THE LOGIC BEHIND THE FIXED RATIO METHOD

I realize some of you may be saying that a fixed fraction and a fixed ratio are the same thing. But, in fact, they are referring to two different subject matters and that is the difference. The fixed fractional method is referring to what percentage of your capital should you risk on the next trade, and every trade thereafter.

The Fixed Ratio method is referring to difference between each increase and decrease. This is the key. You will recall earlier in the article that I gave examples using average times to increase as well as average dollars to increase. Using the fixed fractional method, the time needed to increase at the beginning was far slower than the time needed to increase further into trading. The dollars required to increase contracts at the beginning was far more than the dollars required to increase contracts at higher levels. In all of the research, this was the flaw in the method, the fly in the ointment if you will. Fixed ratio corrected this flaw by simply making these differences EQUAL or FIXED.

For example, if it took an average of 10 trades to increase from one to two contracts, it will take an average of 10 trades to increase from 19 to 20 contracts. If it takes an average of $10,000 WITH THE FIRST CONTRACT to increase from 1 to 2 contracts, then it will take $10,000 PER CONTRACT to increase from 19 to 20 contracts. In other words, there is a Fixed Ratio of contracts traded to dollars required to increase. It goes like this. I call the ratio between contracts traded to dollars required the "delta". This simply means "change".

Depending on how aggressive or conservative you want to be, you simply change the delta in the following formula accordingly. A smaller delta is more aggressive while a larger delta is more conservative.

Current Balance + (#contracts * Delta) = next increase in contracts.

 A $20,000 starting balance using a $5,000 delta would increase from 1 to 2 contracts once the account reached $25,000. To increase from 2 to 3 contracts, you would apply the same formula: Current Balance = $25,000 + (2 contracts * $5,000) = $35,000. You would increase to 3 contracts once the account hit $35,000. This continues throughout your increases.

Eric Sprott: Why Are Investors Buying 50 Times More Physical Silver Than Gold?

For the time being, the silver price is essentially set in the paper market where the daily average trade on the Comex is approximately 300 million ounces. An outrageous number when you compare it to the daily mine production of about 2 million ounces. As Bart Chilton, Commissioner of the Commodity Futures Trading Commission stated on October 26, 2010, “I believe there have been repeated attempts to influence prices in silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act have taken place in the silver market and any such violation of the law in this regard should be prosecuted.” Which brings us back to the phrase “Follow the money.” In our view, it is almost inconceivable that investors would allocate as many dollars to silver as they would to gold, but that is what the data shows. The silver investment market is very small. While the dollar value of gold in the world approaches $9 trillion, the value of silver in the forms of jewelry, coins, bars and silverware is estimated at around $150 billion (5 billion ounces at $30 per ounce). This is a ratio of 60:1 in dollar terms. How long can investors continue to buy silver at the current ratios when the availability for investment is only 3:1? We are surprised that the price of silver has remained at such a depressed level compared to gold. Historically, the price ratio between gold and silver has been 16:1, when both were currencies. Today the ratio is 55:1, so what are the numbers telling us? We believe this is one of those times when smart investors will be well rewarded to “Follow the money.”

 Submitted by Tyler Durden on 12/24/2012 - 16:37

Kelly Formula In Trading

Kelly % = W – [(1 – W) / R]

Where:
W = Winning probability
R = Win/loss ratio

The output is the Kelly percentage, which we examine below.

Putting It to Use
Kelly's system can be put to use by following these simple steps:
Access your last 50-60 trades. You can do this by simply asking your broker, or by checking your recent tax returns (if you claimed all your trades). If you are a more advanced trader with a developed trading system, then you can simply back test the system and take those results. The Kelly Criterion assumes, however, that you trade the same way you traded in the past.
Calculate "W", the winning probability. To do this, divide the number of trades that returned a positive amount by your total number of trades (positive and negative). This number is better as it gets closer to one. Any number above 0.50 is good.
Calculate "R," the win/loss ratio. Do this by dividing the average gain of the positive trades by the average loss of the negative trades. You should have a number greater than 1 if your average gains are greater than your average losses. A result less than one is managable as long as the number of losing trades remains small.
Input these numbers into Kelly's equation: K% = W – [(1 – W) / R].
Record the Kelly % that the equation returns.
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The 2011 J. P. Morgan Global ETF Handbook

The 2011 J. P. Morgan Global ETF Handbook

Covered Call Strategies

• Sell 4 weeks/5 weeks covered call for stock when VIX is under 20 , SPX is up trend and no earning report for the stock in contract month.
  
