Wednesday, November 09, 2011


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.

Good Trading


Anonymous said...

How did you decide to get back in last night? Nothing at the close of the regular trading day yesterday seemed to indicate that we would reverse as we did

Chris Johnston said...

Just as I stated, the sell setup was still in place. We had a nice tight ledge in the Aussie and up closes there and in the EURO. I like shorting below up closes more than down closes in general. So when I saw those closes, with the bigger picture sell still there, I just put the orders in. I figured we might just keep going up, but if we did happen to take out the low, I wanted to be short.

Chris Johnston said...

Setups are not changed by a bar or two, since they are bigger picture situations. How one enters is what changes on a daily basis.

Let me know if I am not explaining this satisfactorily

ya said...

Also when you write shorting bellow upclose do you mean a sell order under the close or the low of the previous day?
Was Cattle still a sell in your work as of yesterday morning?

Thanks again

Chris Johnston said...

I sold at the low

Cattle was not a sell for me this week

ya said...


I posted 2 seta of questions/comments; The first one re $AD setup. Some times i have trouble saving these comments, did you get it?

Chris Johnston said...

I did not see the AD question

ya said...

As I am looking at ad chart I see small bearish divergence between POIV & price 10bars ago, but price has moved down since than, so it is no longer current signal? while i am not familiar with cj cot indicator the last sell you showing on the chart happened some time ago & both price & indicator has moved up significatley since than? Does not provide any info to my eye? Do you assign much weight to COT data on currencies since most volume is traded on forex? What is our downside target? Mine 0.98 What kind of trailing stop do you like to use once in positive territory? Thanks a lot

Chris Johnston said...

That is a lot to cover. First minor POIV divergences or any other indicator, should be ignored. I don't consider that one you pointed out to mean anything. The look RB had recently is more what I look for with POIV

I ignore Forex, too many suckers with no money trade those markets even though there is also big size.

The COT Synthetic does not always speak, the indicator is just many of my charts. I point out things on it when I think they are relevant. COT data is very tricky to use, more so than ever nowadays.

Stops should be above or below pivots, they should not be placed where they should be placed without regard to where you entered. The market does not care what price we get in at. The only exception would be if you have a huge paper gain, and there is not a logical stop point in between, I think you can have the stop at break even. A huge gain is not 30 ticks, I am talking a significant gain.

I have a fried who does this every time he gets $400 or so a contract, and of course he gets stopped out in every trade just to watch them turn back around and go the way he thought. He always tells me he gets in good. How good can it be if he gets stopped out all the time. He says that because he death watches the trades and usually sees a few positive ticks in every trade.

Aye Carumba! He just won't listen to me no matter what I tell him.

Anonymous said...

Your comments coupled with ya's clarification that you sold at the low make sense. I too thought you sold the at the close of the upclose near the high. So it sounded like you were valuing the setup more than price.

I too have the same problem as your friend. I find myself getting stopped out of as many as 20 trades sometimes all slightly above breakeven to cover comissions. But every now and then I catch something big. I tried paper trading a strategy where I placed stops at local highs and lows near and that account is up 25% year to date, much better than my actual account. But that account is $100k in size whereas my real account is only $5k. So I can clearly see how that works but I suffer from some of the problems of small accounts that you have mentioned: large draw down, etc. and feel that I have to trade extremely conservatively until I can build up a stake.

trade futures said...

Euro looks tricky in the 1.38 and 1.35 range. I were also trading it a year ago, and now it is in exactly the same kind of levels. Would not be amazed if it dropped back to the 1.28 level at the end of the year. Then we would be back to square one, right where it started this year.

By the way, nice commentary on the thinking that goes inside your head.

ya said...

If you are ignoring $ad indicators (poiv,cj cot) how did you arrive at a bearish setup in this case besides seasonal tendency which by itself is not a panacea?

Chris Johnston said...

the divergence in the poiv is clearly negative having a big one at the recent high, you are reading this wrong. A little wiggle at some minor low like you are pointing out is meaningless compared to what is at the significant high. Don't micro analyze divergences in oscillators look for significant ones not little wiggles, they mean nothing.

If you read my prior posts on my cot indicator I explained that you always go by the most recent signal until one in the opposite direction shows us. The most recent signal was a sell, it has not gotten into the buy zone yet. As a result that still said sell and still does today.

ya said...

Thank you for patently answering my questions. I must misunderstand definition of divergence, In my mind it is when indicator does not confirm the price. Trading just that will lead you into losses. So when i look at the chart of $ad I see after initial divergence POIV indicator is sort of following the price down, confirming the move. Please point out my divergence with your interpretation.

Chris Johnston said...

agree with your definition

It was there at the 2 month highs and there is nothing there now and we are not at a significant low point to look for one anyway.

Divergences are very subjective just like many things are and in my mind there is no bullish divergence the way I look at it here.

If you are bullish and think you see one, that is what makes markets, people looking at things differently. You may be right, but for how I use this there is not any bullish divergence here. It is just following the price as you say.

The RB example I gave you to look at is what I would have to see here to view it as bullish.

Lets move on

ya said...

I just reexamined the recent RB chart where you show a "lot of divergence". I see the indicator not following the price down and not confirming the move & creating bullish divergence. Please understand, I am not driving my point, I am struggling to understand your use of this tool.