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February 11-18, 2004




(Quotes from Ed in Red)


Wed, 18 Feb 2004

Miami Tribe Checking In

Members are quickly gaining skill at sending and receiving. We find that the hardball process is a great way to get things started after check in.

We notice that some feelings pass quickly, others slowly. We are getting better at staying on task while experiencing the feelings that pass slowly.

I would tell you more about our results, but they seem to be quite similar to everyone else’s. Perhaps these results indicate your intentions?


Wed, 18 Feb 2004


20 by 40


Congratulations on your great site and exquisite personal development. I recently began trading with a simple system, that employs all the main principles that you and other successful trend traders indicate. I can't trade commodities or single stocks as my financial services firm does not allow it, and I can only leverage equity funds 2:1 ... so that may be an issue, but my currency trading is going well.

Given those trading restrictions, and that I have only minimal starting capital, would you say working very hard for the next five years or so to maximize my capital would be the fastest way to accelerate the compounding of my wealth? (goal is $20MM by age 40 - I'm 33 now with $15K - spent a lot traveling).


Silly question as I already know the answer, but if you have any wise insights I would be keen to hear them.

Thank you Ed.

FAQ does not tell people what to do.  See ground rules.  You might take the feelings that go with your questions into the TTP process.

Thu, 19 Feb 2004

Nice Trends

Who said there are no markets that trend anymore ... ? [Coke & Steel Markets]


Not me.

Wed, 18 Feb 2004


Polarity Process

Hi Ed,

Please tell me what the Polarity Process is, and how it is related to TTP.


The Polarity Process is a TTP method, that fractionates logical alternatives into feelings in different parts of the body, and then synthesizes them physically.

Wed, 18 Feb 2004


Drum Out

ed i am working my way thru your site - it is very helpful - i would like to attend one of your workshops, i will not be able to make the one in may [if you have one in the fall or early next year i should be able to make it]. i am starting to read more areas of your site and am trying to understand some of the stuff on size, risk, money management, etc. all you [and everyone else] are writing and expressing about feelings and trading really make sense to me[ the Fred, CM and drama all are things i know i have experienced] i need to tell you that should some of my construction buddies hear that i'm going to talk about my feelings i will probably get drummed out of the club.


i'm not really worried about it but it thought it might give you some insight into my background. i know you are on to something with the ttp and it will probably take me another three or four months to absorb all the stuff on your site and be able to try to partcipate in the ttp.


thanks for all you are doing , Ed it has been helpful to me ... i would still like to try to start something here in [City]. hope all is well and good luck with the workshop. sincerely

I recall working in a machine shop in a ship yard in Portland Maine.  I recall all of us having strong feelings about a lot of things, like the foreman, for example.


There are appropriate ways to express feelings in most groups.


You might take your feelings about risking getting drummed out of the group, into the process.






have strong feelings too.


Clip: http://www.tomball.isd.esc4.net/


Wed, 18 Feb 2004



Hi Ed,

Would you please discuss the benefits of setting goals and the pros/cons of having goals that are process related (I will commit to my rules of entry, exit and money management) versus return related (I will make 30 million dollars this year)?


I do not know the benefits to you of setting goals.


I do not know how to will commit or how to will make a profit.

Wed, 18 Feb 2004





For the past few days I’ve been catching up on my FAQ reading. There isn’t a week of FAQ that doesn’t produce at least two or three pages of notes that I use to integrate into my trading program or my own psychological makeup.

When I left the office last night, I walked home taking my usual route. Recalling the day’s events, I smiled when I thought of a story my wife had mentioned concerning our two year old son. He’s a very active little guy who loves to jump and run and play - typical of a two year old. But he always loves to have both his parents watching - ”Look at me mommy and daddy, look at me” as he jumps and runs and plays. With two parents that love him more than anything in the world, we always want him to know that he has a safety net under him at all times.

As I walked a few more blocks, I also recalled how many posters to FAQ also mentioned to need for “validation”. I’ve been running a successful hedge fund for the last 10 years and I also find a need to be “validated”.

My mother committed suicide when I was 12 and my dad, who was an officer in the Marines, was the type of guy who preached that your best just was never good enough.

