year cycle, also called the Presidential Cycle, because it coin-cides with the elected term of U.S. presidents. Each of the 4 yearshas a different historical return. The election year (1) is normallystrong. The postelection and midyears (2 and 3) are normallyweak. The preelection year (4) is normally strong. According toHirsch’s Trader’s Almanac, election years since 1904 have seenaverages gains of 224%; postelection years, gains of 72%; midtermyears, gains of 63%; and preelection years, gains of 217%. (SeeFigure 14.16.)374 Chapter 14
COMBINING CYCLES WITHOTHER TECHNICAL TOOLS
Two of the most promising areas of overlap between cycles andtraditional technical indicators are in the use of moving averagesand oscillators. It is believed that the usefulness of both indicatorscan be enhanced if the time periods used are tied to each market'sdominant cycles. Let’s assume that a market has a dominant 20day trading cycle. Normally, when constructing an oscillator, it’sbest to use half the length of the cycle. In this case, the oscillatorperiod would be 10 days. To trade a 40 day cycle, use a 20 dayoscillator. Walt Bressert discusses in his book, The Power ofOscillator/Cycle Combinations, how cycles can be used to adjusttime spans for the Commodity Channel Index, the RelativeStrength Index, Stochastics, and Moving Average ConvergenceDivergence (MACD).
Moving averages can also be tied to cycles. You could usedifferent moving averages to track different cycle lengths. To gen-erate a moving average crossover system for a 40 day cycle, youcould use a 40 day moving average in conjunction with a 20 dayaverage (one-half of the 40 day cycle) or a 10 day average (one-quarter of the 40 day cycle). The main problem with thisapproach is determining what the dominant cycles are at a par-ticular point in time.
MAXIMUM ENTROPYSPECTRAL ANALYSIS
The search for the right dominant cycles in any market is com-plicated by the belief that cycle lengths aren’t static; in otherwords, they keep changing over time. What worked a month agomay not work a month from now. In his book, MESA and TradingMarket Cycles, John Ehlers uses a statistical approach calledMaximum Entropy Spectral Analysis (MESA). Ehlers explains thatone of the main advantages of MESA is its high-resolution mea-surement of cycles with relatively small time periods, which iscrucial for shorter term trading. Ehlers also explains how cyclescan be used to optimize moving average lengths and many of theTime Cycles 375
oscillator-type indicators we've already mentioned. Uncoveringcycles allows for the dynamic adjusting of technical indicators tofit current market conditions. Ehlers also addresses the problem ofdistinguishing between a market in a cycle mode versus one thatis in a trend mode. When a market is in a trend mode, a trend-fol-lowing indicator like a moving average is needed to implementtrades. A cycle mode would favor the use of oscillator-type indi-cators. Cycle measurement can help determine which mode themarket is currently in, and which type of technical indicator ismore appropriate to use for trading strategies.
CYCLE READING AND SOFTWARE
Most of the books referred to in this chapter on cycles can beobtained through mail order firms like Traders Press (see referencein previous chapter) or Traders’ Library, P.O. Box 2466, EllicottCity, MD 21041, [800] 272-2855). There’s also a lot more softwareto help you perform cycle analysis with your computer. TheEhrlich Cycle Forecaster and Walt Bressert’s CycleTrader are bothavailable as add-on options to run with charting software provid-ed by Omega Research. Bressert’s CycleTrader integrates the con-cepts he describes in his book, The Power of Oscillator/CycleCombinations. (Bressert Marketing Group, 100 East Walton, Suite200, Chicago, IL 60611 (312) 867-8701). More information on theMESA computer program can be gotten from John Ehlers (Box1801, Goleta, CA 93116 (805) 969-6478). For ongoing cycleresearch and analysis, don’t forget the Foundation for the Studyof Cycles. 
INTRODUCTION
The computer has played an increasingly important role in thefield of technical analysis. In this chapter, we’ll see how the com-puter can make the technical trader’s task a good deal easier byproviding quick and easy access to an arsenal of technical toolsand studies that would have required an enormous amount ofwork just a few years earlier. This assumes, of course, that the trad-er knows how to use these tools, which brings us to one of the dis-advantages of the computer.
The trader not properly schooled in the concepts thatunderlie the various indicators, and who is not comfortable withhow each indicator is interpreted, may find him- or herself over-whelmed with the vast array of computer software currently avail-able. Even worse, the amount of impressive technical data at one’sfingertips sometimes fosters a false sense of security and compe-tence. Traders mistakenly assume that they are automatically bet-ter simply because they have access to so much computer power.
377378 Chapter 15
The theme emphasized in this discussion is that the comput-er is an extremely valuable tool in the hands of a technically orient-ed trader who has already done his or her basic homework. When wereview many of the routines available in the computer, you'll see thata fair number of the tools and indicators are quite basic and havealready been covered in previous chapters. There are, of course, moresophisticated tools that require more advanced charting software.
Much of the work involved in technical analysis can beperformed without the computer. Certain functions can be moreeasily performed with a simple chart and ruler than with a com-puter printout. Some types of longer range analysis don’t requirea computer. As useful as it is, the computer is only a tool. It canmake a good technical analyst even better. It won’t, however, turna poor technician into a good one.
Charting Software
Several of the technical routines available in charting softwarehave been covered in previous chapters. We'll review some of thetools and indicators currently available. We’ll then address someadditional features such as the ability to automate the variousfunctions chosen by the user. In addition to providing us with thevarious technical studies, the computer also enables us to test var-ious studies for profitability, which may be the most valuable fea-ture of the program. Some software allows the user, with little orno programming background, to construct indicators and systems.
Welles Wilder’s Directional Movement andParabolic Systems
We'll take a close look at a couple of Welles Wilder’s more popularsystems, the Directional Movement System and the Parabolic System.We'll use those two systems in our discussion of the relative mer-its of relying on mechanical trading systems. It will be demon-strated that mechanical trend following systems only work well incertain types of market environments. It will also be shown how amechanical system can be incorporated into one’s market analysisand used simply as a confirming technical indicator.Computers and Trading Systems 379
Too Much of a Good Thing
It may strike you that there are too many indicators from whichto choose. Instead of simplifying our lives, has the computeronly served to complicate things by giving us so much more tolook at? Charting packages offer 80 different studies that areavailable to the technician. How does one possibly reach anyconclusions (and find the time to trade) with so much data tocontend with? We’ll say a few words about some work beingdone in that direction.
SOME COMPUTER NEEDS
Charting software can be applied to virtually any financial mar-ket. Most software is user-friendly, meaning that it can be easilyimplemented by choosing from successive lists of available rou-tines. The place to start is with a charting software package thatworks for the computer you already own or are thinking of buy-ing. Bear in mind that most charting software has been written forIBM-compatible computers.
Charting packages do not provide daily market data. Theuser must obtain that data elsewhere. Data can be collected auto-matically from a data service over telephone lines (requiring aphone modem). Charting packages provide the names of variousdata vendors from which to choose. These data vendors provideall the software and instructions needed to set up and collect thedata files.
When first starting out, the user must collect historical datagoing back for at least several months to have something to workwith. After that, data should be collected daily. It is possible toanalyze “on line” data during the trading day by hooking up to aquote service. However, in our use of daily data, we will be refer-ring to end-of-day data, which is available after the markets close.The final piece of equipment you might want is a printer to obtaina copy of whatever appears on the terminal screen. CD-Rom capa-bility is highly recommended since some software vendors pro-vide you with several years of historical data on a CD-Rom disk to380 Chapter 15
get you started. There are some data vendors that also providecharting capability, which simplifies your task even more. Onesuch service is Telescan (5959 Corporate Drive, Suite 2000,Houston, TX 77036, (800) 324-8246, www.telescan.com).
GROUPING TOOLSAND INDICATORS
The following list groups some of the chart and indicator options.
e Basic Charts: Bar, line, point and figure, and candlesticks¢ Chart Scales: Arithmetic and semilogarithmic
¢ Bar Chart: Price, volume, and open interest (for futures)e Volume: Bars, on balance, and Demand Index
e Basic Tools: Trendlines and channels, percentage retrace-ments, moving averages, and oscillators
e Moving Averages: Reference envelopes, Bollinger Bands
¢ Oscillators: Commodity Channel Index, momentum, rate ofchange, MACD, Stochastic, Williams %R, RSI
¢ Cycles: Cycle Findere Fibonacci Tools: Fan lines, arcs, time zones and retracements
e Wilder: RSI, Commodity Selection Index, DirectionalMovement, Parabolic, Swing Index, ADX line
USING THE TOOLSAND INDICATORS
How does one cope with so much from which to choose? A sug-gestion is to first use the basic tools such as price, volume, trend-lines, percentage retracements, moving averages, and oscillators.Notice the large number of oscillators available. Pick one or twothat you are most comfortable with and go with them. Use suchthings as cycles and Fibonacci tools as secondary inputs unlessyou have a special interest in those areas. Cycles can help fineComputers and Trading Systems 381
 