• During first two weeks ( weeks 3 in 5 weeks contract ), buy back the options whn its value drop to 20% of the original premium or less.
• During week 3 ( week 4 of 5 weeks cycle ) of contract period, buy back the options when the ask is 10% or less of the original premium.
• During week 4 ( last week ) of the contract , buy back the option at any price if we feel necessity to sell the underlying equity immediately.
• If at any time during the contract period you have reasons to believe that a stock will drop dramatically in price, buy back the option at any price, sell the stock , and immediately move the cash into another period.
• Rolling down when buy XYZ@38, sell $40 call at $2. One week later price drop to $35 nad option value drop to $.40 ( drop to 20% of value). At the same time the $35 strike is selling at $2.0. Rolling down generate additional $160. If the stock above $35 after expired, income =$200+$160,loss from stock $38-$35 = $300.Profit $60.
• Hit the double strategy :Buy back the options when t meet our 20%/10% requirements, sell the same option strike and month again if stock and option price up.
• Convert dead money to cash profits, consider when there is dark cloud hanging over the stock.There is nothing wrong with selling a stock that is not performing.Closed all the position.
• Exit strategies near expiration Friday, if price at or in the money, you can either rolling out(Rule price In the money ), rolling out and up( Rule price ITM ) or no action.

Trading VIX Options

Steven Smith of TheStreet.com has a video interview up in which he asks Brian Overby for his thoughts on how to trade VIX options.

Overby, who is Director of Education at TradeKing and authors an informative options blog, Options Guy, tackles some of the idiosyncrasies of the VIX and has some excellent suggestions for those who insist on trading the volatility index. Frankly, there is close to 100% overlap between what he says and what I believe about the VIX.

I recommend clicking through to the video, but in a nutshell, Overby’s thinking boils down to the following:

1. VIX options do not follow the (cash) VIX index
   
   
2. To understand the price action in VIX options, look at VIX futures
   
   
3. When trading VIX options, trade the front month (closest contracts to expiration)
   
   
4. Trade VIX options when the VIX is at the extremes of its trading range
   
   
5. Utilize a mean reversion trading strategy
   
   
6. Look to sell vertical spreads (sell puts when the VIX is low; sell calls when the VIX is high)

10 Rules Of Investment Classic

1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people's heads. It's easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an opposite excess in the other direction
Think of the market baseline as attached to a rubber string. Any action to far in one direction
not only brings you back to the baseline, but leads to an overshoot in the opposite direction.

3. There are no new eras -- excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots.
Look at how far the emerging markets and BRIC nations ran over the past 6 years, only to get
cut in half.As the fever builds, a chorus of "this time it's different" will be heard, even if those exact words are never used. And of course, it -- Human Nature -- never is different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don't expect a plateau to work off the excesses. Profits are
locked in by selling, and that invariably leads to a significant correction -- eventually. comes.

5. The public buys the most at the top and the least at the bottom
That's why contrarian-minded investors can make good money if they follow the sentiment
indicators and have good timing.Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors survey.

6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains "make
us exuberant; they enhance well-being and promote optimism," says Santa Clara University
finance professor Meir Statman. His studies of investor behavior show that "Losses bring
sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning
stocks."

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad
momentum is hard to stop, Farrell observes. Watch for when momentum channels into a
small number of stocks ("Nifty 50" stocks).

8. Bear markets have three stages -- sharp down, reflexive rebound and a drawn-out fundamental downtrend
I would suggest that as of August 2008, we are on our third reflexive rebound -- the Januuary
rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.
Even with these sporadic rallies end, we have yet to see the long drawn out fundamental
portion of the Bear Market.

9. When all the experts and forecasts agree -- something else is going to happen
As Stovall, the S&P investment strategist, puts it: "If everybody's optimistic, who is left to
buy? If everybody's pessimistic, who's left to sell?"
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for
patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.
10. Bull markets are more fun than bear markets

Especially if you are long only or mandated to be full invested. Those with more flexible
charters might squeek out a smile or two here and there

High Valutaion

Last week, the S&P 500 Index ascended to a Shiller P/E in excess of 24 (this "cyclically-adjusted P/E" or CAPE represents the ratio of the S&P 500 to 10-year average earnings, adjusted for inflation)
Based on our standard methodology (elaborated in numerous prior weekly comments), we presently estimate that the S&P 500 is priced to achieve an average total return over the coming decade of just 3.15% annually. Again, we've seen weaker projected returns over the past decade. But then again, the S&P 500 lost about 5% annually in the decade following the 2000 peak, and even including the recent advance, has achieved an annual total return since 2000 of almost exactly zero. So despite periodic speculative runs, rich valuations have an annoying way of ruining the fun. Equally important, even during extended speculative periods as we observed in the late-1990's, those advances have tended to suffer deep and abrupt intermediate-term corrections once elevated valuations are joined by overbought conditions, over bullish sentiment, and rising interest rates, as we observe today.----John P. Hussman, Ph.D.

Paulson Latest Holdings

Full breakdown of holdings as of Dec. 31 (full green row highlight is new position).