MERCENARY TRADING DESK FREQUENTLY ASKED QUESTIONS Table of Contents Note that each element of the Table of Contents can be clicked on to navigate to a more detailed explanation of the term. Frequently Asked Questions Q: What is the Mercenary Trading Desk? Q: What is included in the Mercenary Trading Desk subscription? Q: What is the Strategic Intelligence Report? Q: What is the MT Driver’s Manual? Q: How does Mercenary Trader approach trading? Q: How long do you typically hold positions? Q: How often do you make new trades? Q: What does a typical trade setup look like? Q: What is a “risk point?” Q: When do you adjust risk points? Q: How do you determine position size? Q: How do I find an archive of your historical trades? Frequently Asked Questions Q: What is the Mercenary Trading Desk? The Mercenary Trading Desk is a direct window into the trading decisions of Mercenary Trader. Subscribers have access to our daily trade setups, our open positions, daily market commentary, and our weekly Strategic Intelligence Reports. Q: What is included in the Mercenary Trading Desk subscription? A typical trading day begins with our morning materials. The morning materials include our trade setups for the day, any adjustments to existing positions, commentary on the upcoming day, and chart visuals for new setups. At the end of each trading day, we post a position summary which includes details on our current positions. MTD subscribers also receive our weekly Strategic Intelligence Reports (SIR). Q: What is the Strategic Intelligence Report? The Strategic Intelligence Report (SIR) is a weekly PDF sent to your inbox each Saturday, covering the most important trading issues for the week. Each SIR includes a macro view — what we’re paying attention to in the big picture — and a “spotlight” that dives deep into the guts of a timely trading idea, investment thesis, or industry group. The SIR combines insightful macro commentary with individual stock coverage, industry group coverage, and long or short investment ideas. This report cuts through the clutter and tells you what you need to know each week – from a smart money management perspective – while highlighting stocks, sectors and industries with notable long or short potential. Q: What is the MT Driver’s Manual? Our goal with the Driver’s Manual is to teach you everything we know about trading… and we mean EVERYTHING. From trading psychology to risk management to pattern recognition, position sizing, trade structures, and much much more. This product is currently a work in progress. Q: How does Mercenary Trader approach trading? Our approach can broadly be described as “Long / Short with a Global Macro Overlay.” Our trades are based on a top down approach, which begins with a big­picture view of broad economic forces, then filtering in bottom up security analysis and individual trading decisions. Mercenary Trader furthermore operates from a long/short perspective, meaning we are just as comfortable profiting from securities moving lower in price as we are in capturing returns from vehicles that are rising. As a general rule, we look for a balance between long and short positions, but each trade must stand on its own merit. Q: How long do you typically hold positions? We are active in setting up new trade opportunities and aggressive in managing the risk for our positions. Our typical holding time falls in a window of two to six weeks, but depending on the conditions, there can be significant variations. We typically enter a trade when the price action confirms our setup. In our trading style, we are typically highly flexible with out positions, but once we have a position that has established a trend and allowed us to tighten our risk points, we are likely to give this trade more room to run and add to the position (pyramid) along the way. Typically, this means a longer holding period with much higher profit potential. Q: How often do you make new trades? Each day before the open, we list any new trade setups and include our entry parameters, our risk points, and a rationale for why we like the setup. The number of trades in play relates directly to the opportunity set we are seeing in the market. During some periods there will be fewer opportunities and our trading size will be smaller. At other times we will have higher conviction, more opportunities to pursue, and more aggressive levels of position sizing. As a general rule, we have multiple new setups each week — but not every setup actually results in a trade. As mentioned, we typically need price action to confirm our thesis before we will pull the trigger and enter a position. Q: What does a typical trade setup look like? The majority of our trades are entered via stop / limit orders. So for long positions, we are using a buy/stop order and attaching a limit order. We choose a stop price as the planned entry point for the trade. Q: What is a “risk point?” One of the most important variables in successful trading is aggressive risk management. Every time we put a potential trade on our books, we know ahead of time where we will exit if the trade moves against us. As a trade moves in our favor, risk points become our method for protecting profits along the way. As an example, consider a long position in US refiner Tesoro (TSO) … In this example our initial risk point was $45.71. If the market price for TSO dropped below the the $45.71 level, we would exit the position. Q: When do you adjust risk points? For each trade, we have a process for monitoring the position carefully to determine when to tighten our risk point. As a position moves in our favor, we are relatively quick to bring our risk point to breakeven and eliminate our initial risk on the trade. As a position continues to accumulate profit, we will adjust our risk points accordingly to lock in unrealized profit. For positions that are trending in our favor, we will selectively add pyramid exposure to the trade (buying more shares for bullish trades, or shorting more shares for bearish positions). When this happens, we will continue to adjust our risk points accordingly, first to eliminate initial risk on the net trade (if any), and then to lock in profits as the trend expands. Q: How do you determine position size? Our position size for each trade is based on standardized units of planned risk, as expressed in basis points (hundredths of a percent). “Planned risk” is simply the intended amount of capital you place at risk in a trade relative to the distance between your entry point and risk point. For example, if you purchased 100 shares of stock with $1.50 of risk between entry point and stop, your planned risk would be 100 shares X $1.50 or $150 planned risk for that trade. If you were trading with $15,000, that $150 would represent 1% of your total capital or 100 basis points of planned risk. If you were trading with $150,000, that $150 would represent .10% of your capital or just ten basis points of planned risk, and so on. Since each trader has different risk parameters, there is not a “one­size­fits­all” position size. A more aggressive trader might take 100 basis points (1.0% of capital) as a standardized unit of risk. A conservative trader might have as little as 5 basis points (0.05% of capital) as their standard unit. The bigger your standard unit of risk, the more volatility you will endure (both positive and negative). For the sake of example, the Mercenary Trading Desk may recommend a 1.0 size position, a 4.0 size position, or even a 20.0 or 30.0 position in any particular trade. This simply means we are taking either a standard unit of risk on the trade, four units of risk, or more. For our flagship account, Mercenary Trader uses 12.5 basis points per unit of risk. So for a 2.0 initial position, we would begin with 0.25% or 25 basis points of risk. An 8.0 position would represent 1.0% or 100 basis points of risk and so on… Q: How do I find an archive of your historical trades? Since we manage real capital using the Mercenary Trading Desk signals, we cannot distribute a trade summary or table of returns. Our legal counsel has advised us that this could be considered a “public solicitation” and result in regulatory issues. . Still, all of our historical trades are available via the historical post archives. You can access these archives by using the calendar function at the bottom of the right sidebar of the Mercenary Trading Desk.