots of time to do fulfilling things related and unrelated to work. I’ve been able to give back, volunteering at nursing homes, teaching adult religious ed, serving on the board of a homeless shelter, and for a large charitable trust. I also had time to develop deep friendships, pumped a lot of iron, read, and bake, and am now over half-way done with a second master’s this one in pastoral theology. I’m also active in my local MOAA chapter and the Tucson Subvets’ Base. The tradeoff: Giving up leisure time as you ramp up your business, so that you can have more leisure time after that.

Cynthia A. Kase and Shipmates Enjoying “Leisure Time” and “Social Life” (see photo) Celebrating the U.S. Submarine Service 115th Anniversary

Social Life

If you don’t have a successful life, then you can’t say your business is truly successful. So while it’s normal for one’s social life to suffer in the short run, successful business people usually have successful social lives, including nice relationships with colleagues and clients.

The tradeoffs are the same: short-term sacrifice for longer term gain.

 “Expensive Spending Habits”

If one defines “expensive spending habits”, as spending more than one can afford, I’m against it. No matter how much one makes, I’m against spending more and saving less than prudent. However, to those whom luxury items are well within reach – and for whom spending on “expensive things” won’t make much of a dent, then I think that’s their business.

The tradeoffs are living frugally in the short-run to build up a high net worth in the longer-run. 

Read on

To many, entrepreneurship is a romantic concept. You can be your own boss, experience the freedom of self-management, accumulate material wealth, and live glamorously.

Could it be too good to be true?

Not necessarily — any successful business owner will tell you that all of these goals are achievable. However, reaching these goals requires making lifestyle tradeoffs in order to create and maintain a stable and profitable business. People who wish for these benefits without making the appropriate lifestyle tradeoffs are pejoratively called “wantrepreneurs.”

On the other hand, true entrepreneurs willingly accept that lifestyle tradeoffs must be made to achieve their dreams of running a successful company.

Note: I’m intentionally using the word “tradeoffs” and not “sacrifices” throughout this article because it’s a mistake to say that success entrepreneurs must make lifestyle sacrifices. The word “sacrifices” seriously misrepresents what entrepreneurs are doing when they make lifestyle changes, and also unnecessarily diminishes the positive returns entrepreneurs enjoy by making those changes.

It is important that entrepreneurs have a clear-eyed understanding of the tradeoffs they must make, both in terms of what will be lost, and what will be gained. The intent of this article is to help entrepreneurs understand the nuances of those choices.

In particular, I have identified the following 5 crucial areas where a clear understanding of lifestyle tradeoffs must be considered deeply:

1. Sense of Security

What you will lose:

A majority of entrepreneurs find that they have to quit their 9-5s in order to have the time to work on their new project. Often, they give up their steady salaries, medical benefits, paid time off, sick days, and a whole swath of perks that make life feel comfortable and secure.

“It’s easy to feel secure when you’ve got a paycheck regularly coming and you’re doing well professionally.” 

sense of security

Owner of Kase and Company, Inc. Cynthia Kase, points out “there’s a key difference between being secure and feeling secure.” Most of us would agree with her view that “it’s easy to feel secure when you’ve got a paycheck regularly coming and you’re doing well professionally.” Yet, Kase urges people not to get too comfortable in their positions because“ultimately a corporation’s top priorities don’t include your security.”

Founder and CEO of Cheekd, Lori Cheek was living a life of comfort before deciding to start her business. “Coming from a career of making nearly $120K a year, living a pretty fabulous life traveling, dining out and shopping like it was my job in one of the most expensive cities in the world.”

In order to start her business, Cheek had to exhaust her savings, which she had built up over her 15-year career in architecture. After finishing off her savings she “made nearly $75,000 by selling designer clothes at consignment shops and on eBay, doing focus groups, secret shopping and by selling my electronics and other odds and ends.” Her sense of security really became threatened when she was nearly evicted from her NYC apartment.

What you will gain:

So what do you get in return for your sense of security? Frank Pobutkiewicz of College Apprentice explains that he felt security in the sense of control. “My income, success, and schedule are directly correlated with my actions. I traded a traditional sense of a security at a large company or firm for this sense of control.

Similarly, Cynthia Kase felt that owning her own business allowed her to take her life into her own hands. “Even though, at times, I felt quite insecure, in the long run, taking responsibility for my own security has meant I could give it the priority I chose.”

“I feel like I’m living the American Dream.”

