Lock Limit - how does it work?

[mcdirt]

Matt,

As you said, you have been lucky enough to get 2 lock limits in a row on Jan Lumber. I know that this limits the movement of a commodity contract in a single day but don't know about the mechanics and side-efects.

ie if you get a lock limit, then does that imply that a strong move is likely to continue in that direction or does it mean that volatility has become too great and the price could equally gap in the opposite direction on the next open?

How does the exchange enforce/organise the limit - what happens to bids/offers etc that people are placing?

rgds McDirt
PS Received and watched the Van Tharp Position Sizing DvDs - not bad. Shorter than I had envisaged from the descriptoin but worth watching. Have you tested his scaling-in approach with MTP Futures trades?

Steve said that one of the things he was going to discuss in the daily report was pyramiding, I'd be very interested in reading about that.

[Matt Bowen]

Hi mcdirt,

I know that this limits the movement of a commodity contract in a single day but don't know about the mechanics and side-effects.

and
ie if you get a lock limit, then does that imply that a strong move is likely to continue in that direction or does it mean that volatility has become too great and the price could equally gap in the opposite direction on the next open?

How does the exchange enforce/organise the limit - what happens to bids/offers etc that people are placing?

Well, I'm certainly no expert on the mechanics of "Lock-Limits" on commodity futures exchanges, but here is what the CME has to say about the matter in
the rulebook: 20102.D. Daily Price Limits

http://rulebook.cme.com/rulebook10837.html#bm_1702_D

PS Received and watched the Van Tharp Position Sizing DvDs - not bad. Shorter than I had envisaged from the descriptoin but worth watching. Have you tested his scaling-in approach with MTP Futures trades?

No, I manage family money and they are very happy with the 2% fixed fractional guidelines. In order to use the scaling you need a really explosive move (this was very easy to do with stocks in 1998 and 1999) and if you notice in the videos...this is exactly the same time period when Van Tharp was using the scaling. You are not going to see very many professional money managers using scaling techniques in their risk analysis. Just remember, funds are reported on a "Mark to Market" basis and clients DO NOT like to see 20% profits vanish because the trader was employing scaling on the risk analysis... That's a good way to see your turnover and redemptions sky-rocket. Clients like smooth equity curves, not roller-coaster rides. How many times do you see a stock build a base after the third or forth tier? Not very many...Usually a stock (or commodity) will run up build a base, then breakout into new highs and it will repeat this process 3 or 4 times during a good run...after the fourth base you start to see distribution from the funds and institutions... unless it's just a phenomenal move.

[mcdirt]

Thanks Matt, just wondered if there were any tips from an old hand about lock limits as I have never been in a Futures trade that has had one.

Yes, the Van Tharp stuff is circa 2000 I think from what he says at various points in the DvDs or "tapes" as he calls them. In the Futures report you use the terms "Just released" and "new series" - maybe, but they appear to have been recorded some years ago.

Scaling in and 25% stops are not something I would consider so you have to beware of what the experts suggest at times I guess.

rgds McDirt

[Matt Bowen]

Hi McDirt,

Yes, the Van Tharp material was recorded in 1999 just after he released the "Trade Your way to financial freedom" (which by the way is and excellent book to read and I think it compliments the videos).

http://www.iitm.com/products/books/trade_your_way_to_financial_free.htm

Scaling in and 25% stops are not something I would consider so you have to beware of what the experts suggest at times I guess.

I agree with you 100%... I think he was addressing the "How do I make 100% crowd" and with scaling you can rack-up some big numbers in you own individual account... Obviously, not a method to handle managed funds.

-Matt