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Ten Ways to Escape Trading Constraints


Find a competent money manager or try these methods on your own.

Minyan Frank writes:
"I work at a financial firm that has a multi-week holding period requirement. The only risk management allowed is the ability to employ a fixed-percent stop loss below one's purchase price. It cannot become a trailing stop or moved until the holding period passes. Under no circumstances can a stock be sold for a profit before the holding period is over.

"Considering the volatility over the last year, it's been difficult to do much with these constraints, as I feel that it throws off the any favorable risk/reward scenarios that I find.

"If you had these limitations, how would you approach trading your personal account?"
This is a very interesting question. Since you work under strict constraints, one serious consideration could be to find a professional money manager whose style is consistent with your approach to the markets. Also, you should seek advice from a competent registered financial planner/advisor.

However, if one had to manage those funds personally, here's how I'd approach the situation.

1. Small positions in the best technical set ups.

2. No counter-trend trades, since the real trend might resume before the restrictive time-period is up.

3. No illiquid, small stocks since they might touch new highs and drop back to lows before the holding period is up.

4. Wait for sector confirmations before buying individual names.

5. Buy only buy the strongest names in the sector.

6. Don't buy names whose earnings are expected in the next few days, in order to minimize earnings risk.

7. Pay close attention to being adequately diversified; I wouldn't want any one sector to unfavorably impact the portfolio.

8. Don't short much (again, this runs the risk of being right and then wrong within the 30-day period) and instead, employ "long-cash" versus the popular long-short strategy.

9. Still pay attention to short patterns as a way of learning "what not to go long."

Investigate options strategies that can be employed to optimize profits, given your constraints.

And of course, one effective strategy might be to pray the stock does well after each position is initiated (smile).
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No positions in stocks mentioned.

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