Friday, June 13, 2008

Emotions

If you trade oil futures try one experiment. It will cost you maybe one or two ticks in commissions, but emotionally you will learn a lot about yourself:
Take a quiet period and go long 1 contract CL N8 (which is the current front month contract) and if possible at the same price Short 2 contracts QM N8.
Make sure you have no stop or target orders in the market.


Globetrader-220

This position will cost you 150USD in margin as in fact you are flat, you have no market exposure at all, as every tick down in CL will be made up by a tick up in QM and vice versa. The only slight difference comes from the fact, that QM trades in 0.025 increments while CL trades in 0.01 increments. As the tick value in QM is half that of CL you will need 2 QM contracts to offset the CL position.

Now take the time and follow your position during the day. Monitor how you react to the losing side and how different you react to the winning side of that combined position. Notice how you have that urge to take profits in the green position, while you are somehow reluctant to let go of the losing side, instead having the feeling that that loosing position will come back.

At the end of the day, when everything is quiet again, close your position.

I don't suggest taking advantage of extremes, as the purpose of that experiment is to learn how you react different to a losing and a winning trade, even when objectively there is no market risk at all.

You are at no time exposed to any market risk, you may have to pay one or two ticks plus commissions, but that is well worth the experience.

6 comments:

Firebird said...

Hey, this is a fantastic suggestion, I'm gonna try it and I'll let you know (I trade in oil even though I'm quick to cut my losses, I can probably benefit from seeing what happens when I TRULY let my profits run).

Any more suggestions regarding oil? Have you noticed any significant (i.e. exploitable) differences between the large and the mini contracts?

Thank you for the blog, best trading,

Jorge

markus said...

Chris, this is just a spread trade. It can go against you or you can make a profit, but it will not be much with 1-2 contracts cause the sorts of oil are usually highly correlated.
Not a very exciting spread.
Try another experiment which may be also full of emotions: Always trade with a stop which lets you risk a maximum of 1% of your equity per trade and never touch the stop. Do this for 6 months. ;-)

Cheers,
Markus

Globetrader said...

Markus,

it's not the usual spread as it is the identical oil. QM is just a mini contract of the bigger CL contract. And the purpose of the trade is not to make profit from the spread, but to learn something about yourself.

Actually what this trade accomplishes is simulating a long and short oil account within 1 account, something you usually need 2 accounts for.
And if you get better at handling both positions, you may profit from both sides due to the high intraday ranges oil is trading with. You may accomplish the same by stopping losing positions and reversing the trade, but some traders do better, when they go -I call it- active flat, instead of leaving the market, by closing a position.

Chris

markus said...

Chris,

your are right.
Sorry, I had better checked it before .

Cheers,
Markus

Anonymous said...

This is like going to a porno theater and masturbating to a bad film...lol...

Globetrader said...

At least I know IB loves my strategy LOL