As for Cheek, building a business has been the most powerful thing that’s ever happened to her. “I’ve taken a major risk (both financially & mentally) and surrendered my career in architecture & design, but my heart and mind are in this project every waking moment. I’ve never been more dedicated to anything. I feel like I’m living the American Dream.”

2. Social Life

What you will lose:

For the Director of Your City Office, Simeon Howard believes that the biggest tradeoff of entrepreneurship is what you lose in your social life. “I don’t recall taking a holiday for the first 2-3 years of starting my company and on the first holiday I did take, I distinctly remember the feeling of watching my friends run off to the beach whilst I stayed in and worked remotely.

Mike Munter from Mike Munter Marketing agrees that the biggest loss comes from not working in an office environment. “It’s really challenging to make new friends when you work from your home office as an entrepreneur.”

What will you gain:

Although owning a business reduces the amount of time he has to spend with friends, Munter prefers the freedom to set his own hours. Instead of having to schedule social time around work, he can arrange his work around his social time. “If my softball team is playing at 5pm, I don’t have to rush home or try to leave work early, I just plan for it, get my work done, and go!”

Founder of GenY Success, Jason Bay, also recommends fellow entrepreneurs to surround themselves with like-minded, ambitious and hard working peers. “Aligning my social life with those I would like to do business with, mentor or be mentored by has been a game changer.”

3. Sleep

What you will lose:

entrepreneur lacks sleep

According to Rohit Arora, CEO of Biz2Credit, “when you are running your own business, sleep often becomes a luxury.” In considering how much sleep you will get when starting a business, Arora compares business ownership to raising a kid: “It’s like what they say about parenting: you can never know what it is like until you have a child. For many small business owners, their enterprise is like their child.”

“I can’t even sleep in on the weekends anymore because I always have new ideas floating through my mind.”

“As a business owner, I definitely don’t sleep as much as I used to. Sometimes it is due to being overwhelmed or stressed, but for the most part, it is due to excitement,” says the owner of The Media Captain, Jason Parks. “I can’t even sleep in on the weekends anymore because I always have new ideas floating through my mind.”

What you will gain:

Although he doesn’t get as much rest as he used to, Parks no longer dreads getting up bright and early each day. “I’m pretty fired up to wake up each morning and head into the office, especially since I’m most productive in the early AM,” he explains. For him the positive aspect of not sleeping in is that “I’m passionate about my job and look forward to work each day.”

The founder of Something To Consider, Erik Fogg, admits that in order to run his business he certainly sleeps less. However, with the schedule flexibility of business ownership, Fogg is able to use polyphasic sleep to devote 6 hours to sleep and more time to other things without sacrificing REM.

4. Expensive Spending Habits

What you will lose:

expensive spending habits

When starting a new business, do not expect your standard of living to remain the same. Like many new entrepreneurs, you should expect to invest a large portion of your savings into your business. This inevitably means that you will have to adjust your regular spending habits.

The biggest tradeoff for David Waring of, was giving up his expensive spending habits. “I went from making 6 figures and living in a luxury Manhattan apartment to nothing and living on my cousin’s couch.”

In order to start Home Remedies, Debra Cohen, had to give up her dream of upgrading to a bigger home. “As an entrepreneur, my income was never guaranteed and it was more prudent to stay in a smaller home that we could afford.”

What you will gain:

Surprisingly, there is a lot to be gained developing better spending habits. For Waring, it was about recognizing the value of a dollar. “What I gained from this was a greater appreciation for money so now that I am earning a nice income from my business I appreciate it a lot more than I would have otherwise.”

Although Debra Cohen gave up on moving to a new house, she was able to make the best of her situation. Not only did she develop better spending habits, but also her business gave her access to some of the best contractors and we were able to help renovate her home within her budget.

“I feel these trade-offs have become healthy habits, so in a sense, this consequence has sort of become a blessing in disguise!”

The founder of ArtPort, Garrett Houghton, actually found that bootstrapping his business not only helped improve his spending habits, but it also helped him develop healthy eating habits as well. “I always make my lunches now instead of going out to eat and also have cancelled a lot of the subscription services that I felt were not necessary. However, I feel these trade-offs have become healthy habits, so in a sense, this consequence has sort of become a blessing in disguise!”

5. Work/Life Ratio

What you will lose:

work life balance

Rohit Arora points out yet another entrepreneurial tradeoff:“Entrepreneurs work long hours to get their companies up and running, and then dedicate much more time than they likely envisioned once the business has taken off.” Most new entrepreneurs will find that they have a lot less time to watch movies, catch up on TV shows, or pursue new hobbies.