tune moving average and oscillator lengths, but require study andpractice. For mechanical trading systems, Wilder’s Parabolic andDMI are especially noteworthy.
WELLES WILDER’S PARABOLICAND DIRECTIONALMOVEMENT SYSTEMS
We're going to spend some time on two Studies that are especiallyuseful. Both studies were developed by J. Welles Wilder Jr. and dis-cussed in his book, New Concepts in Technical Trading Systems. Threeof Wilder’s other studies included on the computer menu—Commodity Selection Index, Relative Strength Index, and theSwing Index—are also included in the same book.
Parabolic System (SAR)
Wilder’s Parabolic system (SAR) is a time/price reversal systemthat is always in the market. The letters “SAR” stand for “stop andreverse,” Meaning that the position is reversed when the protec-tive stop is hit. It is a trend-following system. It gets its name fromthe shape assumed by the trailing stops that tend to curve like aparabola. (See Figures 15.1-15.4. Notice that as prices trend high-er, the rising dots below the price action (the stop and reversepoints) tend to start out slower and then accelerate with thetrend. In a downtrend, the same thing happens but in the oppo-site direction (the dots are above the price action). The SAR num-bers are calculated and available to the user for the following day.
Wilder built an acceleration factor into the system. Eachday the stop moves in the direction of the new trend. At first, themovement of the stop is relatively slow to allow the trend time tobecome established. As the acceleration factor increases, the SARbegins to move faster, eventually catching up to the price action.If the trend falters, or fails to materialize, the result is usually a stopand reverse signal. As the accompanying charts show, theParabolic system works extremely well in trending markets. Noticethat while the trending portions were captured well, the systemwhipsawed constantly during the sideways, nontrending periods. 
(*SPX) S&P 600 Stock Index
Parabolic Stopand Reverse Points
(SAR)
 
