Wednesday, February 3, 2010

Kroll, The Professional Commodity Trader

Earlier I wrote about Stanley Kroll on Futures Trading Strategy (1988). In 1974, the year before his first “retirement” at the age of 40, he invited the readers of The Professional Commodity Trader (reprinted in 1995 by Traders Press) to follow him as he traded between July 1971 and January 1974, during which time for the 39 accounts that he managed he turned $664,379 into $2,985,138. He funded his own account in July 1971 with $18,000; eighteen months later it had appreciated to $130,000. Apparently before he “retired,” he was sitting on a $1 million account. What was the secret of his success?

Kroll was a discretionary trend trader in the tradition of Jesse Livermore. He had simple entry and exit rules. To initiate a position he would trade in the direction of the major trend, against the minor trend. “For example, if the major trend is clearly up, trade the market from the long side, or not at all, buying when: a. the minor trend has turned down, and b. prices are ‘digging’ into support, and c. the market has made a 35-50 percent retracement of the previous up leg.” To close out a long position at a profit, liquidate one-third at a logical price objective into overhead resistance, another third at a long-term price objective into major resistance, and trail stop the remaining third. There are three approaches to closing out a position at a loss. First, enter an arbitrary “money” stop-loss such as 40-50% of the requisite margin; second, enter a chart stop-loss “to close out the position when the major trend reverses against your position—not when the minor trend reverses (that’s just the point where you should be initiating the position, not closing it out).” Finally, “maintain the position until you are convinced that you are wrong (the major trend has reversed against you) and then close out on the first technical correction.” (pp. 27-28) He admits that the last alternative can be potentially lethal; the technical correction may not come in a timely fashion.

Kroll offers some advice to the would-be futures trader. He urges the wannabe to play only for the major moves—not for scalps. As he writes, “Riding a winning commodity position is a lot like riding a bucking bronco. Once you manage to get aboard, you know what you have to do—hang on and stay hung on; not get bumped or knocked off till the end of the ride. And you know that if you can just manage to stay in the saddle, you’re a winner. Sounds simple? Well, that’s the essence of successful trading.” (p. 44)

Put another way, when ahead, “play for the big score and don’t settle for a minor profit.” On the other hand, when a trade isn’t working out, “spend your constructive effort in calculating how to close out the losing position with a minimum loss or perhaps a modest profit—and if such an opportunity is offered, take it.” Contrary to a lot of the literature, he also advocates striving for a high winning percentage. The problem with accepting a small fraction of winning trades is that “the winningest accounts . . . still manage to chalk up some mighty big losses—it seems just about impossible to always keep losses small, no matter how hard you try.” (p. 153)

I’ve extracted some words of wisdom from Kroll’s book, but what makes the book so enjoyable is that Kroll takes the reader through actual trades, some winners and others losers, and shows the courage it took to ride the bronco and the acute pain he felt when he was bucked off. It’s a book that you read in one sitting, fully engrossed.

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