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Learning the Everything: 2015
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Learning the Everything: 2015

  #21 (permalink)
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annnnd....once again, correct read on the market, too chickenshit to stick with the read in advance of an event. literally got out of the best position possible 7 minutes before....cost me about 15K in opportunity costs. i just have so little confidence in myself. I got back in of course but 14 ES points lower than where I was !

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  #22 (permalink)
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Out of curiosity, how much risk in $'s would you have needed to put on the table to realize the full $15k in missed opportunity costs?

Have you considered possibly expressing part of your trade idea in an option position that you'd be more willing to hold through to the end?

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  #23 (permalink)
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MacroNinja View Post
Out of curiosity, how much risk in $'s would you have needed to put on the table to realize the full $15k in missed opportunity costs?

Have you considered possibly expressing part of your trade idea in an option position that you'd be more willing to hold through to the end?

that's difficult to quantify. The risk is based on a stop loss target, which I have around 10 points, or 500$/contract. Yet the margin required to initiate the position is around 5000$/contract. 15K in opportunity costs would have required 15 contracts or about 75K in margin requirements/7.5K in potential risk...though margin and stop loss are not the same as having spent the money obviously.

I have thought about using options. I use options in equities, and am able to ride the fluctuations much more effectively, holding the positions for several weeks. Yet, I find it difficult to use options on a short term basis. Paying for extrinsic value is a difficult concept for me to get accustomed to, especially since it's quickly dwindling in the short term. I've tried doing day trades using Delta 40-50 strikes, with a small amount of sucess, but felt pressured as I had picked weekly expiration cycle to pay for the least amount of extrinsic possible. Do you use options? Would you suggest using further expiration dates?


Last edited by jackbravo; April 5th, 2015 at 05:43 AM.
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  #24 (permalink)
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@jackbravo,

So I might suggest that the first step might be to get better at quantifying the risk involved in the trade. In the above example where you felt flustered by missing $15k in potential profits, the risk is precisely quantifiable as you have just done yourself calculating the $7,500 dollars at risk if the stop were to get hit in exchange for the potential to make $15k in profit.

I'm not sure how large of an account you are operating out of, but let's conservatively say you are very well funded with a $100k trading account, that represents 7.5% risk on a single trade with a 2:1 risk to reward ratio. I think the 7.5% risk by itself would you have thrown off of most trading floors.

I also wonder then, if psychologically your unwillingness to take the trade is because the amount you are putting at risk (both in a % relative sense, especially if you're account is say only $50k meaning you are risking 15% on the account and also an absolute $ sense is too large).

My coaching challenge to you then would be, what if you only took a maximum 2% risk exposure, and only took trades that had a greater than 3:1 risk to reward ratio? At a psychological level, would you find yourself A) more willing to pull the trigger on the trade and B) more willing to hold that trade to full profit?

Re: Options expiry

Along with this theme of quantification, let's define what a "short amount of time" means. I would shy away from day trading futures options just because the spreads are so wide that just the cost of the spread on the round trip would put a dent in the profits compared to just trading the futures contract out right.

With regards to how long to out for the expiry date, there's no easy answer because that involves a further analysis on theta, implied volatility for the relative value of the option itself, etc.

But as an over simplification, if I am expressing a swing trade and the volatility is not overpriced, then I want to give myself at least a 2-4 week time window for the option to play out.

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  #25 (permalink)
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MacroNinja View Post
@jackbravo,

So I might suggest that the first step might be to get better at quantifying the risk involved in the trade. In the above example where you felt flustered by missing $15k in potential profits, the risk is precisely quantifiable as you have just done yourself calculating the $7,500 dollars at risk if the stop were to get hit in exchange for the potential to make $15k in profit.

I'm not sure how large of an account you are operating out of, but let's conservatively say you are very well funded with a $100k trading account, that represents 7.5% risk on a single trade with a 2:1 risk to reward ratio. I think the 7.5% risk by itself would you have thrown off of most trading floors.

I also wonder then, if psychologically your unwillingness to take the trade is because the amount you are putting at risk (both in a % relative sense, especially if you're account is say only $50k meaning you are risking 15% on the account and also an absolute $ sense is too large).

My coaching challenge to you then would be, what if you only took a maximum 2% risk exposure, and only took trades that had a greater than 3:1 risk to reward ratio? At a psychological level, would you find yourself A) more willing to pull the trigger on the trade and B) more willing to hold that trade to full profit?

Re: Options expiry

Along with this theme of quantification, let's define what a "short amount of time" means. I would shy away from day trading futures options just because the spreads are so wide that just the cost of the spread on the round trip would put a dent in the profits compared to just trading the futures contract out right.

With regards to how long to out for the expiry date, there's no easy answer because that involves a further analysis on theta, implied volatility for the relative value of the option itself, etc.

But as an over simplification, if I am expressing a swing trade and the volatility is not overpriced, then I want to give myself at least a 2-4 week time window for the option to play out.

Thank you for your reply.

That's the thing, I no longer play the game with stops. I've realized after reading the SPOO thread on this site, and my experience after reading many trading books which all recommend the same thing (stops, R:R ratios, short term scalping techniques) that the literature available for beginning traders might actually be the cause of such a high failure rate. I can tell you that I've become much more successful as of late taking trades for specific reasons and getting myself manually out of a trade when those reasons are not true (of course, I'm not good at this yet, and many times my reasons turn out to be incorrect). In any case, I like this style of trading better as I don't feel like I'm forced out of trades by stops getting randomly hit. As such, figuring out when I'm on the wrong side of a trade is entirely dependent on the trade, and therefore the risk is only quantifiable on a per trade basis. For example, this past trade, I had 20 contracts short at 62.50, felt that if price broke out of the range towards the 67/68 area, then I was probably wrong and would get out, so that's about a 5 point stop. Yet I didn't stick with this plan due to my lack of experience and self -confidence, and got out at 61.

