Friday, March 25, 2005

The Fallback Defense

Thursday was the first day I intentionally and with no emotional problems at all waited for the defense strategy to start doing it's magic when Euro was already 18 ticks against me and my Addon order was just another 2 ticks away.

The order got hit and my exit order went in for the defense contract at 10 ticks profit. 3 or 4 minutes later I was out +10 on the defense. On a pending news release I covered the second contract -7 for a +3 on the whole trade.

Sure it was not the success, Anti likes to have with the defense where each and every individual contract in the defense has to be closed at a profit, but the trade as a whole made a small profit and that's all what counts at my current waypoint on my path to become a trader.

The moment the first contract of a defense gets taken out Anti's strategy calls to enter the Limit defense order again at the same price level. But after short consideration, I decided, that the Fallback Defense is the better system for me as it allows me to bring the average price of the whole trade down, while ensuring, that in case the rally I looked for, when I opened the trade, starts I'm still in with the original position, just from a lower entry price.

How does it work:

Long Euro 1.3322
Average Entry price 1.3322

1. Defense 1.3302
Hit and taken out at 1.3312
Average Entry price of the trade is now 1.3312

2. Defense 1.2992
Hit and taken out at 1.3302
Average Entry price of the trade is now 1.3302

3. Defense 1.2982
Hit and taken out at 1.2992
Average Entry price of the trade is now 1.2992

and so on.

The moment Euro starts to go north again, you are in with the initial position at a nicely lowered average entry price.

Only thing you need to make sure is, that the contract you apply this Fallback Defense goes 2 steps back 1 step forward, 2 steps back, 1 step forward even in a trend move. Euro is such a contract, as after about 20-22 ticks in one direction you usually see a spike of 10 ticks in the opposite direction.

If you'r interested in a recent SFO magazine article talking about this method, a must-read is Boris Schlossbergs Trade like a Dealer article. You will need to register but SFOmag is free, if you give them your email address.