staring down the barrel of a gun

A commentator on TV said recently that trading the financial markets is like playing with a loaded gun. I am trying to do this without accidentally shooting myself. In this game there are many rules, some of which you do not yet know. I read that “only when you have found every way to lose can you find the ways to win”.

Anyway, I have been improving at trading with slightly bigger stakes (don’t be worried, it is in the region of 10-15 Euros a handle on ES). As a relative newbie I had the common issue of “dollar counting”. I would see a dollar amount gained on a position. It may be around the same as the amount I just lost and closing the trade would bring my account balance back to what it was before the initial loss. I used to make money a few months ago by trading with bigger stakes than I now do. When a position went into profit I was watching the $ figure and not the number of points it had made. I am getting better at this, letting it hit my stop loss and not instantly re-entering with a revenge trade.

Because prices move so fast you need to have a decent position at the start to take advantage of these lightning fast moves. If your stake is too small you cannot scale out but if it is too big you might find yourself managing a big loss. I realise this is a pretty basic description of the issues involved in every trade and of course you have to calculate the risk and the reward before hand.

A mojor issue is when to add to a position instead of scaling out or when to scale out instead of add. This is a slightly different and more subtle problem. I read that “the early bird catches the worm” but “the second mouse gets the cheese”. Experienced traders know they may have to enter a few times to catch the move and that is where scaling is a double edged sword. Beginners think their initial entry is enough but it is not so. Repeated entry and exit on a trade may be required at the key levels and you can take some small amounts repeatedly without banking on the big move happening.

I was thinking about this as last Thursday I watched the ES and its ‘friends’ the EurUsd and Nasdaq flirt with recent important monthly lows. I had made some money earlier in the day buying at the lows and reversing at the highs. I was flat and done but in the few critical minutes in these charts you can see the occasion where you would hope you have a short position with a cushion.

If you do not have a decent position then you have to let it go, which I did. Sometimes it makes sense to buy at this major support and you can see that it came back off the these levels a few times.

I wanted to post the charts without showing what happened next as I captured the screen as a reminder of how I felt at the time.

As it happens the Euro went to 1.3425 and is now back to 1.35, NQ to 2264 and now at 2218, ES to 1180 and now back near 1200. This happened for no identifiable reason, other than options expiry games and a market apparently starved of liquidity due to the Euro Crisis and potentially MF Global traders being locked out.

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