I looked to my father as a figure that could never be pleased. 4.0 grade average in high school and college, captains of several sports teams, etc - all in the name of being validated by my father. Trying to be right, trying to be perfect in all things.

With my father having passed on a few years ago, I still find myself trying to be validated by others around me (my wife, my business partner, at times, anyone who’ll listen).

Being validated by others provided me with a safety net and allowed me to go forward. Knowing how silly this concept really was, I suddenly lost my breath. What happens when that safety net is removed? How will I move on? It was a feeling of air being sucked out of my lungs.

In trading, there is one thing I do very well - take lots of very small loses. The part of trading that I constantly have to battle with is letting my profits run. I sense that in cutting my profits short at times stems from this feeling of wanting to be validated by my father - ”Hey dad look at me, look how much money I just made…..look at me”!!!!

As I walked the last half mile, I realized that if I replaced this need for validation with the concept that I use to cut losses in the market - that just might be the solution. I realized I have a great support network around me, I try to live a lifestyle that doesn’t promote risky decision making. No one idea is going to be detrimental to my family’s lifestyle, etc. No one idea is going to blow me out of the business. Mistakes, bad judgment, wrong decisions, etc, will happen and will continue to happen - as long as I can handle those bumps in the road, I can just flow with the good times that come along.

Not only in the market, but in life.

I’d like to thank not only Ed but all the other posters who have shared themselves in this wonderful website.

Your approach to validation seems to include finding work-around substitutes for it.


That sounds like more drama.


You might take your feelings of wanting validation. (not the feelings of validation itself - the feelings of wanting validation) into your Tribe as a starting point for TTP.


You might find positive intentions for both validation and invalidation.



Validating your Ticket


enables you to move forward




InvalidateRect(hWnd, NULL, TRUE);


The Invalidate

Rectangle Statement


 in C++ / Windows

tells the application

to get busy and repaint the screen.



Clip: www.bvg.de/ueber/ design0702.html

Tue, 17 Feb 2004



Dear Dr. Ed -

I hope the new year is treating you well. I live in Barcelona Spain and don't have access to US magazine covers. I have been trading this stock [Symbol] for the last six months. In the last week the trading has been, to say the least, a little climatic. Have you seen [it]  on any magazine covers?


FAQ does not provide instrument - specific advice.  See Ground Rules.

You can view recent magazine covers by visiting the publishers' websites.

Mon, 16 Feb 2004

Classic Picture

Hi Ed

Per the attached, [cover of Forbes] I guess this run is about over - time to tighten up stops, although it seems like we "could" also break-out above 1180, on S&Ps (?)


Covers with emotionally evocative images tend to be pretty good contrary indicators. 


The cover you cite has mostly text.


You might check if you are looking for an excuse to get out.  There is a fine line between intuition and being into wishing.


Mon, 16 Feb 2004


Lack of Integrity

Dear Mr. Seykota,

In recent tribe meetings and hardball / TTP sessions, I have been working on my commitment issue for months. I find that I have different layers of issues, and at different times a new issue will pop up.


The "problem" is my lack of integrity, in the sense that I am not able to keep commitments to my own self.


Or Fred does not feel like honoring whatever I set out to do. So even after a promising session where I feel encouraged and pump up for a change, after several days, I revert back to my old self of letting distractions deviate me from the path which CM knows will greatly benefit me.


This has been a chronic problem, and I feel there is a message somewhere that I am not picking up. A lot of your comments to other FAQs resonate with me, so may I please once again seek your wisdom? Many thanks.

You might take your feeling of having a chronic problem, of reverting back to your old self, into the TTP process.



Chronic Back Pain


is one way Fred

can get your attention


Clip: http://www.painhelp.com/


Mon, 16 Feb 2004


Reno Workshop

Hi Ed,

I wish to attend the May 7-9 workshop, I'll drop a check in the mail tomorrow.

I request a non-smoking room and I have no issues with the current menu.


Mon, 16 Feb 2004


May Reno Workshop

As we admit new members into the [City] tribe, I use the hardball lecture to describe the process and add the warning that this stuff shouldn't be "toyed" with because wishes can come true.