 
Figure 15.1 The Parabolic SARs look like dots on the chart. A buy signalwas given when the upper SAR was hit (first arrow). Notice how the SARsaccelerated upward during the rally and caught most of the uptrend. A smallwhipsaw occurred to the upper right, which was quickly corrected. This sys-tem works when a trend is present.
 
(*SPX) S&P 500 Stock Index
 
Daily Bar Chart
Parabolic SAR
 
 
 
 
Figure 15.2 _ A longer range version of the previous chart shows the goodand bad aspects of Parabolics and any trend-following system. They workduring trending periods (to the left and right of the chart). But are uselessduring the type of trading range that occurred from August to January. 
pasos (°SPX) S&P 500 Stock Index
 
Monthly Bar Chart
Monthly Parabolic SAR
 
Nyeepee Tatepte ee 1
 
be i)
 
Figure 15.3 Parabolics can be used on a monthly chart to track the pri-mary trend. A Sell signal in early 1994 was followed by a buy in late sum-mer. Except for one whipsaw during 1996, this system has stayed positive foralmost four years.
 
(DELL) Detl Computer Corp
 
Weekly Bar Chart
| -HL.ll! .
Weekly Parabolic SAR. oe
jhe
Pe
“Ber Fab erin
 
at
 
 
Figure 15.4 Parabolics applied to weekly chart of Dell Computer. Afterstaying positive through most of 1997, a sell signal was given duringOctober. That sell signal was reversed and a buy signal given as 1997ended.384 Chapter 15
 
That demonstrates both the strength and weakness ofmost trend-following systems. They work well during strongtrending periods, which Wilder himself estimates occur onlyabout 30% of the time. If that estimate is even close to reality,then a trend-following system will not work for about 70% of thetime. How then does one deal with this problem?
DMI and ADX
One possible solution is to use some type of filter or a device todetermine if the market is in a trending mode. Wilder’s ADX linerates the directional movement of the various markets on a scaleof 0 to 100. A rising ADX line means the market is trending anda better candidate for a trend-following system. A falling ADX lineindicates a nontrending environment, which would not be suit-able for a trend-following approach. (See Figure 15.5.)
     
