ABSTRACT
Portfolio Risk management As we suggested in the preceding chapter, there is some relation between the state or stage of a Major Market and its potentialities for prot. There are many mechanical plans and systems for coping with the problem, but we do not believe it can be fully solved by mechanical means alone. We mentioned one plan by which the commitments were governed according to the consensus of trends in an entire portfolio of charts. (EN: The Magee Evaluative Index, or MEI.) There are other plans that depend on pyramiding the commitment as the trend proceeds, and still others that are based on averaging costs by increasing the commitment working against the trend, that is, by buying on a scale-down at progressively lower levels in a Bear Market, and selling on a scale-up in Bull Markets. (EN9: Invitations to disaster, the first, and demanding adroit skill, the second. Avoid such methods unless you are an expert position trader.)
None of the plans, taken by themselves, are adequate to answer the questions of when to buy and when to sell. The primary purpose of this book is to study the technical phenomena of individual stocks. If we can learn from the charts at what points to buy and under what conditions to sell, we have acquired the basic machinery for successful trading. On the other hand, obviously, if your buying and selling are at points that more often than not result in net losses, then it makes no difference how you divide up your capital or apply it in the market, for it will be bound to shrink until, eventually, it has all disappeared. (EN: An investor who finds himself in this situation should set a benchmark. He should decide that if he loses 50% of his capital he will quit trading and put his money in index or mutual funds or in the hands of an advisor. Generally speaking, an advisor is preferable to a mutual fund. And both are preferable to an investor with two left feet. They can certainly do no worse than a consistently losing performer. EN10: On second thought, from the vantage point of 2011, maybe they can.)
The rst problem, then, is to learn to use the technical tools, patterns, trends, Supports, Resistances, and so on. Then we can consider how much money we will risk and in what way.
