Wednesday, July 11, 2007

Keep the loser

Gary, I have to say I really enjoy your thoughtful comments. So let me quote and answer in a new article, as then I have the luxury of writing with Live Writer instead of using Google's comment box.

if you have an 80 tick loss in the WTI and an 80 tick profit in the CL you have successfully completed a masturbatory are STILL at ground zero and you have to make up your mind which position you want to "leg" out of...the loser first, and hope the profitable leg gets more profitable, or the profitable one first and hope the loser becomes "less" of a loser

Let's look at a chart first.

NG Q7 - Natural Gas / Expiry August 07  120 Tick chart

Trading Natural Gas (NG Q7) long was the way to go yesterday and that's what I actually did, even if I only managed to get a small portion of that really sweet 3000$ range NG posted yesterday.

But NG has been in a long downtrend and actually still is in an unbroken downtrend on the daily chart, so assuming NG would resume the downtrend again, like it did the day before, is for sure something I might have looked for, had I traded at all after 10am EST yesterday. You are right, that prices sometimes just don't retrace, and using the strategy I'm argueing for in this miniseries of articles would show me a loss, but I never said I've found a riskfree strategy. I'm not looking for the holy grail here, I'm content, if the profits this strategy gives me mean it has an edge while at the same time reducing my risk.

The swings I see on the chart are +160, -90, +80, -50, +90, -40, +60, -40, +40, -60.

While the chart covers a 300 tick range, the swings actually covered a 710 tick range.

Looking at the chart I might have considered a short at 16:58 on the break of the 34ema and the oscillator crossing the zeroline to the downside.

  1. Position 1 Short NG Q7 at 6.510
  2. Position 4 Long QG Q7 at 6.540  (NG down 300$ and effectively flat now)
  3. Cover 4 Long QG Q7 at 6.600 (round number resistance) (Profit QG 600$, NG down 900$)
  4. Position 1 Short NG Q7 at 6.590 (Now average Short 2 NG at 6.550, but including the QG profit the Short has an average of 6.580)
  5. Cover 2 Short NG Q7 at 6.570 for a profit of 200$ for the whole position
    (I see a quick reversal on the chart on that test of 6.563 and I don't know from the tickchart how fast it really happened. So depending on the speed of the tape it might have been a breakeven trade as well, as after a profit of 15 ticks the stop is moved automatically to Breakeven plus 2 ticks to allow for slippage)

The alternate scenario has me taking the Stop at 6.540 for -300$ and a profit of 600$ for the reversed position for a profit of 300$ for the whole position. (I would for sure be interested in the Stopsize you use for trading NG btw)

But here the human factor intervenes:

I find it a lot easier to open a position than to reverse a position or after taking a stop to immediatly open a new one. So it might be as likely that I take that 300$ loss and watch NG continue it's uptrend without me, finally going short 6.600 at the round number resistance and eventually taking a 30 tick profit for a flat account.

One other thing you wrote got me thinking:

play with tight 8 and 13 tick stops and you are going to end up wheeling 151 "cars" like I did yesterday...quite an interesting new game

The way I trade right now might be ok for up to 5 cars, anything beyond and I can't see me holding on to the trade without blowing my account rather sooner than later. 150 cars with the technique I use right now is out of the question, as I would open myself to 270k$ losses and more.

I now use this kind of charts (Trading CL Q7 with COIL Q7 as information):

Trading CL Q7 / 120 Tick

The Daily, 120min, 30min and 10min charts help me not to lose perspective of the bigger picture and I have to admit compared to looking at just one timeframe so far the results are promising.