“I’ve found that the key to success as a business owner, especially in a sales-driven environment, is top quality customer service, and being available when your customers need you,” says Harry Ein of Perfection Promo. “Lost is uninterrupted leisure time. My customers have my cell number, and they call from all different time zones. I answer the phone at 6am and 10pm, 7 days a week, which certainly interrupts leisure time.”

Jason Parks also sheds light on his experience with his loss of leisure time: “In the five years of owning my business, I have only taken one vacation where I had to miss more than two consecutive business days. I’d say one aspect that isn’t great about owning a business is that you can’t truly enjoy your vacation time. I’m jealous when I hear a friend talk about their three weeks of vacation time they have saved for the end of the year. Even when I take time off, I’m still thinking about the business. It can sometimes be more stressful being away from the office and not answering emails.”

What you will gain:

Time is a precious commodity for every startup. First and foremost, the most important benefit from giving up some of your leisure time is that you have more time to invest in developing a profitable business.

Although Ein is on call 7 days a week, he believes there is a huge benefit to trading in some of his leisure time. “Gained is the trust, appreciation and loyalty of customers, as well as long-lasting relationships, all key ingredients for success. These gains are as important to me as they are to my customers.”


If you are serious about entrepreneurship, sit down and consider the potential tradeoffs. Don’t think of the tradeoffs as sacrifices, but rather in terms of what will be lost and gained. It’s important that you decide how much you are willing to change your lifestyle in order to build your business. With realistic expectations of the tradeoffs, you will be well prepared to achieve your g
oal of entrepreneurship.

What have you sacrificed to get your business off the ground?