I look forward to seeing ... old and new faces in May.





Watch What You Wish For


Clarity Catalyzes Intention


Clip: elfwood.lysator.liu.se/.../ i/higa/genio.jpg.html

Mon, 16 Feb 2004

Incline Village Trading Tribe

Hello Ed,

Wanted to drop you a line and do a little catching up. I often think of our tribe members and hope they are all processing well and doing fine. I have not had the luxury of a convenient tribe where I am. The good news is I will be returning to Incline in the next few weeks and hope to get back in the Thursday routine with my fellow tribe members.

I do process on my own but as you know the group support and interaction does the most for clearing. I miss that and actually find that on an ongoing basis need that as well.

I have [solved a problem] and feel the release of the dark cloud that has hung around me. I know that the work I did last summer and fall with TT, and you helped me make this important transition. Thank you.

I am missing the beauty of Tahoe, especially after seeing the photo on the FAQ the other day !!

My best to you and the group.

The Incline Village Trading Tribe  currently stands full with 12 members. 


You are now on the waiting list.


Consistent attendance is essential.


Incline Village

Trading Tribe


Mon, 16 Feb 2004


Trend Following Methods

Dear Mr. Seykota

I have read with interest about [trading systems] and have just started visiting your website.

I am new to stocks and am interested to learn more about ... trading / trend following methods. Is it possible to get course materials, for home study? Where and how can I get them?

Your guidance and assistance in the matter would be greatly appreciated.

Thank you and Best Regards

FAQ does not endorse commercial products. See Ground Rules.


You might consult the free website at www.turtletrader.com for information on various trading styles.



Mon, 16 Feb 2004


Question on Trading Range
see More Questions, 4 Feb 2004.

Hi Ed,

Ed Says:
"If the trend is already in progress, one way to get on board is to enter a stop order just outside the recent trading range."

... hmmm ... I was about to ask you, what if there is no trading range?

Upon re-reading the sentence again, I received your message that trading range is "one way to get on board".


There are many ways! The more general way is to "buy on penetration of resistance, sell on penetration of support".

Can you explain to me what is the different between a 20-days breakout and a 50-days breakout? I cannot find a good definition on "breakout".


I have drawn a picture to illustrate my question. Is the 2nd penetration a 50-day breakout, because it hit a new 50-days high?

Does "#-days breakout" refers ONLY to trading range breakout? I have this confusion because I never heard traders mentioned things like "100-days reverse-head-and-shoulder breakout", "60-days double tops breakout" or "30-days cup-and-handle breakout".

Big thanks to YOU!

I do not know what you mean by 20-days breakout and 50-days breakout.


A breakout is, in general, a price penetration of another price.


A number of days might define a trading box, a moving average, an exponential average ...


You might check your source, the place you recall hearing about these terms in the first place.



Breaking Out


Clip: http://www.high-tech.com/



Wed, 11 Feb 2004


Hi Ed,

Can you help me understand this issue:

I am thinking about the judges and happy judge. Taking a situation where the system gives me a signal, but I am hesitant to enter the market - a state of uncertainty. So there has to be a judge, who judges my signal as uncertain and keeps me from entering the trade.


I want to understand the situation ( but I am doing it myself - no trading tribe-TT). I think about the situation when the signal shows up. The I try to locate the judge and the feeling not wanting to get into the trade. But I can't come up with anything.

The issue:

The TTP participants want to get to the state were Fred communicates to CM freely. It helps us in issues like the one above. But when I am thinking about this issue by my self, then it's my CM thinking about it. I can't control Fred. So when I am thinking - it's CM doing the thinking. In this situation I am trying to resolve the communication of Fred and CM by using the CM only, right? Can this work? Is a second person essential. But when I'm on the hot seat, I talk, so I communicate and think - to describe it as accurately as I can - using the CM. Could it work that I do it myself? Is there any helpful DIY method?

I know TT ENHANCES the TTP process. Since it enhances, TT enhances the DIY method. It should work DIY but not so well.

DIY * Enhancment = TT ,

so DIY= TT/ Enhancemnt > 0

Also, where are feelings located - is it more Fred or CM? What are feelings - is it the communication Fred-CM?