      
 
p4r21197 (*SPX) S&P 500 Stock Index 03/16/08]
 
 
 
 
 
 
 
 
 
Figure 15.5 The ADX line measures the degree of directional movement. Adownturn from above 40 (left arrow) signaled the onset of a trading range. Theuptum from below 20 (right arrow) signaled the resumption of a trending phase.Computers and Trading Systems 385
 
Because the ADX line is on a scale from 0 to 100, the trendtrader could simply trade those markets with the highest trendratings. Nontrending systems (oscillators, for example) could beutilized on markets with low directional movement.
Directional Movement can be used either as a system on itsown or as a filter on the Parabolic or any other trend-followingsystem. Two lines are generated in the DMI study, +DI and ~DI.The first line measures positive (upward) movement and the sec-ond number, negative (downward) movement). Figure 15.6 showsthe two lines. The darker line is + DI and the lighter line -DI. Abuy signal is given when the +DI line crosses over the - DI lineand a sell signal when it crosses below the — DI line.
Figure 15.6 also shows both the Parabolic and DirectionalMovement systems. The Parabolic is clearly a more sensitive sys-
 
 
parzs/97 (*SPX) S&P 500 Stock Index
Daily Bar Chart
 
#88 e8e@ 8 & lg 8 8 8 B
 
 
 
 
a ve w“SADT Rin Pa aang iaeanon © Orga Rasewo eT
 
 
Figure 15.6 = The Directional Movement lines along the bottom of thechart can be used as a filter on Parabolics (upper chart), When the +DI lineis above the —DI line (far left and far right of chart), all Parabolic sell signalscan be ignored. That would have eliminated several whipsaws during therally phases.386 Chapter 15
 
tem, meaning that more frequent and earlier signals are given.However, by using the Directional Movement as a filter, several ofthe bad signals in the Parabolic could be avoided by followingonly those signals in the same direction as the DirectionalMovement lines. It appears then that the Parabolic andDirectional Movement systems should be used together, withDirectional Movement acting as a screen or filter on the more sen-sitive Parabolic.
The best time to use a trending system is when the ADX lineis rising. (See Figures 15.7 and 15.8.) Be forewarned, however, thatwhen the ADX line starts to drop from above the 40 level, that isan early sign that the trend is weakening. A rise back above the 20level is often a sign of the start of a new trend. (The ADX line isessentially a smoothed difference between the +DI and —DI lines.)
 
 
795 (‘DWU) Dow Utilities
Weekly Bar Chart
|Te ilsth " "hy putt |I
! uti tt Wy yl eu! yatta
A(t
 
14 Week ADX
 
 
 
 
 
 
 
 
Figure 15.7 |The 14 week ADX line peaked in early 1996 from well over40, and initiated an 18 month trading range in utilities. The ADX upturnduring the summer of 1997 from below 20 signaled that utilities were start-ing to trend.Computers and Trading Systems 387
 
02/28/85 (*XOl) Amex Oil Index
 
40 line
Monthly Bar Chart
 
 
 
 
 
 
 
Figure 15.8 An ADX line overlaid over a monthly chart of the AMEXOil Index (XOI). The ADX peaked above 40 in 1990, ending the oil stockrally. The upturn in the ADX line from below 20 at the start of 1995 sig-naled the end of a 4 year trading range in oil stocks, and correctly spotted thestart of a new upleg.
PROS AND CONS OFSYSTEM TRADING
Advantages of Mechanical Systems
1.. Greater discipline is achieved.
. More consistency is possible.
. Trades are taken in the direction of the trend.
. Participation is virtually guaranteed in the direction of
nip wn
NO
Human emotion is eliminated.
every important trend.
. Profits are allowed to run.. Losses are minimized.388 Chapter 15
Disadvantages of Mechanical Systems
1. Most mechanical systems are trend-following.
2. Trend-following systems rely on major trends in order to beprofitable.
3. Trend-following systems are generally nonprofitable whenmarkets are not trending.
4. There are long periods of time when markets are nottrending and, therefore, not suitable for a trendingapproach.
The major problem is the failure of the system to recognizewhen the market is not trending and its inability to turn itself off.The measure of a good system is not only its ability to makemoney in trending markets, but its ability to preserve capital dur-ing nontrending periods. It is this inability of the system to mon-itor itself that is its greatest weakness. This is where some overrid-ing filtering device, such as Welles Wilder’s Directional Movementsystem or the ADX line could prove especially useful by allowingthe trader to determine which markets are most suitable for atrending system.
Another drawback is that no allowance is generally madefor anticipating market reversals. Trend-following systems ridewith the trend until it turns. They don’t recognize when a mar-ket has reached a long term support or resistance level, whenoscillator divergences are being given, or when an Elliott Wavefifth pattern is clearly visible. Most traders would get moredefensive at that point, and begin taking some profits. The sys-tem, however, will stay with the position until well after themarket has changed direction. Therefore, it’s up to the trader todetermine how best to employ the system. That is to say,whether it should be followed blindly or whether it should beincorporated into a trading plan with other technical factors.That brings us to our next section on how a mechanical systemcan be used as just another technical input into the forecastingand trading process.Computers and Trading Systems 389
 