Photo credit: Lendingmemoby Cynthia A. Kase

Read on FEI Daily

Without investment risk none of us would make any money in the markets, but managing trading risk as a financial executive is a lot more complicated than one might like.
Often risk limits are set arbitrarily and  impacted by trader performance, units traded, the typical risk per trade, and whether the risk per trade is statistically appropriate.  If the risk is too low, that means you constantly see your stops hit and exceed your limits, only for the market to turn back in your favor. If the risk is too high, you will stay in losing positions too long, and give up too much on profitable exits.
Proper stops cannot be placed purely on one’s comfort level, or budget, but are dictated by market conditions and volatility.
STEP 1: Understanding Trader Performance Risk and Percent Chance of Loss
Everything else being equal, a trader with a good track record has a lower probability of losing the risk limit than a trader with a poor one.
Corporate traders are often inexperienced, as I was when I was transferred into international energy trading from engineering in 1983 (just as the crude oil contract was introduced). So it’s not always a valid assumption professional traders are competent or well-trained. Back then, energy traders only used fundamentals (defined as research combined with speculation), and setting risk limits as a gross value made sense. The best computing power we had on the trading floor was an Intel 8086 beige-box desktop, and streaming data evaluation — available on today’s Bloomberg terminals — was not within reach.
Many years later, computing power can push lots of streaming data through very sophisticated algorithms evaluating risk in portfolios, even if they contain thousands of securities, in the blink of an eye. Thus we can set risk limits and control risk in a much more granular and nuanced way. It’s not a question of either fundamentals or technicals. Today, there’s no excuse not to do both.
This first step involves understanding the math that underlies basic risk calculations, and how they are impacted by trader performance. Here are the key formulae, derived from game theory.
A =     RL / {In(P) / [ln(1 – W) – ln(W * R)]}
RL =     A * {ln(P) / [ln(1 – W) – ln(W * R)]}
P =     EXP ({RL * [ln(1 – W) – ln(W * R)]}/A)
A =     Amount of Risk per Trade
RL =     Risk Limit, or Total Capital
Willing to Lose
P =     Percent Chance of Losing RL
W =     Percentage of Time “Win”
R =     Win-to-Loss RatioLet’s assume the risk limit is $100,000. The trader will be “shut down” if that much is lost. However, there’s a big difference between a 25 percent chance of losing $100,000, versus a more tolerable 0.25 percent.
The question becomes how much of a chance is being taken of losing “everything”. W is the percent of times a profit is made. So if 100 trades are taken and 55 are winners, the W value is 55 percent, or 0.55. R is the ratio of the average wins, say $10,000, and the average losses, say $5,000, with R, then the win to loss ratio equal to 2.0.
Using various inputs with a range of P values produces the following:
The table shows risk-of-ruin can be by cut by a factor of 10 but cutting the risk per trade by half. Dropping from 1 percent risk to only 0.25 percent, a 75 percent further reduction, only takes a 24 percent cut. So, cutting the amount risked per trade has outsized payouts relative to the probability that the RL will be lost. Also cutting risk per trade by about one-third would allow a more conservative assumption of W = 1.5:1 for untried traders.
With a percentage of winning trades of 40 percent, the win-to-loss ratio would have to rise to 3.67 for the same results. Many pundits point out that it’s possible to have a winning track record with less than 50 percent wins. The problem is that this scenario usually relies on outlier wins, as opposed to steady wins in the 3.5 to 4.0 range. Since outliers are, by definition, not typical, one must be wary of such assumptions.
Kase has developed more complex Monte Carlo models to simulate outliers in wins and losses, and the percent of wins for a more nuanced view, and to track trader performance against statistical expectations. However, plugging the formulae above into a spreadsheet is a good place to start.
Step 2: Measuring Risk
Step Two involves translating risk per trade into risk per unit and units per trade in a non-arbitrary fashion.
The risk per unit is the point at which a stop would be placed. It’s necessary to assess the degree of risk inherent in a given market, and design a stop suitable for it. Being ex-Navy, I like to use a nautical analogy. Sailors must evaluate conditions, such as the height of the waves, wind speed, direction, and the like. You risk ruin choosing to sail a dinghy in a raging Atlantic storm, because its price is consistent with your budget.
The primary measure of trading risk is True Range (usually written TrueRange), and it is this value that should be the basis of setting stops. TrueRange is proportional to local volatility. TrueRange = maximum(H, C[1]) – minimum(L, C[1]). This is similar to a bar’s high low range, but includes gaps between the previous bar’s close and the current bar’s high or low. Chart 1 below shows a TrueRange (red) and High-Low range (blue) as identical. The middle chart shows the low of the TrueRange at the previous day’s close, below the low, and to the right also at the previous day’s close, above the high.
Nomenclature is H = high, L = low, C = close, and [n] = bars back. This bar is always bar[0], though it’s customary to drop [0], as it’s understood.
TrueRange may be calculated over multiple bar lengths, such as sets of three bars.
STEP 3: The Amount of Risk per Unit, or Setting Stops
Simple stops might be based on a multiple of Average True Range (ATR). Typically a value of around 1.7 would be considered a warning, or even an exit if broken on a closing basis, and a multiple of 3 to 4 works for a must-exit point. Depending on your exit strategy a stop using a multiple between 1.7 and 4 should be used to determine the risk per unit.
ATR is available in most, if not all, charting platforms, but if yours doesn’t have it, it’s easy to calculate on a spreadsheet.
Because the standard deviation of True Range varies, Kase developed an improved stop called the DevStop. It uses multiple standard deviations over the mean TrueRange based on two-bar sets, corrected for right-hand skew. Using two-bar calculations helps capture some directional information on whether bars are overlapping due to oscillations or moving directionally. Because these stops are statistical, a setting of 1.0 standard deviations over-the-mean captures about 84 percent of the observation on a cumulative basis.