I hope this makes some sense to you.


PS. I am impressed by the level of your wisdom and experience, which gives you the strength, energy and persistence to answer all this questions in the FAQ and help us to evolve ... C U when I get there ...

Say you have some or another feeling that arises when you try to pull the trigger - and that this feeling keeps you from pulling the trigger. 


The feeling might even be your inner wisdom, preventing you from getting into a bad trade.


Say you really do want to do the trade, and that the feeling stops you.


One approach is to just experience the feeling. This may lead to an AHA and a disappearance of the feeling.


If the AHA supports the trade, and the feeling no longer exists, then you can more easily execute the trade.


In the case where you are unwilling to experience the feeling, then that unwillingness to feel likely locates in another feeling, a judgment Feeling.


In that case, you can experience the judge first, and when it disappears, you can go back to experience the original feeling.


The judge might have another judge, judging it, and so on, in a stack of judges.


If you track the stack, far enough back, you eventually encounter a Happy Judge, who likes to judge, and whom you can experience.  When you do so, the stack collapses.


A Tribe is essential in resolving stacks of judges, in that it can help you stay on track while you navigate your self-protecting stack of judges, each with a feeling you think you don't like.






tend to protect each other


Clip: http://www.cardozo.net/life/


Sat, 14 Feb 2004

Future Tribe

Hi Ed, I am interested in maintaining my name on the TT directory. I have spoken to a few friends about TTP however they seem uninterested in forming a trading tribe so I will take a trend followers attitude and wait for the right persons to arrive and the tribe will eventually form itself. I will appreciate your comments on that.

Will take, will eventually form, and will appreciate are all creatures of the non-existing future - a place in which you seem to be forming your Tribe.


You might consider moving your language and the formation of your Tribe to the now.


The way to start something now is to, well, start it now.



Scene from NASCAR of the Future



Will Start Your Engines.


Clip: http://krucam.tripod.com/images/


Sat, 14 Feb 2004

Very Good Webpage!


You have made a very good webpage to show the misunderstanding of the Bernoulli Effect / Equation!

Already in 1895 Otto Lilienthal in Germany showed that pressure changes due to curved paths, which is the radial momentum effect!

Sending you some links of Flight Physics I have collected since 1995!

Best Regards

Thank you for the links. They now appear on the Radial Momentum Site. 


FAQ does not publish the identity of contributors. With your permission, however, I can attribute the links to you.


Fri, 13 Feb 2004

Tribe Directory

Hi Ed,

I notice that everyone has integers for their average number of members. If you like, you round our 5.1 average up to 6!

I like 5.1. 


I also like 6.0. 


I'd also like to know how you round 5.1 up to 6.0.


Fri, 13 Feb 2004


October Workshop Snapshot Check-in


I send you my support for realizing your Oct workshop snapshot. I am happy to read your brief updates about the TTP book on FAQ.

At the workshop we spoke briefly and positively about my wishes to help with your book process (editing, clarity, tribe experiences, etc). I wish to reaffirm my commitment.


Thank you for your offer.


FAQ seems to keep writing itself, a page at a time.





help precipitate

what's already on the way


Clip: from a 1513 book by Eucharius Roeslin

Fri, 13 Feb 2004



Hi Ed,

It's been two months since I realized my dream of 'wake up', and I've been
really busy. I'm really good at following my system, it's really easy for me. One cool thing for me is I celebrate when I'm in a DD, each loss becomes a step closer to a win, and each win becomes a step closer to a loss ... wins and losses are becoming blurry, I love the losses as much as the winners.

I've been looking at my trend following track record over the past few years and I've decided to manage other peoples money, so I've registered as a CPO and I'm prospecting clients for two funds that I've created. I'm so happy ... Everything is so much fun for me, LIFE is so much fun!

This adventure began when I joined my local trading tribe, and it accelerated exponentially after the Reno workshop. Sometimes friends tell me to cool my jets but I love having jets ...

Thanks for everything, Ed, and All the best to you and yours,






are Open at Both Ends



are closed at one end.


