WHEN IN ROME PART DEUX
Yesterday I went through my logic as to why I exited some shorts, and also why I felt it was correct to break the rules in that case. The one comment I did not make which I should have was, "you can always get back in." As we all know the world is full of annoying cliches, many of which aren't worth the ink they are printed with. This one for me is worth quite a bit. Part of how I trade unfortunately has a ton of discretion in it. I do have basic setups and I am very disciplined about waiting for them to show up. Once they do show up, how to get into the trades themselves from the setups is where all the judgements come in.
I used to just sit and wait for what I thought was perfect, and missed a bunch of things along the way. The world is not perfect, and if you wait for perfection you won't often find it. The flip side to that is that you can't just swing at anything, you will surely get wiped out doing that. What that leaves is a whole bunch of middle ground. That middle ground is where our evil human tendencies can bite us. It was my feeling coming into this week, that I felt the world was a sell signal. I saw sells everywhere I looked and said as much in my commentary. The trick was to try and whittle it down some since almost every market looked the same to me, and I am not comfortable risking too much in what is essentially the same trade. I am more than comfortable having 5 positions on in different things all with a 2% risk. I am completely uncomfortable having 5 positions on with 2% risk, when all of the setups look the same. That is basically a 10% risk on the same thing. This is what I warned people about doing.
I wound up choosing a couple of markets to play in and pared my bets so that overall the total risk was about 3% between all of them. If you are just starting off, it is impossible to have your risk that low because you probably do not have a large enough account balance to ever make a trade. I covered all of that in a prior post, so I am not going to get back into that again. Once you have a large enough account to do some damage, 6 figures or more, that is where these risk parameters come into play. Once you get into a trade with all the diligence done, your risk in place etc.., and something goes wrong, you have a couple of choices to make.
First, and also most of the time, you just place your stops and let things play out. The second thing I do sometimes is assess what is happening just in general. At times, and it is not often, but this week was one of them, I was able to determine that my entries were no good and I needed to bail out and regroup. I went through all of this yesterday. What I said above that was not included in the commentary, was that once you exit something if you are not sure about the trade, is that you can always get back in. Once you are flat, the emotions go away, and you get a more objective look at things. It is at that point that you will be able to see what you might have missed, or at times if you got out incorrectly. Once you have made that assessment you can always get back in. One thing you do not want to get into doing, and I have made this mistake before but not in recent years, is jumping in and out and in and out of the same trade. I think a rule of just one re-entry and no more is a good general parameter. You do not want to get carried away going in and out and feeding the brokerage firms for no reason. Be disciplined with this and make sure it is based on market logic and not emotion. The chart below shows an example of market logic in the EURO not emotion.
I was short here where indicated above and exited quickly as I explained in my prior commentary, the middle exit point. Had I held that trade I would have likely been stopped out at the other exit spot yesterday. The reason for that is that yesterday confirmed a higher short term low than the previous one, meaning the short term market structure had turned back up. As a result, my stop had I still been in, would have been at the other exit point, hence a much bigger loss than the little one I took. This is an example of market logic, highs and lows, making the call for me and not emotion. Now I am back in again, so that is that. The market structure has gotten me back in, not emotion. You could certainly argue that moving the stop down like that was too close and you might be right, maybe I just blew this whole thing. However, that is the logic I used and overall it works for me. Once again you get here what I really do, not marketing about how great I am etc.. Sometimes I make lousy decisions just like everyone else, so maybe this was one of them. However, it is behind me now, the logic as to why I did it is here.
In this case my judgement was that the sell setup especially in the currencies, was still there. I had just jumped the gun a bit on the initial entry, or maybe I didn't. Maybe I blew the stop? Maybe the trade just required 2 entries? Maybe I should have just waited for the second one only? I say who cares, that type of thinking is small and you need to learn to get past it. Trading is about trying to find opportunities and just taking your shots when you find them. In any event, there was no reason why I should not have sell orders in last night again in whichever one I picked. I decided to pick the Aussie Dollar. I chose it because of the POIV divergence, and also the nice tight ledge it had. It also had a small stop which allowed more contracts than going back into the EURO again. However, it really is basically the same trade. The EURO will move more per contract, yet I have more contracts in the Aussie. The Aussie was also leading the weakness last night and filled first. I really see the Canadian Dollar overall as the weakest, yet it went through it's entry last overnight. Sometimes we can only over figure this stuff so much, and then it becomes counter productive.
It looks like today we have another one of these European driven declines. I still think this dip if it is one of more than a day, is a buy spot for stocks not a panic we are falling off a cliff again scenario. As we saw in the Ohio vote last night, the trend toward bankrupting the country to extend entitlements, and keep inflating the debt bubble to pay them, is alive and well. I say swing away! They may think they are getting over, but those of us who can think our way through things will find a way to profit handsomely when they bring us all down with their selfishness and greed. Just like Gorden Gekko said, "Greed is good." Too bad they don't have state futures, Ohio might be a great short sale right here!
I still am trying to understand why a lifeguard can work 5 years and be payed a guaranteed pension of 100k for the rest of his life? Who knew they made 100k in the first place? Go figure.