Voice chat conference by FL on 2/1/2005

Let's talk about parlaying. What am I talking about, parlaying? You go ahead and you start a campaign. You know your risk is 3 points. For argument's sake we'll say you're going to do 2 contracts, risking 3 points, 3 times 2, you've got 6 points worth of risk. Let's say it ran up today and we'll say you kicked it out today, and let's say all you did was you bought one at 70, one at 80, kicked them out at 90, so you've got 30 points worth of profit. Now comes the next campaign. What are you going to risk on the next campaign? We're not going to risk more than 3 points in terms of points. Well, I'm looking at my little profit sheet here. Oh, I just made 30 points. Let's take the parlaying into the ridiculous area. You started the first campaign with 2 contracts, and you ended up with a 30 point profit. You want to parlay one trade into the next trade. You're going to end campaigns, but you're not going to end your series of campaigns for a while. So if you want, you can start the next one off with 10 contracts. If you're wrong, you lose 3 points. That's 3 times 10 is 30. That's what you made in the other one. So what you're doing is you're taking your profit from one campaign, and adding it to the second one. Now that's being a little ridiculous, but instead of starting out with 2 contracts, since you're ahead 30 points, start out with 4 or 5 contracts into the next one, and look at it as a parlay from one into another into another. And that way you can get into some serious quantities fairly quickly.

An easy way to do this is through risk management, and here's what you want to do with risk management in order to do that. Let's say for argument's sake you have total risk is $10,000 (TR = 10,000), and you're just starting out. So now you want to have a lot of room in case you're wrong, which you're going to be. So your risk on the first try in the campaign is going to be TR divided by 20. So if TR = 10,000 divided by 20, you're going to risk $500. OK, $500 means you can do approximately 2 contracts. So you're going to do 2 contracts. If you're wrong, you lost $500, you're left with $9,500. Then you divide $9,500 by 20, you risk $450 on the next one. So again, you can do approximately 2 contracts. A hundred dollars here or there is not going to make much difference. Now you do a campaign, and let's say this one is successful and you made $2,500 on it. You now have this column over here of your total risk is $10,000, and you're going to divide by 20 so you never have more than 5% of your total risk. So on your first trade you lost $500, on the second one you made $2,500. So we want to put $500 back into the TR column, so that column is $10,000. So if we made $2,500 on the second trade, we now have an extra $2,000 dollars. Where are we going to put that? Let's start another column, and we'll call that column "profit."

Now another campaign comes along. What can you risk on it for a parlay? You can risk 1/20 of the first column, which is your total risk. You've got $500 worth of risk over there. Now your second column where you have your profit, you've got $2,000 over there. What percent can you risk of that? Whatever you want. You want to risk 100%? OK. You want to risk 50%? You want to risk 25%? Whatever you determine. Let's say you want to risk 25%. OK, I'm going to risk 25% of that. So that's another $500. So now on this second campaign you've now got $1,000 worth of risk. So where you were starting off with 2 contracts you now can start off with 4 contracts. Let's say it goes bad. What happens if it goes bad? You lose $1,000. So your first column is now back to $9,500, and your second column is down to $1,500. Key rule, we want that first column to be $10,000 or greater, always. So we now have to take $500 from the profit column, and put it back into the "total risk" column to bring that back up to $10,000. So now our 2 columns look like I've got $10,000 of total risk and I've only got $1,000 worth of profit. Now you can make another trade. Another campaign comes along. You risk $500 from your total risk, which is 1/20. you've got $1,000 in your profit column. You want to risk 50% of this? You want to risk 25%? You want to risk 100%? Whatever you want. Let's say you're risking 50% of it, so it's another $500. Let's say this trade wins, and let's say this trade makes $4,500. So your total risk is fine. We're now adding $4,500 to our second column, so that column now has $5,500 in it. Now here's where an interesting decision comes along. Do I want to keep building that profit column and keep risking 25% of it? I would not think so. If you want to be too progressive, yes, you can do it, but when you're down to where you've got 25% risk, if you get four losers you're blowing it out. What I would prefer seeing people do is setting a goal with that. Let's say the goal in the profit column was $5,000. Well we've got $5,500 in there. What are we going to do? If we achieved that $5,000 goal, we're going to take $5,000 from that column into our total risk column, bringing our total risk column from $10,000 up to $15,000. Now when we calculate our risk on the next trade we've got $15,000 in our total risk column. You divide that by 20, you've go a risk of $750. And you've got $500 left in your profit column. You want to risk all that on the next one? Go right ahead. What you're doing, basically, is you're building a stronger base. You're being aggressive to a point, where if you parlay two or three winners in a row you've now increased your total risk. By increasing your total risk you're increasing your start size, as opposed to constantly staying with 2 contracts. You're increasing your start size, but you're still being able to risk 1/20 of "total risk." I hope I didn't lose anybody on that. It's fairly simple, but I might have said it a little bit screwy. Did that help anybody or do you have any questions on that?