Some people process their feelings

like jet engines

while others

put them in a bucket.



Clip: http://www.ueet.nasa.gov/



Fri, 13 Feb 2004


Trending Question

Hi Ed,

A previous question asked you which markets you trade, to which you replied "Trending".

To clarify: Please give an example of a liquid futures market that you do not consider to be a trending market ?

Most markets have both trending and sideways periods.





Display a characteristic

sideways motion.


Clip: http://animals.timduru.org/dirlist/


Fri, 13 Feb 2004

Check-In, Check-Out, and Kelly

Dear Ed,

A friend of mine tell me that, in group therapy, Check-In and Check-Out have specific meanings. Check-In means that members give updates from last meeting about how they are doing and Check-Out means that, at the end of a session, members ask questions regarding this meeting.

Do you mean that when you use these terms?

Also, in Tue, 10 Feb 2004 post, named More Kelly, you say,

"Note that the Kelly solution, a 25% bet size, is far larger than industry standard. When you factor in the organic part of your trading system, you might come up with a much lower, more palatable solution."

I can't agree more.

According to my back-testing, the drawdown of an optimized system can be huge. In a robust, optimized system, the drawdown can be far beyond 50%, sometimes as big as 90%. If you trade long enough, you can almost be certain that such drawdown occurs, due to a losing streak.

Since it is way too big for me to keep my mind and spirit clear, I simply scale back the leverage until I feel comfortable with the drawdown. Lake Ratio also gives very useful insights.

I find it extremely rewarding to master risk management skills. It makes a positive expectancy system profitable. Its insights give me faith in my system.

TTP, on the other hand, helps me stick with the system, makes sure everything nice happen to me. A beautiful track record is not luck, it is inevitable.


Check-In and Check-Out are roughly equivalent to Hello and Good-by.


Check-Out is a completion process, not generally a place to raise questions and new business.


You might consider including your drawdown / profitability preference table in your simulations so your optimal solutions can include your preferences.






Means Hello, Good-bye

and Love


Island Hand Sign

 Shaka-In & Shaka-Out


Clip: www.worldtourist.com/na/ us/hi/weddings.htm

Thu, 12 Feb 2004

TTP and Intentional Community

Ed --


found your site a few weeks ago - i live in [City] - approx. 3+hours from [Big City] by car. i talked to [Name] ... last week - he gave me the e-mail addresses of two people who live closer to me  - i mailed them but no response yet. i would like to try to start a community here


i am currently reading faq and am thru may 2003 - learning a lot -i have traded just about every market [ except rough rice and eggs!] with all the accompanying horror stories.


i am a slow and awkward typist so e-mail is difficult for me. my phone #is [Number] after 11:00a.m. est to 4:00 p.m. is usually the best time to catch me. i am close to the research triangle park [not sure if that is good or bad as far as a source of traders] .


i do understand a lot of what you are saying and teaching and learning - i am a trend follower who needs some people to work out my Fred / CM commutation process. how i found your site now instead of earlier is an interesting story.


thanks for what you are doing and hope to hear from you.

ed as you might be able to tell - i wrote this a few days ago - i was worried that if i sent this to you before i read all the FAQ and i had a large number of inquires [if i am listed as a contact in this area] i might not be ready. after more reading i don't think that is going to be a problem. actually the lack of people interested is encouraging. i know you understand that. my trading is improving. thanks Ed.


Date: Wed, 11 Feb 2004



Dear Ed,

... correction - the spelling ... is - "Gandhi".

B. Rgds

Thanks for the catch.



Nice Catch


Clip: http://www.books-4u.com/


Wed, 11 Feb 2004

Going Bankrupt

Dear Ed

Let me start by saying that I have always been of the opinion that your generous efforts to aid traders at no charge, is quite unique in the trading panorama, please keep up the good work.

However, I am writing to you to say that in all trading sites one aspect that is not emphasized enough is the simple fact that a person can trade himself to ruin.


Many people will read ' The Market Wizards' and then throw themselves into the market accumulating losses upon losses, each time convinced that "I won't do that mistake again."

