Saturday, April 02, 2005

Last Man's Exit - A failed Defense

If you were in Teddy’s room yesterday you saw something remarkable (or something stupid, in case you follow the mainstream):



After Euro did his 100 tick stunt up to 1.3080 and retraced to the countertrend target range Anti went long 1.3032 expecting a trend reversal long.









All Eurotrader know what happened. Euro continued to sell-off. And Anti applied his Defense StrategyCroc_49

According to the rules, the defense would have been appied as follows:


at 1.3019

at 1.3009

at 1.2999

and at 1.2989

For a total of 5 contracts

No scale out was possible, before Euro hit the 1.2989 level

I don’t want to question the reasoning to go long right at the calculated countertrend target of 44 ticks. There are reasons to trade this way and there are reasons not to do it, but wait for a reversal signal. It’s a decision every trader using targets in his trading has to make for himself.

But being long 1.3032 you have to manage and you do it according to the plan. And this get’s you in the mess, you see above. But let’s see if -even theoretically– there is a way out, before Euro broke down really with the release of the ISM numbers.

Ok, at 1.2989 you are down on the first contract 43 ticks, on the second 30, on the third 20 and on the forth 10 for a total of  – 103 ticks. As you can see the 89 add-on could have been added and exited 3 times bringing the total down to 73 ticks in the red. (Shifting the frame down 1 tick so the 10 tick range was 1.2988 to 1.2998, the moment you saw the fierce resistance at 1.2999 could have given you 1 additional entry, but not more.)

So it stands, the defense was 73 ticks down, when Euro broke down to the 1.2930 level with the release of the ISM-numbers at 10am.


And here is the news spike:

Anti said he added at the 77 and 57 levels and scaled these also out for another 20 ticks. I have marked up something I call the Last Man Exit. It’s the last chance to bail on a trade, which was downunder for quite some time and which comes up to Breakeven or around breakeven, before it goes really down under. In my career I was in a few such trades and have seen this Last man exit offered to me in most of these trades. When I refused to take it, the trade usually cost me huge. This led to my current strategy, that a trade which was downunder for some time, will be exited at Breakeven +1, usually regardless of the then prevailing chart conditions. I will reconsider the market situation when flat and reenter in the same direction if warrented. But once you are flat you can be sure -as far as this is possible– that you are again objective.

The Last Man Exit offered to Anti was 1.2997. At this point, he had made another 20 ticks from the already scaled-out Defenses DS5 and DS6 and was still Long 5 contracts from 1.2932, 1.3019, 1.3009, 1.2999 and 1.2989. The whole trade was down 35 + 22 + 12 + 2 – 8 = 63 ticks versus 50 earned with the defense.

Could you have exited at this point? I don’t think so, as you wouldn’t have known in Croc_51realtime, that 1.2997 was the Last Man’s exit. But having traded it and looking at a 100V chart a reasonable exit, which was achievable was 1.2990. The Stochastic was breaking down fast, and it was a trade which was really deep downunder before, so I hope, I really hope, I have the guts and nerve to exit such a trade at 1.2990 for 42 + 29 + 19 + 7 – 2 –50 = – 40 ticks.

Writing about this will hopefully enforce this thinking.

But let’s take a look at the picture above. Was there a way to get out of this mess at Breakeven or a Profit, without violating or bending the rules too much?

The rules say DS5, DS6 and (in case you use it DS7) are added at 20 tick intervals. Now let’s make the profit targets of these 20 ticks as well.

This gives us on the spike up to 1.2997 instead of 20 ticks 40 (with DS7 60) ticks on the profit side. The Last man exit was 1.2997 and the trade at 1.2997 was down 35 + 22 + 12 + 2 – 8 = 63 ticks versus 70 (90) earned with the defense. 

So if you did not apply DS7 your breakeven level was 1.2996 and you got offered a real Last Man Exit for a Breakeven +1 tick trade. Knowing about the Last man Exit, I hope I would have placed my Limit Sell at 1.2996 or more likely 1.2997 for the remainder of the trade.

If you applied DS 7 the Breakeven level was 1.2992 for the trade. I tell you what, after such a turmoil I can guarantee, that I would have placed my Stop at BE +1 the moment the trade was 4 ticks in the profit. How you ask? Just by letting it done automatically from FuturesTrader. No other way to be fast enough, as it was a Spike upto the Top at 1.2998.

As it turned out Anti held his contracts, traded some back and is down about 250 ticks net on the trade at the close on Friday.

What was the really astonishing thing and the reason why I still will continue to trade the Defense: Anti told the whole room, yes I’m still in and yes I’m down 250 ticks. It’s the way it is. The Defense failed in this case and I made an error not switching to the Short side, when euro exceeded the 66 ticks from the Top to the Downside.

The Defense Strategy is no Holy Grail, it is not 100% fool proof and there will be days like yesterday, where you get hurt badly.

I myself, trading Euro from the Long side from 1.3009 applied the defense as well and using my Fallback Defense added to the trade at 1.2989, which brought my average entry down to 1.2999. I exited 1 contract at 1.2999 according to the plan and set the new addon level to 1.2979 (not 1.2989 which anti would use and which makes the difference between his and my application of the Defense, as I have the intention to bring the average entry down 10 ticks with every addon, to get me a better entry level for the initial contract, once the market turns in my direction). So I stayed long 1 contract while Euro bounced in the 1.2985–1.2999 range. The first time Euro broke up above 1.2999 it was sold down so fast, I could not punch in my exit order. (Realising, that there really was no follow through above 1.3000 just took too long.)

But I took the second break above 1.3000 as a hint to place a Stoporder at 1.3000, when 1.3002 printed. It was, as it turned out, a really wise decision, as for me it was the Last Man’s Exit for a breakeven +1 tick trade.