Martin Kronicle

When you interview your potential clients, ask these 5 questions or you might be in for more than you delineated in your Client Agreement. You get to interview and screen your potential clients as much as they will be screening you. Don’t sign up anyone who can “fog a mirror.” You’re not as desperate as you might think for the assets, and there must be a good fit between you and the client emotionally.

1) Have you ever had to sue a manager or take them to arbitration? What happened?

There is a class of investor that sees you coming from a mile away. Make sure that you stay away from them. It goes without saying that you must have your own business and documents in order. The major Broker/Dealers and FCM’s keep a list of such clients and they’ve been know to NOT open accounts for them when they recognize the SSN or Tax ID number.

2) How long have you been with your Investment Advisor? What do you like best about that relationship? What could be better about it?

If they are promiscuous with their advisory relationships, what makes you think it will be different this time because you are in the equation? It won’t be. Don’t sign up this time-waster. You can’t build a solid asset base off this jackass nor a reliable revenue stream. Leave the drama of the hair-trigger hiring and firing for another manager.

3) How soon are you going to need the funds that you are considering investing with me and my program?

If they want to buy real estate during the “next leg down” in a major city, don’t sign them up. They’ll need the money in the middle of a drawdown and you’ll never hear the end of it. I recommend that you make sure they can leave the money with your for 5 years minimum.

4) What percent of your overall investment pie does this money represent?

If this is more than 5% of their liquid net worth, be wary…it might be fast money…and that type of money leaves as fast as it comes in. You don’t want to build a book of guys who want 400% annual rate of return. They feel that this is readily attainable and moreover that they should not have to withstand more than a 10% drawdown to get it. Follow your rules, not the gambling habits of some moron who has no clue about how to run money responsibly.

5) When would you like to schedule your monthly update call with me — beginning of the following month or at the very end of the current month?

You don’t want to have clients that have an emotional need to speak with you daily. They are neurotic, spend the day watching financial TV, and don’t realize that calling you is a major distraction and actually harms your performance. Cut them loose or don’t sign them up in the first place.

Speaking with you every morning is not going to make your systematic not discretionary rules work better. Ask them to find a way to satisfy their needs without calling you.

Just because there is a high-net worth person, who has sizable liquidity, who likes you, and who wants to give commodity trading/managed futures a try, does not make them necessarily a good candidate for you to work with.

Another thing you can do after a strong counter-trend rally in the contract you’re looking to short, is to buy puts or longer-dated puts. The June 1250 puts on the S&P 500 emini are priced at $2,400 and have 91 days until expiration. Rallies can make put options cheaper and by owning puts you are still trading with the overall trend.

If you are wrong, and the trend reverses up, you have a defined loss with the puts that you don’t have with the futures. Plus, with 91 days until expiration, you have time for the down trend to resume, as well as have more information about Japan and the potential for QE3 to evolve.

Another benefit is that you are short over the weekend with the puts, whereas you are not if you are a day trader and go home flat on Fridays. This way, if there is bearish news released on a Saturday or Sunday, you’re already short and have limited loss exposure.

The key is to not over lever your account. With each option costing $2,400, make sure that you don’t put an inordinate amount of your equity into any one position. If you have a smaller account, there’s not much you can do about it, but you don’t have to let the premium go to zero either. You can risk 50% of the premium before you offset it.

You have to define your risk and know that trading futures and options on futures can involve loss. The professional traders know what they are going to lose before they put the trade on. I suggest you do the same and don’t risk what you cannot afford to lose.

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You don’t sell breakouts on the downside. Bear markets are different animals from bull markets. You enter the market short when the price rallies to the trend line and reverses.

Chaucer, Dante, and Shakespeare all used foreshadowing in their writing. One of Shakespeare’s most famous quotes is the title of this post “Beware the ides of March,” which appears in Julius Caesar.

It got me thinking with today being the Ides of March, that strong counter-trend moves are a bit of a foreshadowing in the trading world. Very frequently, the counter-trend moves provide great entries once they reverse.

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Take a look at the large green candle in the Dollar Index chart. Once the high of that day is tested and fails, there are several places that a trader could have faded that counter-trend move. Can you name at least one of them? I’ve written about this rule before on MartinKronicle.

Seats for the April mentoring trading class are filling up. Learn to define you trading edge.