Although it might sound very obvious, It should be explained very clearly, especially by brokers, that not everyone has what it takes to be a trader no matter how much he studies technical analysis, charts, money management, breakout patterns ... etc etc.


An aspiring trader should be repeatedly warned that he must decide beforehand how much he can afford to lose in trading, and that if he loses that amount THAT HE SHOULD QUIT.


This might sound like common sense, but to a trader on a losing streak fresh capital is like oxygen, always convinced that he will win back all his losses, until he finds himself in a dead end.

By now you've probably already aware that I am speaking from firsthand experience.

My story will make a lot of people's skin crawl, I myself cannot believe my incredible shortsightedness and foolishness but If I can keep one person from making the same mistakes then here it was worth writing this e-mail:

I started with EU 8,000 and lost the lot on the stock market after 4 months , I knew very little about the market and what's worse my broker gave me a 500% leverage. After those four months I was convinced that I knew what I had done wrong, So I ' borrowed ' 18,000 from my parents savings account, money they were putting away to finally buy a house.

Lost those as well. After thinking it over very carefully I realized that I had committed a terrible mistake, the only solution was to earn back that money, otherwise this it would have been a disaster. So I  pulled out another 37,000 (Yes thirty seven thousand Euros!!)


Actually it worked at first, I won back all my losses and I was elated. But two months later I had lost the whole lot.


My world crumbled around me, at first I could not believe how such total dedication could be rewarded with such a cruel ending, ( as though it were someone else's fault) . Now the weight of this disaster is more then I can bear.


I wonder how I'm going to face my parents and tell them that I have burned up all their savings, tell them that their son is capable of stealing from his own parents (The fact that I would have put back anything I took doesn't change anything)


I would give anything to be able to repair my errors, and I am thinking of offering one of my kidneys to the highest bidder. I just cannot face my parents and tell them that i have betrayed them. Someone might say hey it's only money, but that money was something nor I nor my family could afford to lose, now the remorse keeps me awake at night, completely absent during the day and sick at the mere sight of food.


I truly feel I have ruined my life and that of my family. Believe me trying to live with this on my conscious is almost impossible.

Now I know that you will say that I should seek help for the drama that I am creating and that is overcoming me, ( believe me, it has me by the throat) but that is not why I am writing to you, I only wish to communicate my negative experience to someone like me that might come across your site so that they may be forewarned.

Feel free to post this e-mail anywhere you wish, I have sent it to every trading site I could find, it may help put people on their guard from the allure of easy money.

Best regards

Let's say Fred wants you to feel remorse, sick in the stomach, constriction at the throat, and that your CM considers these to be "bad" feelings and refuses to experience them.


Let's say Fred knows that if you lose your family's money, you gain a great excuse to experience these feelings.


Let's throw in some unresolved conflict between you and your parents.


The markets provide a convenient vehicle in which you can create dramas - that give you a great excuse to experience your "bad" feelings.


Now that your feelings are active, you might take the opportunity to fully experience them, and put this drama behind you.


Repressing your feelings may lead to destructive drama such as losing money, losing other people's money, even losing body parts.




Losing Kidneys


may be one way for Fred

to bring up feelings

about being pissed off or pissed on


Clip: www.natura.com.mx/articulos/ desint.html





Wed, 11 Feb 2004

Power struggle


Ed Says:
You might consider what is standing between you and converting your power struggle (pushing against someone) into personal power (pushing with someone).

From time to time, I find myself involved in this kind of drama with someone else. It's a meeting of opposing, destructive forces, like matter and anti-matter. It seems that we both need this great failure, from time to time, to change and grow. Yet, I don't like it in any way. Not being able to cooperate, or simply communicate, with someone I like is very frustrating.

You might notice what is standing between you and experiencing (1) your feelings of frustration and (2) your feelings of not liking it.





One of the Joys of Life



Clip: www.nejman.com/todiefor/ london.htm

Wed, 11 Feb 2004

Two Silly Observations

see Silly, Feb 4, 2004

Ed wrote:

2) I find no quotes for symbol, FAQ.

Not in the US, but Germany. Fast Scout Limited provides an internet web site
which helps in internet search and navigation. The site classifies,
indexes, catalogues and updates business related web sites. The Company
also develops the Virtual Web Employee Internet.