Using System Signals as aDisciplining Device
The system signals can be used simply as a mechanical confirma-tion along with other technical factors. Even if the system is notbeing traded mechanically, and other technical factors are beingemployed, the signals could be used as a disciplined way to keepthe trader on the right side of the major trend. No short positionswould be taken as long as the computer trend was up. No longswould be taken in a computer downtrend. (This would be a sim-ple way for fundamentally oriented traders to use a technicaldevice as a filter or trigger on their own trading ideas.) Trenddirection can be a matter of judgment. The computer signalsrelieve the trader of some degree of uncertainty. They can preventhim or her from falling into the trap of “top and bottom picking.”
Using Signals as Alerts
System signals can also be used as an excellent screening device toalert the trader to recent trend changes. The trader can simplyglance at the trend signals and instantly has several trading can-didates. The same information could be found by studying all ofthe charts. The computer just makes that task quicker, easier, andmore authoritative. The ability of the computer to automate sys-tem signals and then alert the trader when signals are triggered isan enormous asset, especially when the universe of financial mar-kets has grown so large.
NEED EXPERT HELP?
One of the products offered by Omega Research calledTradeStation offers a variety of Expert Features (Omega Research,Miami, FL 33174, (305) 551-9991). You can call up its ExpertCommentary, which interprets indicators for you based on cur-rent market conditions. Omega’s Expert Analyst will determine390 Chapter 15
which indicators should work best in the current market andinterpret them for you. In addition, it has two Expert Tools. TheTrendlines Automatic Indicator actually draws trendlines for you.The Candlestick Patterns Indicator reads the more common can-dlestick chart patterns.
TEST SYSTEMS OR CREATEYOUR OWN
Omega Research also includes a library of the most popular trad-ing systems used by traders. You can test them, change them, orcreate your own if you wish. All of Omega’s charting tools, indi-cators, and trading systems are written in a relatively simple lan-guage called EasyLanguage. EasyLanguage takes trading ideas thatyou have described in plain language and converts them into themachine code needed to run the program. It’s hard to overesti-mate the value of being able to develop, test, optimize if you wish,and then automate your own trading ideas—without being acomputer programmer. The computer will even generate theappropriate trading orders for you and alert you via your alphanu-meric pager that signals have been triggered. (In Appendix C,we'll use Omega Research’s EasyLanguage and TradeStation toshow you how to go about creating a trading system of your own.)
CONCLUSION
This chapter introduced a couple more of Welles Wilder’s systemsto you—Parabolics and Directional Movement (DMI). Parabolicscan generate useful trading signals, but probably shouldn’t beused alone. The two D] lines can be used as a filter on Parabolicsor any other sensitive trend-following trading system. The ADXline, which is part of the DMI system, provides one way to deter-mine which type of market you’re dealing with—a trending or atrading market. A rising ADX line suggests a trend and favorsmoving averages. A falling ADX line suggests a trading range andfavors oscillators. We also used the Parabolic examples to showComputers and Trading Systems 391
 
