This is the nuts and bolts of trading at its finest...trade management...I do not think that there are any "hard and fast" answers to this question...Without a doubt, this is the aspect of trading the gives one the most creative freedom within certain limits... Depending on your capitalization, there are many ways to either average your cost and/or average your exits, etc...Mainly, the most important part of the plan is the planning stage...For instance, I think one of the most important things to consider at all times is a) your basis cost and b) the success of your entry...You have to be very objective about the latter...Sometimes if you enter following a breakout and you have to much size on, you take the risk of trading into a "hole" and then you have to ask yourself, is this trade worth the risk of letting the market run me over as it runs back to the breakout point...If you are fairly certain you have nailed the short term high or low, then you may have a bit more latitude as far as exits go... I think alot of traders take unnecessary losses at certain times that could be managed better if they could objectively assess the success/failure of their entries...Without a very good entry, the trade basically becomes about playing defense really quickly...With a good entry, the trade becomes about managing the profits...Sometimes, if trading in a range and the first entry is not perfect, but the trade is still inside the range and the market still suggests the original direction, adding to the trade is a viable option as well... As far as adding to a position as it proves you right, ...You have to decrease your exposure as the trade moves your way...but again, this relates to your basis cost...How much of a profit do you have and how will the add-on affect the overall profitability of the trade... Actually, there was a typo...I did not intend to say decrease your size, per se, but rather decrease the add-on contract size relative to your initial entry...For instance, if 10 contracts on the first entry, perhaps 3-5 on the add-on entry...This way you do not jeopordize your entire cost on the trade should the market come off and retrace a bit back towards the entry...
05-17-02 10:12 PM Another thing that was not mentioned was the simple mechanics of expiration week. Let's not forget that during options expiration, there is a clear agenda to keep stocks from expiring through specific strikes. Coming into this week the "MaxPain" was 1100 SPX and lo and behold the market settled within about 5 handles and straddled that level for 3 days. I think the Tuesday gap higher(similar to April 16th-April expiration cycle) put in motion a very neutral market where shorts were not going to be too aggressive in their selling because technically we broke above 10 Day line resistance and bulls were just picking at the pullbacks and we just kind of "chopped higher". Someone also mentioned that the dollar is not confirming this move, which I think says alot. It is also worth noting that last expiration cycle we had a very choppy 3 days following the April 16th spike, with a news shock on April 18th when that plane went flying into the Pirelli building in Milan, only to be followed by more chop around the 1125 pivot for that expiration cycle. The following Monday we gapped lower and set in motion a week long decline that was straight down with hardly a retracement. Not saying this would happen again, but I would never make any "macro" analysis based on these expiration runs. They have proven over the years to be real fakeouts alot of times...
I have been looking at and using tiki for about 3 years and I have noticed over that time how its application has changed as far as using to time entries and exits for s&p futures... Basically, the concept is that a +/-22 reading on tiki indicates buy/sell programs are hitting the market. This could also be confirmed with the PREM indicator as there are set premiums/discounts that trigger these programs. In the past, back around 1999-2000, you would typically have 1 tiki or 2 tiki's in a row and price would quickly come off of that level for a few minutes. In a trending market, you might get a number of tiki's(with trend) without any retracement or a number of tiki's (against trend) that would be quickly absorbed by players looking to enter on any counter-trend move...In a trading range environment, tiki's would typically trigger into a resistance/support area and quickly come off with a decent scalping opportunity... Nowadays, I have been noticing a proliferation of tiki "clusters", where you will have one tiki, then another, and another, and another...sometimes up to 6-7 in a row on a 5 minute tiki chart. Since the markets have been pretty much "one way" in the past two months, it just appears that these tiki programs come into the market and move it to an extreme with little retracement and that all of the momentum comes in with force at one time for about 30 minutes and then prices stall... I don't want to get too much into this, but just to give some of my observations about how this indicator has worked in recent years..
