ONE DAY WONDERS
As I stated on Friday, there was no sense waving to the crowd yet on the 10 Year short position, and that it could be a one day wonder. That is exactly what it turned out to be. With the stock futures down reversal overnight, the bond markets were sent soaring. This is one of the most frustrating things that happens in trading, a huge one day profit that completely disappears the very next trading day.
What causes these? Is there anything we can do about them?
As far as what causes these, this one was clearly caused directly by the stock market rally, so once it reversed, it was likely this was going to reverse as well. What we can do about it is make sure that our trades are not too highly correlated. If you were long the ES and short Bonds, you have given back double the profits. I was looking at both, realized they were the same trade, so just chose one. In a world where so many trades are the same, this is one thing we can certainly do. Was there anything else that might have tipped us off that this trade was no good?
First off, the is an incredibly strong trend upward, so this was a counter trend trade. Trends rarely end on spike highs although that does happen from time to time. We could have been conservative and waited for the bounce that is happening now to try and enter on a lower high. Unfortunately in today's world we have no way of knowing if that will happen or not. As a result, if we are looking at doing something like this we need to be prepared to be stopped out once or twice before finally hitting it. That is probably likely to happen here if in fact we top at all. Maybe this is not a top and we just cascade higher.
It was a trade by my rules, so I took it knowing, and I even put it in my notes, that this was a marginal trade. I went slightly lower on my risk due to this. I did not think for a second that Friday meant anything at all, and I stated that in here. It is very hard to stay emotionally detached to money since trading is all about the money. However, we have to be aware that anything can happen at any time, so not to get too carried away either way with ourselves.
I think what causes these is just the nature of how fast money moves nowadays, and how it chases the latest greatest ideas so quickly. Once a move starts, everyone piles on incredibly fast. Of course that money can also leave the party at any time. The markets have gotten choppier. As a result, you have to sit through alot of crap often when trading, even when the trades ultimately go your way. It is rare to get in, get a big move immediately, then be able to take profits and look for the next trade. At times it happens like my recent ES and Soybean Oil trades, but that is not the norm.
As to what can be done about this, nothing. It is just part of trading. Sometimes the trades that look the best turn out the worst and vice versa. It sure keeps things from getting boring if nothing else. The fate of this market will be determined by what stocks do here. Usually, and there are of course exceptions, market intraday reversals like this continue down. That is probably a 60% probability, and 40% it comes back up. As a result, it is probably 60% likely that this trade winds up as a loss now, and 40% that it does not.
One day wonders will continue and there is nothing we can do about them but keep our heads and not let them get us too down.