Really, the thing that's most difficult for me is when I find myself positioned against the predominant direction in the SPOO thread. I try not to read it for people's trading ideas, and rather read it for the philosophy of trading, but it's very difficult to stay away. In this current trade, I felt most people in that thread were long and I was short, and I got scared out of the trade. There have been many trades in the past when I was positioned opposite and lost, and those trades still plague me. The previous big trade, I was aligned with the people in the thread, and was able to hold the trade and let it play out. So I think it's really a lack of confidence in my own interpretation of market data.

Definitely position sizing has a huge impact, and I'm probably trading too big. Had I 2 contracts in the trade, I would've most likely let it play out. I'm trading out of a ~200K IRA account, and my focus on growth of the account rather than using it for livelihood. I try to trade about 1contract for 10K in the account as I feel my general mental stop of 10 points represents 5%, and is in line with what my realizations of how stops should be used (to represent an incorrect interpretation rather than to as a risk tool).

Regarding options, I haven't tried trading futures options but have used SPY options as a surrogate given high liquidity. But it's still not the same as trading futures, and I find trying to swing trade the stock market to be more difficult than swing trading individual stocks (which I've done).

I think what I'm going to do from now on is only post successful trades. My thought is that if I only write down success, I will become more confident in my own interpretation and style of trading. I realize this goes against the grain and possibly the intent of journaling, yet I've always been attracted to the road less traveled until it leads to a dead end.


Last edited by jackbravo; April 5th, 2015 at 11:02 PM.
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  #26 (permalink)
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Well, it sounds like you intuitively understand that you're probably trading at too large of a size, which suggests that the obstacle is the emotional discipline to not get scared when you're probably right. (Especially if you're already going through the mental process of drawing a line int he sand to establish when you are clearly wrong int the trade and need to get out).

Based upon the numbers we've talked about, if the account size is 200k, then that still means your mental stop is at 3.75%, which still seems to me entirely too large for an account focused on equity growth (rather than day trading income). Most funds I'm familiar with have a MAXIMUM monthly draw down of 5% before the trader isn't allowed to execute any more trades for the rest of the month.

Then on a daily basis, a maximum position size is maybe around .5% of exposure if the stops get hit. And on the up side, anything north of 30% for the year is simply stellar.

As you've suggested, if you only would have traded 2 contracts, you would have had no problem staying with the trade you designed. Now the question for your own emotional gut check, would you have made more money on 2 contracts going to your trade target, or did you make more money trading the 20 contracts? You might even just keep a log of this over time of your actual executions versus your designed trade executions completed but at the reduced size, and see which ones performs better. If the current size outperforms in reality - emotions and all, then just keep on trucking. If the hypothetical small size does better...then maybe switch over.

Best of luck!

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  #27 (permalink)
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Holy smokes! A 0.5% maximum drawdown a day would put me at trading 2 ES contracts (which, really, would be trading the full contract and negating the leverage). But that is a major weakness I have, portfolio risk control, and something I'm working on.

Thank you for the well wishes!

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  #28 (permalink)
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Not sure about fundamentals, but I'm SAST (short-a-shit-ton) ES/NQ for the following reasons:

1. It seems that price action has been signaling distribution for the past few weeks.
2. Vix appears to be suppressed, given the spikes of late, which are the definition of volatility.
3. Seasonality indicates a downtrend until tax day.
4. I don't see a reason why long term buyers would step in at this juncture, when they need to use monies to pay taxes, it's not the beginning of a month or quarter, we're near all time-highs, lots of volatility as of late. Without long term buyers, the thing should range at worst, drop at best.

I do not like that bonds and gold are not confirming my bias.
I do not like fading the SPOO thread.


Last edited by jackbravo; April 9th, 2015 at 11:04 AM.
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  #29 (permalink)
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No offense but it sounds like you are playing with fire.

I would take a step back and quantify your risk and define your strategy a little better before even considering the size you are suggesting.

Stops are vital for long term survival, especially for beginners. The 'literature' recommends them for a reason and is not the reason why many fail. This would be more likely due to the fact that beginners do not have a well defined plan or the discipline to go with executing their plan.

My 2c anyway.

Best of luck and I mean no disrespect, just don't want you to blow your account before you have had a real go at this game.

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  #30 (permalink)
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Skinchin View Post
No offense but it sounds like you are playing with fire.

I would take a step back and quantify your risk and define your strategy a little better before even considering the size you are suggesting.

Stops are vital for long term survival, especially for beginners. The 'literature' recommends them for a reason and is not the reason why many fail. This would be more likely due to the fact that beginners do not have a well defined plan or the discipline to go with executing their plan.

My 2c anyway.

Best of luck and I mean no disrespect, just don't want you to blow your account before you have had a real go at this game.

No disrespect felt. Thank you for your comments.
You're right, I definitely do need much better risk control.
However, I strongly believe the use of stops is not it. If you follow the SPOO thread and read the works of Victor Neiderhoffer, these multi-decade traders advise that the use of stops is for the benefit of brokers rather than traders. In my own experience, I have found that to be true as well. In fact, I have been much more successful since since stopping stops. Once in a while, I'll use them when I'm in scalping mode, and inevitably, I take losses due to getting stopped out.

For me personally, I will attempt to risk control by controlling position and cost basis. I'm still trying to figure how best to determine when my idea regarding a certain scenario is wrong (like today). A certain amount of price movement against me? A certain loss amount? Price action?

Anyway, appreciate you stopping by, and wish you success with your trading as well.

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