Wave: Do you get to a point where you say when your account doubles you move that profit to your original risk and then start over again?

If you want... The rule that you can't break is that if "total risk" is starting out with $10,000, you can never risk more than 5% to 10% of that, which is 1/20. You can do whatever you want with the profit column. You can be aggressive. You can be conservative. You can set a goal, and then bring that over to TR. Whatever you add to your "total risk" column is always going to get divided by 20 to figure out your IR, or "individual risk." Do anything you want with the profit column. You can be conservative, be aggressive. Do what you want. I mean, if you're going to constantly stay aggressive and just keep building and building and building, if you get a nice run you'll make a bloody fortune, but then if you have one loser you can wipe the whole thing out, so that's not such a great idea. I like the idea of risking 5% from the first column and in your profit column risking 25% to 50%, whatever you want of that. But setting up a goal, and when you get to the goal (I don't care if it's $4,000 or $5,000), move that money into your "total risk," and this way you can build on a strong foundation, to build this into a real business.

Wave: I ran some of those numbers through a spreadsheet, and it really is amazing when you start using profits on the next trades.

Yeah, it works out great, and you're maintaining a key thing in risk control by never risking more than 5% of TR, and you're letting TR build. Anybody have any questions on that, or comments?

Wave: Just a comment. I ran some numbers through an Excel spreadsheet I have, and I found that once you get over 40% or 50% max, it doesn't really make a difference any more.

Whatever is comfortable for you. You can do 10%; you can do 25%; you can do 50%. Just realize that the higher the percent is, the easier it is for you to wipe that thing out with a couple of losses. On the same token if it's goal is loading, the quicker you'll get to your goal. As long as you don't violate your "total risk" column, you can do pretty much what you want in your secondary column, the profit column, which will allow you to build and do all sorts of other stuff with it. And I like it to be goal-oriented. Play with it, risk whatever you want of that. You know, 25% sounds nice, with a goal, if the "initial risk" column was $10,000, setting a goal for that column to get up to $5,000 and bring it over to the TR column. You can use whatever numbers you want with that. That's a people thing, and there's nothing overly magic to it.

Wave: So you can build your position much faster even if it was intra-day, having a margin of $500 per contract versus $2,000?

As long as you don't violate your total risk column, it doesn't matter what you do, but you can't violate your total risk. If you're taking risks greater than 5% of "total risk," in that column, it doesn't matter what margin is, you can't violate that. If it helps you to do it the other way, that's up to you. Anybody else?

Trumbull: From one of your earlier comments, when you said you'd talk about parlaying later on, you said something about parlaying having more possibilities for scalping?

OK, how do you use parlaying in scalping? Same thing. Say if you're a scalper, you still have total risk column and you have a profit column. Just do the same thing. If you're in 2-lots, and that's your basic thing for scalping, it's really depending on your stops, but what you're going to do is take your total risk and divide that by 20, and that will give you your dollar amount that you can risk. I don't know if you're risking 1 point, 2 points, 3 points or whatever it might be. If you're risking 1 point, you're risking $50, and if you've got $500 worth of risk, you can do 10 contracts and you haven't violated TR. If you do scalping with a 1-point stop I think it's kind of silly, but maybe some of you guys have found something that works that way. But that's up to you. But you just use the 2 columns the same way, and this way you can comfortably build your size up. If you have a method that you've back-tested that works, that has a positive expectation over a series of trades, then you have a winning situation. Some guys will have something a little better, somebody won't. It doesn't matter as long as it's got a positive expectation over a series of trades, then you've got a winning situation. Then what you want to do is control your risk so you're going to give it a good opportunity that while it does have some draw-downs you will not knock yourself out of the game. You'll have some controls on your risk, so in theory you always have 20 units of risk coming out of your TR column because you're always dividing that by 20. So it will give you a little more peace of mind, knowing that you have that TR divided by 20. Then you continue to play the game. As it starts to work, which, if it has a positive expectation it will, it will gradually build, therefore you want to start building your quantity. But this way you're increasing your quantity in a very organized, mature fashion that will allow it to grow and not have big draw-downs, but gradually grow and grow and grow, until your size gets to where you say, Oh, I've got enough size and I don't need to go more than that. OK, I'm up to 500 contracts at a crack, and I don't need to do more than that, and you can stop at that point, and you're a 500-lot trader after a while. And if you follow the rules properly, and you do things right, you'd be surprised how quickly you're up in the 100 plus contracts. It's not going to take very long. If you do it properly it really doesn't take that long, but you've got to be consistent, you've got to follow your rules. You've got to follow your risk control that lets you build in a nice, pleasant, gradual manner that will keep your confidence high, and now you've got an absolute money-maker by the tail.