I have recently been reading a blog written by a registered investment advisor and affiliate of Abraham Bedick Capital located in Fort Lauderdale, Florida. Andrew Abraham has been tinkering in the financial arena since 1990, has spoken at numerous investment conferences and provides commentary and analysis for various financial publications. His blog, Abraham Bedick Capital Management posts various trading tips as well as specific analysis of international and domestic markets. Worth a look for sure.

Thought you might like his post in November regarding asset allocation, it reminds me of one of Adam's "10 Golden Rules Of Trading," wouldn't you say?

What Asset Allocation Can Do For You?

Asset Allocation simply means distributing your money across various investment avenues in order that the poor performance of any one avenue or asset does not jeopardizes the entire investment plan and yearly return. Asset Allocation is one of the basic premises of having an investment plan. As basic of an idea, it is one of the rarest traits in a financial plan. Would you even consider getting on a plane without a flight plan and the pilot not knowing where he is going? It is an obvious answer.

Many times I have encountered investors that feel that they are well diversified. They feel that they fulfilled the premise of asset allocation with stocks, bonds,cash and a little real estate. They would own some Large Cap or Blue Chips, some mid caps,small caps and a sprinkling of some international shares or funds.

However, when you diversify across assets you give yourself a lot of leeway to counter market uncertainties. When the stock markets is progressing well, one probably cannot appreciate the importance of asset allocation. In fact, you may even feel that asset allocation is a hindrance when having all money in equities seems to be a smarter way to ride the stock market rally. It usually takes an adversity (such as a sharp fall in stock markets) to fully appreciate that having more than just stocks and bonds in your portfolio can be a big bonus.

The advantage of having different assets in the portfolio is that a decline in any one asset can be partially offset with the presence of other assets. Many times different assets react differently to the same set of factors.

This brings me to my plan on how to expand one's asset allocation... In many inflationary periods ( such as now) Managed Futures have excelled and propelled a portfolio. All one has to do is look at the price of oil. How much has it gone up? What about Gold?

How much of an allocation one should you own' is a little tricky, because it will vary from investor to investor and their risk profile. Depending on the exact plan such as money management, correlation and risk per trade different levels of volatility can be experienced. In inflationary times commodities trend upwards and in deflationary times commodity prices fall and trend downwards. I am not a proponent of one trading these vehicles themselves but rather in a managed account or fund. The volatility and leverage can be great. At a minimum one should consider managed futures for at least 5% of their portfolio.

These are very uncertain times and one owes themselves to be aware that they need to think outside the box and look to assist in protecting their investment portfolios.

Courtesy of Andrew Abraham of Abraham Bedick Capital Management

In this blog posting we are going to focus on STOPS!!!!!

Stops are enormously important part of a traders arsenal of trading tools. Some traders confirm that stops are the most important part of their trading armour.

So here are three ways to use stops to protect your capital and lock in profits from a trade. These three money management techniques can be used in stock, futures and forex trading. The important rule is that you do use a real stop in the marketplace. A friend of mine joked with me that that he had never seen a "mental stop" filled in the pits.

If the market is good your stop will not be hit. If the market is bad or changing direction then you'll want to be out of it anyway. That is why stops are so crucial to trading success.

Here are the three most commonly used types of stops. Which one do you use?

(1) Dollar stop.
(2) Percentage stop.
(3) Chart stop.

If you chose (1) you'd be correct, but, you would also be correct if you had chosen 2 or 3. All three are money management stops and are used to either lock in profits or protect capital.

1) A dollar stop, is when you set a predetermined dollar amount to a trade. Let's say you want to risk $500 on a grain trade or $750 on a stock trade. Once you get your fill back from your broker or electronically online you simply figure from your fill price where to put your stop.

Pros: Easy to implement and use.
Cons: Can place stops too close in a volatile market

2) Percentage stop, is a very simple way for you to place a stop on a position. Here's how it works. Let's say your trading account is 100,000 dollars and let's say you only want to risk 1% of your total portfolio on any one trade. You simply take a $1,000 risk which represents 1% of your over all portfolio. This can help enormously in taking BIG LOSSES. A 1% loss is easy to absorb. A 30% or 40% loss is an account killer and can and should be avoided at all cost.

Pros: Easy to implement and use.
Cons: Can place stops too close.

3) Chart stop, a chart stop is where you place a stop that is either above or below a crucial chart level. The good thing about a chart stop is that this level is often used by other traders. That can both a good thing and a bad thing, here's why. Using either stop 1 or 2 only you know where the stop is. With a chart point a great many traders/brokers know that is where your stop is. In an illiquid market this type of stop should not be used as many time brokers gun for the stops. In a highly liquid and active market this is a good stop to use.

Pros: Very easy to implement and use.
Cons: Can't be used in thinly traded markets.

So there you have it. Now you have all three ways to manage your money and protect your profits at the same time.

Some say stops are for wimps, or "if I put my stop in the market they will only stop me out". In big liquid markets nobody is big enough to make their presence felt for more that a day so no one is going to stop you out.

Use stops…they let them work for you.

Have a great trading week.

Adam Hewison