June 22, 2013

• Trading Update 061713 – 062113: Timberrr, Losing My Religion & Anger Management

  On Wednesday, the market responded to the Fed’s announcement that they will be easing off the “QE” throttle towards the end of the year with about a 28 point dump. On Thursday, I thought there would be a bounce, but the selling continued and picked up steam, dropping another 40+ points, or about 2%.

  Ouch. Got burned some in the selling, but at least I was smart enough to pull the plug not too long into the selling on Thursday. Woe to anyone who was long Wednesday, and held their positions through both days – a potential loss of 70 points – that could squish an account.

  Even though I hate using stops, these are what they were made for, to prevent extended losses. I have to remember that when I get tempted to not use them, which I have a bad habit of doing.

  The sad part is I would  have not had any losses if I followed my rules of my system. The problem is I jumped the gun, thinking I saw a pattern set up, but I made an error since the pattern I thought I saw was a mistake.

  Over confidence can kill a trader and lately my trading has been doing well, so I got a little trigger happy. My system is working well- even though I was expecting a big bounce on Thursday, my system prevented me from getting in long, except for one trade, which made a profit. The problem was I should have realized the overall trend was heading lower so I could have capitalized more on the short side.

  Today was contract expiration day – the ES June contracts go inactive and the September contracts become prime. Rollover of the two contracts started last week. I spent a solid three months actively hedging both the June and September ES contracts from the long and short side. After all that time in, I have to say, my skill set has evolved past needing to hedge.

  Hedging a position is good when there is a decent level of uncertainty about where prices are headed, but I’ve found that as my precision in determining market direction increases, the usefulness of hedging declines.

  For example. Lets say I’m long 4 contracts, and short 2 contracts. I would do that if I feel the market is headed higher, but feel the market might fall a bit before then. Now, the more certain I am of the market’s direction, the less use I get from a hedge, which actually reduces your total gain. Being long 4 and short 2 contracts is the same thing as only being long two contracts.

  So with today’s expiration, I can say my big active hedging days are done for now- it’s back to my former method of directional trading, only with much needed improvements.

  Hedging has been a real eye opener, albeit a costly one. My worst performance beat downs have come from hedging, letting myself get burned from both directions. The blessing of hedging was that it made me keenly aware of potential trades from both the short and long directions at the same time, making me aware of things I never picked up on when solely directional trading. The end result was a faster evolution and improvement of my trading methods and market analysis capability. The net effect is I’m now seeing some of the best performance gains since I started measuring them. It reminds me of the lyrics of a song:

   

  “You plunge you hand in…, you draw it back scorched…, but beneath it’s shining like gold, but better.”

   

  Which bring me to my 3rd topic- anger management. The market has been getting on my nerves big time. I know this is impossible, but it sure seems that it’s out to see that I lose. The market is moving solidly in one direction, the second I get in, then the market movement fades and it looks like it’s going to reverse. I know this is a natural phenomenon because people think the same way, but I account for that but it still happens.

   

  Example 1: I enter long, and soon after that market looks shaky and starts wavering. It’s goes up down, all around, but does basically nothing. I get tired and exit with a smaller profit, and not even TWO FREAKING MINUTES later the market now gets new life and zips and zooms to my intended target. This has happened way too many times!

  Example 2: I enter short, and the weak market suddenly gets a new backbone and surges up, up, and away, tick by tick. My analysis says the market is due to fall, but the market is doing the opposite. It’s like it’s trying to break me to close out for a loss.  After way too long, hours, the market eventually drifts back down and I exit earlier than planned for a smaller profit because the market is showing such unanticipated strength. I barely get my order in and the market takes it and zooms up again, but now I’m out with my profit. You know what happens next. The next time the market drops to where I exited, it doesn’t bounce, but instead drops like a huge rock well past my intended target. It felt like some jerk on the other side was just waiting for me to exit my short before letting the market drop.

   

  Trading enjoyment can be measured by the following gauge levels:

  1) Best: When you exit at the desired target and the market reverses shortly after that – meaning you nailed the perfect exit point.

  2) Good I: You exit as desired target but the market keeps moving in that direction. You left profit on the table, but you’re still happy.

  3) Good II: You exit the market at a loss, and the market keeps moving in the same direction so you escaped further losses.

  4) Fair: You exit early with profit due to market gyrations, but market winds up hitting target. You feel cheated.

  5) Poor: You exit the market at a loss, the market then whips around and hits your target price. You feel robbed.

   

  Trade type #5 feels so bad, that the temptation to accept and take Trade #4 is powerful. Trade type #1 is great, but too may of them can be dangerous because it usually leads to overconfidence. But they still feel sooo good.

  Okay, so the logical side of me realizes with the vast number of people in the market, it’s HIGHLY unlikely that someone is manipulating the market just to screw with me, but the emotional side of me can’t ignore the strange coincidences. Maybe one of my posts angered someone at Goldman Sachs and this is their attempt at revenge.

   

  So the good news my analysis is correct, but I could stand to make some more improvements on my entries so I’m not put in a position of being tempted to exit early- and now you know what my weekend homework assignment is.

   

   

   

   

   

  • 12:15 am
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