the good and bad sides of most trend-following systems. Theywork well when a trend is present. They’re useless during a trad-ing range. You have to be able to tell the difference. We alsotouched on the merits of mechanical trading systems. These sys-tems remove human emotion and can be very helpful in the rightmarket climate. They can also be used as technical alerts and usedin conjunction with fundamental analysis. (See Appendix C formore on system trading.)
There’s no question that the computer has revolutionizedfinancial market analysis and trading. While our interest is pri-marily in technical analysis, software programs also allow you toblend fundamental analysis with the technical. When the firstedition of this book was published in 1986, it cost about $5,000to outfit yourself with the necessary computer hardware to per-form serious technical analysis. The leading software package ofthe day cost close to $2,000. How things have changed. You cannow obtain incredibly powerful computers for less than $2,000.Most software packages can be had for less than $300. The betterones provide you with up to 20 years of historical price data on aCD-Rom disk at little or no additional cost.
Another big benefit is the amount of educational help thatyou can obtain with those software packages. The user manualsalone are the size of a book and include technical formulas and allkinds of useful explanations. The screening and alert capabilitiesof today’s computer are especially helpful to those monitoringglobal bond and stock markets and thousands of individual com-mon stocks, not to mention mutual funds. In Chapter 17, we'lltalk about an even mote sophisticated use of computer technolo-gy for developing neural networks. But the message to you is Clear.If you are serious about investing or trading financial markets, geta computer and learn how to use it. You’ll be glad you did.  
 
Money Mana ement andTrading Tactics
 
 
INTRODUCTION
The previous chapters presented the major technical methodsused to forecast and trade financial markets. In this chapter, we’llround out the trading process by adding to the task of market fore-casting the crucial elements of trading tactics (or timing) and theoften overlooked aspect of money management. No trading pro-gram can be complete without all three elements.
THE THREE ELEMENTS OFSUCCESSFUL TRADING
Any successful trading program must take into account three impor-tant factors: price forecasting, timing, and money management.
393394 Chapter 16
1. Price forecasting indicates which way a market is expected totrend. It is the crucial first step in the trading decision. Theforecasting process determines whether the trader is bullish orbearish. It provides the answer to the basic question ofwhether to enter the market from the long or short side. If theprice forecast is wrong, nothing else that follows will work.
2. Trading tactics, or timing, determines specific entry and exitpoints. Timing is especially crucial in futures trading.Because of the low margin requirements and the resultinghigh leverage, there isn’t much room for error. It’s quite pos-sible to be correct on the direction of the market, but stilllose money on a trade if the timing is off. Timing is almostentirely technical in nature. Therefore, even if the trader isfundamentally oriented, technical tools must be employedat this point to determine specific entry and exit points.
3. Money management covers the allocation of funds. Itincludes such areas as portfolio makeup, diversification,how much money to invest or risk in any one market, theuse of stops, reward-to-risk ratios, what to do after periodsof success or adversity, and whether to trade conservativelyor aggressively.
The simplest way to summarize the three different ele-ments is that price forecasting tells the trader what to do (buy orsell), timing helps decide when to do it, and money managementdetermines how much to commit to the trade. The subject of priceforecasting has been covered in the previous chapters. We'll dealwith the other two aspects here. We'll discuss money manage-ment first because that subject should be taken into considerationwhen deciding on the appropriate trading tactics.
MONEY MANAGEMENT
After having spent many years in the research department of amajor brokerage firm, I made the inevitable switch to managingmoney. I quickly discovered the major difference between recom-mending trading strategies to others and implementing themMoney Management and Trading Tactics 395
myself. What surprised me was that the most difficult part of thetransition had little to do with market strategies. The way I wentabout analyzing the markets and determining entry and exitpoints didn’t change much. What did change was my perceptionof the importance of money management. I was amazed at theimpact such things as the size of the account, the portfolio mix,and the amount of money committed to each trade could have onthe final results.
Needless to say, I am a believer in the importance of moneymanagement. The industry is full of advisors and advisory servicestelling clients what to buy or sell and when to do it. Very little issaid about how much of one’s capital to commit to each trade.
Some traders believe that money management is the mostimportant ingredient in a trading program, even more crucialthan the trading approach itself. I’m not sure I’d go that far, but Idon’t think it’s possible to survive for long without it. Moneymanagement deals with the question of survival. It tells the trad-er how to handle his or her money. Any good trader should winin the long run. Money management increases the odds that thetrader will survive to reach the long run.
Some General MoneyManagement Guidelines
Admittedly, the question of portfolio management can get verycomplicated, requiring the use of advanced statistical measures.We’ll approach it here on a relatively simple level. The followingare some general guidelines that can be helpful in allocating one’sfunds and in determining the size of one’s trading commitments.These guidelines refer primarily to futures trading.
1. Total invested funds should be limited to 50% of total capital.The balance is placed in Treasury Bills. This means that atany one time, no more than half of the trader's capitalshould be committed to the mark