I think there is a real myth about this one...I also think you have to be able to average a trade out inside of a range, because you are not going to catch the perfect entry every time...The rules are not static, they change depending on the environment...I trade futures almost exclusively, and many times I might enter the market a bit off of a pivot and then watch it move against me a bit and hit the entry that I would have wanted in the first place... Basically, I find the best way is to just trade smaller size on breakouts and then if you have any movement against the position, put the other half on and then hold yourself to clearing out of that trade if you have any more adverse excursion...Basically, I want exposure to trend movement, but I do not want to give away my entry and be stuck holding the bag if I mistakenly sell a false breakout or vice versa...You just have to have different rules for different environments and know where and when you are absolutely wrong... I just do not think there are any absolutes to trading...Sure, if you continue to average down a position hoping it wins, that is stupid...But to simply say never add to a loser is not that simple...Alot of traders add to losers, they just have an ultimate uncle stop where they know they are absolutely wrong and the risk outweighs the reward
Actually, reading over all of the pros and cons of this thread I definitely see that there are two debates going on here which someone mentioned in an earlier thread... Some people are discussing the merits of scaling in a fixed range with an uncle stop and a keen eye towards averaging in their basis cost on the trade, while others are discussing using the averaging down philosophy to try and turn a bad trade into a good trade... I think it just goes back to planning...A good example would be something like this...The S&P futures are selling off, you want exposure to the down move, but you feel that you may compromise yourself by entering after there has been a good deal of movement away from the optimal entry, so you short maybe 1/2-1/3 of your full position sizing with the goal of either keeping the position until it reaches your profit target or adding more to the short on a pullback against trend into the area you originally wanted to short...Obviously, if you are only trading at a fraction of your full size and the market has not yet proven you "wrong", you can add to the position and improve your cost and exposure to the developing trend...Once it reverses or IF it reverses in the anticipated direction, you can put your stop above that swing high knowing that you are wrong there...
In my last post I said that "stopping" oneself out after a small "blip" caused by nothing more than the ebb and flow of the market could lead to alot of self torture, I also wanted to add one caveat to this statement...One thing that I think is important in determining how to "trade out" of losing positions is how you are entering the market...If you are trading thru ranges or trading short term breakouts, majority of the time you are going to have to absorb the local fading, the programs kicking in, the opposite side of the trade covering into where you are entering, etc...In this case, you are going to basically be wrong from the get go...However, if you apply a noise filter to that breakout, you can basically look at the ensuing movement without the paniced finger on the mouse looking to cover...In that situation, if you basically assumed you were wrong, you would always be wrong temporarily... On the other hand, if you are trading re-tests, then you would probably want to "trade out" of the position much more quickly because you are looking for an immediate confirmation of the move...You also have a wall of S/R that you are trading into...The criteria are different and so should be the reaction... I always think trading is about alot of different elements, it is always somewhere "in between"...Alot of threads on this board try to apply maxims of certainty or "absolute" truths to how to trade, but they cannot possibly encompass all of the scenarios that face us during any series of trades...In fact, alot of unconventional wisdom and many threads which attract as much attention as a Salem witchhunt as far as unpopularity do quite well in the mini's...Truly a perverse market it is!!!
Another aspect that may have been overlooked is "overhead"... From my experience and the experience of others it is very difficult to get ahead as a beginning trader if you are accustomed to material "trappings" such as one who receives a paycheck every week and has no fluctuation in their income or in the "timing" of receiving such income...This major "sacrifice" is something few aspiring traders are willing to make, presumably until it has been taken away from them and they realize just how much they love the "game" regardless of whether not they become as rich as they assumed they would prior to entering the trading arena... I find it is much easier to trade if you own most of what you would finance provided you had the steady income to justify the monthly payments...Best to pay off your car, eliminate credit card debts, pay off your home or rent something cheaper...That way you can have a modest living expenses as your core base and anything that you make above or beyond this amount can be set aside for some later date... Also, it is NEVER a good idea to think of what you could buy with your day's winnings...Because inevitably you will have drawdowns and give back exactly what you made and will feel quite defeated...It is best to simply determine a date to withdraw any excess capital and reward yourself, go back to the beginning equity amount and begin anew...Obviously, if the account is too small this is not a reality...But if you have a decent sized account it is a good idea... Basically, my main point is that you have to have all of your affairs in order PRIOR to entering the game...The fewer costs or overhead you have the better the chances of survival...It is next to impossible to try and pay the bills from your trading at the beginning and to consider this as your sole reason to begin trading is futile...Simply put: it will not happen, not in this environment...If you are constantly thinking about having to pay bills with your trading income, you will never take trades based on the action; you will take trades because you HAVE TO make x or y dollars...Ask any traders who started out and traded with big overhead and had to finance their lifestyle with trading profits; it is a tough and extremely stressful road...You will find yourself constantly reacting, second guessing, filled with hesistation...It is a brutal experience and I think everyone in the beginning stages goes thru it; maybe some are able to elimate these psychological demons, guys just out of college and accustomed to being poor...FOr someone in their 40's, very tough predicament I remember an experienced and veteran floor trader once telling me that alot of the guys on the floor who leased their seats did not exactly "blow out"; instead they just could not meet their overhead...At that time seats were leased at about $7,500 per month and alot of the traders were covering their lease payments but could not cover their living expenses...When you consider, it required over $90,000 per year just to "breakeven", it puts into perspective the advantages we have as electronic traders...Nevertheless, it does not mean that it is any easier to cover one's overhead in the beginning...