Thanks for the FAQ. It helps me tremendously.


Thu, 11 Feb 2004


Amygdala, TTP and Non-Verbal Studies

see: Amygdala, Feb 6, 2004

Hi Ed,

The Emotional Brain by Joseph LeDoux is a very interesting reading.


Wed, 11 Feb 2004


Fund Management Structure &

Risk Management

Dear Ed,

As I told you before, I have experienced a major change in my life both as a trader and as a human being from the day I started to acknowledge myself and my own feelings.


After a period of successful trading, I decided to disclose my trading account performance (track record) to my family. I started to manage some of their capital and the positive & consistent results continued.


Now, their friends also want to invest their money with me, which made me move to the next step. I decided to set an asset management business with my brother and some friends to invest closely related people’s money in the beginning and slowly develop a commercial area to sell our service, according to our trading philosophy.

The problem is that it was relatively easy to manage 5 individual accounts. From the moment people started to come to my door asking to manage their money (beginning of 2004), the scenario changed: I saw myself in a position in which I needed a system to trade all accounts as one single account, in order to maintain organization and efficiency.


The brokerage firm that I currently use offered me a system developed to fund managers with a good structure, but this system raises a risk management problem that I want to show you and discuss in FAQ, if possible.


“The fund manager places trades through the fund manager account, which is the sum of the individual clients’ controlled accounts, in order to trade the “fund” as a whole.


Once the fund manager places the trade on the fund manager account, upon closing of the position, P/L is distributed to the controlled accounts based on each customer’s equity, as a percentage of the total fund. Similarly any commission fee is distributed proportionately to the controlled accounts based on each customer’s equity, as a percentage of the total fund”.


Say we have 5 clients with US$ 10,000.00 each. Thus, the fund manager account equity equals US$ 50,000.00, and each client owns 20% of the total equity.

Our risk per trade is set to 1%, which is equal to US$ 500.00, and a profitable trade of 1:2 provides a 2% return (US$1,000.00).

Let us analyze a hypothetical situation: the fund manager opens a trade by going long in a given commodity and in the 10th day, a new client is accepted in the pool. The new client decides to deposit US$1,000.000.00 in his personal account. From this day on, the new client will own approximately 95% of the total equity.

Now the risk per trade (1%) is equal to US$ 10,500.00 and the same 2% return is equal to US$ 21,000.00.

When he enters the pool, the managed equity grows 2000%, but the trade position doesn’t. So, the profit from the day he enters will not be significant anymore since the position size is not adequate to the account size. Say the fund manager ends the trade with a US$ 2,000.00 profit. In the first configuration, this profit would mean a 4% return; in the second, however, this profit would mean 0.19%


Charles Faulkner says something very interesting: “If you have only one way to do something, you’re a robot; If you have only two ways to do something, you’re in a dilemma. You need at least 3 ways to do something before you have the beginning of some real flexibility”.

My partners and I can think of some models to solve the problem:

1. Fund manager allows the new investor to join the pool while the trade is open and he acquires the right to receive 95% of the trade profit even though he wasn’t there since the beginning and the return will be insignificant due to his account size;

2. Fund manager increases the “fund” position when the new investor joins the pool;

3. Fund manager allows the new investor to join the pool only when the position is closed;

4. Fund manager allows the new investor to join the pool only when a new signal appears to increase the “fund’s” position.

All of these solutions have positive and negative characteristics that I will not explain in this e-mail, because this would make it too long.

Ed, if you can help us I will be very thankful: can you see any other solutions that we may have missed out? Is there any solution already accepted as a FAIR practice by investors and fund managers in the US?

Thank you again for your insights!

Best regards,

FAQ does not provide advice on how to set up fund accounting systems - other than to make sure you are in compliance with standard practices.


Note: a manager who holds on to losing trades, hoping for a rally, can buy into rising markets only with new money; thus, newcomers subsidize  existing customers.


You might take your feelings of confusion into the process. Internal clarity generally manifests as an elegant external solution.


In any event, make sure to inform your customers how your system works.




The Late Newcomer