First Three Bond Lessons to Help you Learn More About the Bond Market
By: pauljudd | Posted: 01st February 2008
Lesson 1: 10 Tics Works the Best
I have found that, on a “new trade,” setting a limit order and taking 10 tics (over $300.00 profit) works the best. The only time you should take more than 10 tics is when your model / asset allocation table tells you to add another futures contract at a different entry price.
Lesson 2: It’s Not Las Vegas—It’s the Bond Market
It never works. I’ve tried it many times. That is, putting on too many positions at the same time (over-leveraging your trading account)—thinking this could be the trade that makes you a lot of money. You may be right; however, I can assure you there’s a trade just around the corner that will take that money back and then some.
Lesson 3: Stops are Risky!
Ten years ago, over a two-year period, I lost $175,000. It wasn’t so much that I couldn’t call the market. I just kept getting stopped-out. Finally I realized that wasn’t the way to trade the bond market. Stops are counter-productive. They just get in the way. Not only can stops take back your profits, but also they can wipe out your trading account.
One reason to focus on bonds is that it is “liquid” (has volatility), and that’s what you need in order to make money. Because of that volatility, common sense should tell you that probably the worst thing you can do is set a stop.
Ask yourself this question: “If I set a 20-tic stop and I get stopped-out, and the next day it happens again, am I managing the risk?” No! You have added to your losses.
It’s Asset Allocation all the way.
Here’s How it Works.
You start off with one futures contract. The only time you add a second contract is when the market goes against you by a certain amount. In other words, you let your bond model / asset allocation table tell you when to add another position.
I have over 14 years of experience with my model, which is based on Gross Domestic Product. It’s also designed for asset allocation.
Stops vs. Asset Allocation
Stops
When I used to set stops, I found that I would automatically put on too many positions (that’s what “kills” most trading accounts—over-leveraging), or I would phone the broker and tell him to move my stop farther back as the market was approaching it, which added to my losses.
When you get stopped-out, it’s also very demoralizing.
Asset Allocation
Asset allocation can allow you to manage the risk better than stops just based on margin requirements. You can actually make make more money as well, because you are allocating your money (management your money) into the market at different price levels.
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About the Author
I highly recommend that you sign up for my Bond Hotline so you can get an idea of the trading methodology which is based on my Treasury Bond Model/Asset Allocation Tables. There are one to two trades per week. My Bond Hotline is updated five nights a week. In fact, the Bond Hotline is an education in itself. I cover current events that will be affecting bond prices. Call my office at 1-800-866-6443 or sign up by email to paul@bondlessons.com.My commitment as a teacher and mentor is to the person who has made up his or her mind to set a goal, which is to focus only on bonds. My creed includes passing along my years of knowledge and experience, as well as being easily accessible when you have questions or concerns. Visit www.bondlessons.com
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