I also trade two separate time frames, although I feel that this is a difficult endeavour...For the most part, I try to separate the days in which I am going to enter a different mindset...If I am planning on entering a swing trade for a minimum profit target of 7-10 handles, I really need to be careful with the manner in which I start scalping...From my experience, swing trading and scalping require two entirely opposite mindsets and if you confuse the two it wreaks havoc on even the most well developed trading plans... I will try to explain in more detail...To scalp, you basically have to partial out of trades extremely quickly and your reflexes have to be sharp...You do not have the luxury of time because a scalp is basically just trying to extract the minimal amount of profit with the minimal amount of risk exposure...To swing trade, you have to have patience, plain and simple...And not only that you have to increase your pain threshold since your profit/risk objectives are magnified...So, in essence, you are expanding your risk tolerance to allow yourself some wiggle room and to reduce or dampen the effect that the market noise will have on this aspect of the plan...The real problem occurs when your mind is somewhere in between...Like entering a swing trade with a minimum 7 or 10 pt profit objective and instantly finding yourself 3-4 handles ahead and covering...Or on the flipside, entering a scalp and finding yourself 3-4 pts in the hole and letting it run against you... I say all of this because I honestly believe that I have never found any of the conventional techniques work for trading the indicies...The internet is littered with self described guru's who teach techniques that are basically only accomodating to one aspect of price action...They will post charts with beautiful flowing moving averages and little lines that show where you should have bought or sold...but the majority of it is hogwash...The truth of the matter is that so much of this stuff is adaptive and internalized...I respect some of Lundy;s posts because I feel that what he writes is much closer to the truth...The conviction is what wins in certain time frames...The quickness and agility is what wins in other time frames...Each time frame has a specific skill set that needs to be learned, but not compromised...When one time frame is compromised with the other that is when the errors mount... So, essentially, what I am saying is that for me I have to know exactly which mindset I am going to be trading in for a specific period of time...When I break this rule I damage my plan...When I take profits too soon in my swing account, I leave big money on the table, money I will need to absorb the movement against when trading on a larger time frame...If and when I do not trade tight in the scalper time frame I am damaging my ability to come back from a series of what should be near scratch trades...
yes, good analysis...I think this happens to alot of people trading the mini's...Like I mentioned in that post, it happened to me somewhat frequently, especially as I began to trade both accounts with two separate time frames... Like I also said before, the biggest risk in trading the indicies, IMO, is being stuck between time frames...Once you get into that gray area, you are filled with hesitation, apprehension and overall fear because you are not quite sure what the heck you are doing with the trade...It is much easier to just adapt one time frame and stick with it and make sure you know which one it is... And you are right that once in awhile you get the trade that immediately goes your way for a good chunk, like 4-5 handles without ever going against you...but truth is, to even find entries like that you are pretty much fading some short term momentum or fading one time frame against another, because you are catching the peaks and valleys...and to get into those types of trades you really have to be aggressive... The good thing about trading on a slightly larger time frame is that you are able to kind of filter the noise a bit and detach yourself from it...You can even be pro-active with it...I will often scale into trades and add to the first entry even when it is running against me, because I am trying to enter inside a specific zone of support/resistance...When you are glued to the scalper time frame, you are basically putting enormous pressure on each and every entry because you are trying to predict within 2-3 ticks each peak and valley...With the number of buy/sell programs running the markets nowadays, the "blips" on the micro time frame are becoming more volatile, and imo a bit less predictable... Just my opinion...Others will disagree...There are plenty of "pure" scalpers out there doing well, but the discipline is very different
This is the aspect of trading, that I believe is more art than science...Another person on a similar thread stated that he made the majority of profits from his "runners"(i.e. the free trades after you have covered your costs on partialling out on first contracts)...I think that is absolutely true...While the drawdowns, at first, will be an eye opener when you are wrong with 3-5 lots, the upside is magnified as well because you can scale out of your position as teh market moves your way, trail your stops and pick up some bigger moves...With 1 lots, you need near perfection in each aspect of the trade...You have to enter perfectly, cause you are not giving yourself teh opportunity to add to a position and scale in, you have to exit perfectly and estimate the exact inflection point in the short term...sometimes you catch the exact bottom, but most of the time you cover on the first signs of strength counter-trend...then the market breaks your way for another 3,4,5,10 handles and you are on the sidelines...or worse yet, you enter, market runs 2 handles against you, stops you out, reverses and runs to your original target...the more contracts you can trade, the more flexibility you have...the better you can scale out and scale in, average in, adjust and scratch losing trades, maximize winners, etc... Personally, I still struggle with adding to winning positions...typically I just accumulate a position inside a certain range and then start scaling out if it goes my way...if it goes against me I reduce the exposure and then try to cover the remainder near break even...it is tricky, like all aspects of trading...