5 When coming into a day of a news event, such as NFP, or just any day other day when you find your portfolio over-weighted to one side being bull, bear, or industry you have to ask yourself:
“Can I sleep tonight”
Through my experience I have found that when I feel uneasy it has been best to reduce that risk or take off the position. Do I always follow this advice…no, and it has been damaging almost every time. A recent case of my stubbornness that cost me can be found in a recent post titled An Addiction I Am Trying To Control.
Basically this post talked about how I closed positions but then put more positions on as I felt I had to do something. Even though they compromised a small part of the portfolio I didn’t feel so great about them later that day. The two positions that I didn’t like were a SPX Bull Put Spread and a /ZB Bear Call Spread. I ended up closing & taking a -$75 loss on the /ZB trade, so nothing huge and that same trade is now severely underwater by about 3x that. But the trade that did more mental damage than anything is the SPX trade.
I sold the 1310/1305 Put Spread for a $35 credit, risking $465 with the SPX trading at 1339. In order for me to have a loss this trade would have to close below 1310 or a 29 point drop by Friday morning (2 full trading days). Could it happen..yes but I went into the trade believing that two more 15 point drops after the selling we already had seemed unlikely. Well Murphy took the markets and he was out to get me. I wrote a follow up about the trade titled A Note on Risk and Following Some Simple Advice to Save Some Money that has more details. The chart below shows the gist of the trade on a 15min time period.
I went back and learned what I did wrong and found I did mess up the entry based on the rules as I was in too much of hurry to get in the trade and I didn’t want to miss it. I also disregarded my adjustment/exit level and didn’t take the smaller loss when I knew I was wrong. Learning from my mistake, I put the trade on again this week Wednesday with the 1280/1275 Bull Put Spread for a 0.35 credit.
I put the trade on when it was ready and recognized my risk parameters & adjustment levels. I was going to keep the trade on into tomorrow as a 30pt SPX drop by close of Friday seemed unlikely but I asked myself “Would I sleep better if I just removed the trade”. My answer was yes as we have data coming out overnight and pre-market and I ended up placing a limit order at 0.10 and was filled later in the day (which was near the high of the day) for +$25 per spread.
As soon as I was filled there was the relief of not having the big risk going into tomorrow morning and hoping for a move to the upside or not a big move to the downside by end of day Friday. I am confident that we won’t have a 30pt drop but I also don’t want to take any chance and I was happy with the profit. Murphy has kicked my ass too many times and now I can have a good relaxing Friday with mind at ease.
5 Responses to “Sometimes You Got to Ask Yourself…”
schadenfreude
Hi Redman. I enjoy reading your posts here at IBC.
On the chart you posted, what prompted you to sell that bull put spread in the first place?
At the time you sold for 0.35, the 50 and 100 EMA’s were both still sloping down and price had only briefly broken out above the 10 & 20. This sort of bottom fishing and ‘calling the turn’ I have found is very dangerous and the deck is always stacked against you in the long run. Simply trading in the direction of the primary trend is always going to be a higher probability setup. Furthermore, those cheap put credit spreads have a uncanny way of taking your lunch money in a declining market as volatility rises. Sort of a double-whammy, as you well know.
Back to your chart and the trade. When price broke down back below the 10 & 20 EMA on that heavy red bar around 11:00 AM, I would have used that as my entry to short either buying puts outright or selling call credit spreads with a stop-loss on a close above the 50 EMA.
Just something to think about.
redman59
Thanks for reading. Reason, no excuse and you’re right as a downtrend it is. I put this trade on Wednesdays and forgetting to do my plan the night before (work night shift), I woke up late & looked at the market making a nice run after the selling that has taken place and as you noted…traded against the trend. The trade was definitely the bear call spread.
Rushing the trade without a plan and following the adjustments I have in place for this strategy, it was a failure from the start. Your 2nd paragraph is spot on too, that was a nice adjustment to make. As for the spreads, I agree & don’t like cheap spreads like these w/big risks but this has been a proven strategy that is consistent & the adjustments & stop levels mitigate those big losses. It was just an overall failure on my part as I messed it up from the beginning and then hoped & further thought we can’t drop that much more…and we all know where that gets us.
This trade has been a favorite learning lesson of mine. Thanks for the observations on the EMA’s and overall trade.
schadenfreude
No problem.
I have done the exact same thing on many occasions myself. It is part of the learning curve. Exercising patience and controlling your emotions is the hardest aspect to master in trading and about 9 out 10 traders will never win in this regard. I am still trying to become one of the lucky 10%.
Here is some more unsolicited advice, with your work schedule, aiming for these little moves and setups on the inter-day charts probably is not the best style for you. I occasionally work nights and travel quite a bit for work, and on top of being a father, husband and full time employee and then only after losing a substantial amount of money in the market, I found out it certainly wasn’t for me.
Watching the market move and getting involved inter-day is a huge source for stress and anxiety and powerful emotions that leads directly to poor decision making. I have forced myself to move exclusively to monthly, weekly, daily time frames and only focus on closing price to avoid this pitfall. It is human nature, people love to watch the ticks up and down, the flashing headlines, the red and green, the fear and the greed, the thrill of being on the right side of the trade. It is a huge rush.
Gaming the market consistently and successfully however should be none of those things. It should be mechanical and almost boring.
Nearly everyone puts too much emphasis on about entry without giving much thought to exit when exit points are much more critical to your account balance.
If you do anything, absolutely force yourself no matter what to plan your trades. Keep a journal, whatever it takes. Spend more time plotting your exit points and max loss above anything else. Over the long haul, I am a firm believer that the only thing that matters in the market is max loss and exits. Profits and success will take care of themselves once you have learned to handle losses and exits.
I use similar EMA’s when looking for setups. If your charting software allows, try extending about 75 blank bars to the right of price, which is about 3 months out on a daily chart. I found it is simply amazing what you can gleen from a chart when you set it up like this. You end up with a clear, visual road map for your trade. All of my trading is done on trend continuation so when price stays in the channel and on the good side of the EMA’s. I am with the trend and winning. Price moves out of the channel or through the EMA. I am wrong and stopped out. You can make some very good returns legging into calendar spreads this way, ‘locking in’ profit by selling front month ATM against the original position when price is moving in your direction.
Anyway, from one night-shifter to another, best of luck and I look forward to more articles.
redman59
Got some good advice in there. One thing I like about the trade is that the entry takes the most thought (which I messed up) but then the rules are price level based so setting alerts & having a mobile works well.
But yes nice note on the work schedule too as for me the week can be taxing but then play catch up on the weekends that I have off, overall though you are right in that the trader needs to adjust his trading to his work & life not the other way around. Unfortunately this usually takes losses to find out but one just has to learn.
Nice tip on the last paragraph and it definitely makes sense with the road map perspective.
Thanks for the comments and replies, appreciate it.
Murphy At His Finest on Friday « redman59
[…] is a follow up trade result to a previous post titled “Sometimes You Got To Ask Yourself…“. I wanted to come back to this trade as it shows Fridays (6/01/2012) price action and is a […]