Chart 2 below shows the ATR stops in the top pane and DevStops in the lower, both based on 30 periods. The placement of the stops on the chart is driven by a 10- and 21-period simple moving average. When the 10-period moving average is below the 21-period moving average, the stops “trail” the lowest low, to which they are added, and vice versa.
STEP 4: As Time Frame Rises, Risk Rises on a Diminishing Rate.
Even though you might be looking at a daily chart, weekly charts are often preferable, and sometimes even monthly, as the oscillations in many, if not most, securities are statistically too large to manage on a daily basis. Remember the market doesn’t care about your budget. If the market dictates a monthly chart, so it is. The key is to know how large your stop must be and set your other risk limits accordingly. Keep your risk profile at the same or a lower level by adjusting units traded.
By doing this, keeping risk the same, you might actually be improving performance because you will be hitting stops and churning much less often, and price action smoothes out.
A big benefit in moving up in time is that the risk only increases proportionally to the square root of time, and in real life, often less. So moving to a higher time frame has diminishing costs.  Moving up by a factor of 25 only increases risk by 5, and from a daily to a monthly about 4 or so. Again, in actuality the impact of outliers is often felt less by the bigger bars, so the risk increase might be dampened.
The penalty is on the downside. If you want to cut the risk inherent on a daily chart by a factor of 3, you need to trade 9 bars per day. Dropping down to a lower time frame, where an oscillation on a daily bar becomes a trend on an intraday is an option, but with diminishing value. The impact of outliers and gaps hits harder. Also this requires active trading that is impractical for moderate to large volumes.
Case Study: AAPL
Let’s look at Chart 3 below, two AAPL (Apple Inc.) charts. The one on the left is a daily and on the right a weekly chart. Each shows price activity from about March 2014 to January 15, 2015. Each chart has double-sided DevStops, with a 10 and 21 simple moving average in the bottom pane. Here the “normal” stops, in the direction crossover, are shown in brown. If there’s a “mini trend” in the opposite direction, those are shown in aqua. The reason these mini-trend stops are shown is that sometimes traders reverse positions before the moving averages do, and therefore, traders have asked us for stops in that case.
Looking at the stops changing color and the moving averages crossing back and forth, it’s clear that although AAPL was trending, the daily was choppy. The weekly only had one back-and-forth cross early and then moved up cleanly.
One might argue that it’s only natural for a weekly to have fewer crossovers than a daily, but in this comparison, the daily is quite choppy for a trending market, regardless. (I call this type of market “hybrid” as it is choppy and trending at the same time). Note the moving averages are used to illustrate the point that regardless as one’s choice of system, there would be a fairly high churn on the daily, anyway. I count about 16 moving average crossovers, 12 hits on the first level stop, six of which followed through to hit the second level. Only the early December hit was significant.
On the weekly, price action looks fairly clean, and the first level stop was hit only twice: once during a corrective period in the fall, and then on the week ending December 12, 2014, at which time there was a close below it. Thus the weekly would have allowed the trade to run at least until then. This is not to suggest that the daily be ignored altogether, just that it should not be the primary chart monitored.
Take a closer look at the smallest of the purple values on the right of each chart. The daily’s value is 6.56 and the weekly’s is 10.44. This is the first stop’s risk. If we assume that one would exit on a close below this stop, the daily has eight exits, while the weekly only one, on December 12. However, the risk on the weekly is only 1.6 that of the daily even though the time has increased by a factor of 5, with a predicted increase of 2.23 (√5) or less. As noted above the actual increase is usually less.
The fact that risk of about $10.44 per unit must be taken might be unpleasant. However, if you look at the red arrows, it’s obvious that the statistically based stops inherently match up with highs and lows on the weekly, not the daily. Finally, look at the small number in green between the risk values. This is a gauge of chaotic activity, based on a ratio of standard deviation versus average range measures, called the Kaos ratio. The reading on the daily is 0.39 versus the weekly 0.33, showing that with the lower value, the weekly is probably a better choice.
STEP 5: Crunch the Numbers
You can determine the risk per unit using the simple stop calculation, and put it into the formulae in Step One to figure out how many contracts to trade. The stop also can determine loss triggers at which you will monitor trades and traders more closely.
To cut out the spreadsheets, I’ve designed an algorithm that automatically pulls the largest stop value and does all the calculations. Based on a risk limit of $100,000, win-to-loss of 1.5, wins of 55 percent, and 0.25 percent, 0.50 percent, 1.0 percent, and 2.5 percent risk of ruin (as inputs into the algorithm), the risk per trade and units per trade are returned in the Chart 4.
Comparing (on either chart) the “red” at a 2.5 percent risk of ruin with the “blue” at 0.25, a 10 fold reduction, a decrease of 38 percent, or a factor of 2.6 is required. So modest reductions in trading volume disproportionately diminish risk.
The risk per trade is the same on both charts, as it is driven purely by the manual inputs into the model. The units per trade is the risk per trade divided by the risk per unit (the stop value) pulled from the chart by the algorithm. Here there has been a five-fold increase in the bar length, but the units per trade drop by less than 30 percent.

Simple risk of ruin calculations can be used to determine risk limit parameters. The key is to use TrueRange based stops to gauge the risk per unit. Risk does not increase at the same pace as bar length increases, which is favorable to using longer bar lengths. Reductions in trading volume disproportionately decrease risk. If stops are hit often, try higher bar lengths. With the five steps done correctly, you can use stops to monitor individual trades and traders, as well as performance over time.

Cynthia A. Kase, CMT, MFTA, chemical engineer, oil trader, risk manager, and highly acclaimed market technician, is president of Kase and Company, Inc., CTA which has two foci: advising corporate and institutional energy clients on trading, hedging and risk management issues, and another as a cutting edge software developer of technical forecasting and trading studies, and algorithmic solutions to trading issues.