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    Wednesday, May 21, 2008

    Reacting to P+L


    Reacting to P+L solely, or mostly, is a recipe for disaster. Yesterday I saw my profits swell, and when I woke up this morning (5am eastern time), the futures were up. If they stayed that way until the open, I'd have surrendered some of my gains. Nobody likes to give back profits, but recall that one of my major tenets is to follow whatever got me into a trade, all the way through. If I used a stochastic signal to enter, I'll use the same exact stochastic to exit, assuming I don't get stopped out. Traders have a strong tendency to relive the most recent events too much. We judge our success and failure at the end of each day. This is detrimental, and we need to remind ourselves of our plan, regardless of the swings in profitability. Naturally, this assumes we are confident and proven that we have an edge.

    Regarding specific positions coming into today, it's important to remember we're close to a holiday. Money can still be made and lost, but it's my experience that holidays, FED announcements, etc really cloud the waters and temper the moves. I've said many times the last few days that I didn't expect the downside momentum to take a strong hold right away. It's possible that I'll have to see this trade right through the holiday and hold for 2 more weeks. In any case, I'll continue to "trade around" my core theme of shorting stocks. I'll take profits on some, into quick declines, and sell short more stock into quick rallies. To be specific, I'll probably only get the chance to act on each side (buyer and seller) only 1 time per day. In other words, I'm not reacting to every tiny move each minute, rather taking advantage of the larger moves that occur each day. I've already booked profits on a couple of occasions, and sold short more stock at 4pm yesterday. I'll judge my performance on how I trade my idea, win or lose, rather than today's (or yesterday's) P+L.

    A friend and mentor of mine advised, "always assume support and resistance will hold, even when they are breached." This was a perspective worth noting, in that one of his favorite trade setups occurred when everybody bought a "breakout". More often than not, the breakout reverses, catching newbie technicians in disbelief. His point was that even if the breakout were valid, a trader could not know this until several days or weeks later. The first time something breaks through a trendline means almost nothing, so let things play out before you decide it's a valid signal.

    We don't have many catalysts today, or in the next few days, so I'll be sure to book profits when offered. This does not change my original idea, it's just being flexible and taking advantage of what's offered. One observation supporting this short side trade, is that yesterday the relationships between various asset classes started to gel again. That is, a weak $US dollar, stronger bonds, and weaker stocks all traded in their usual relationships. So much for the dollar bottoming, heh? Take a quick look at the attached chart, and tell me how you'd feel if you were long $USD, now that the long term trend has proven it's intact (lower)? It's easy to stay away from "bottom fishing" trades if you remind yourself that even if something is done going down, that doesn't imply it has to go up. The most novice trader would conclude that chart is hardly bullish. Asset classes can languish for years. I am flexible, and I'll be long financial stocks at some point (probably) in the next few years, but not until they can hold an uptrend.

    Today I'm looking to trade the recent suspects including any or all of the following: S&P500 short, IWM short, IYR short (SRS long), EEM short, and I'm adding the FXI short, too, regardless if Jim Rogers says China is the best thing he's ever seen. I also like China and her future, but that doesn't affect my opinion of a 2 week trade!

    In the near future, I plan to organize the trades and executions in a more easy to read format. I'm working on it, but I've got positions to manage, friends and family accounts, etc. Please be patient.

    To read:

    2 Comments:

    Blogger TK said...

    Nice trade on SRS!

    May 21, 2008 2:55 PM  
    Blogger itrade4real said...

    Thanks for reading.

    May 21, 2008 3:04 PM  

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