Saturday, November 22, 2008

500 $ margin

It's tempting, it's really tempting!

The last few days I have been testing a trading platform used by a broker, who offers me 500 $ intraday margin to trade the ES futures.

I have been trading on the long side in this 2 day breakdown and I made a ton of paper money. Unfortunately by taking risks my account would never ever survive. The sell-off into the lows on Thursday I survived by trading 1000 cars in the final add-on. 1000 * 500 = 500.000 USD margin and every tick is worth 12.500 USD. That means I was 10 points away from burning half a million USD, when the ES traded at 746 Thursday evening. Cool.

But even realistic trading with the leverage that margin offers me, got me trading up to 15 cars with a point-value of the ES (4 ticks) of 750 $ on a margin used of 7500 USD. Still another 20 to add, if ES continues against or with my position, depending on the strategy traded. Yes, gains come fast with that kind of leverage, but losses come even faster.

On the other hand there is my good old extremely conservative Interactive Brokers account, which offers me intraday margins on the ES which equal overnight margins. I'm limited, very limited trading the ES with that kind of margin. But surprise, I made 2.700 $ trading just 1 or 2 cars in a contract I refused to trade so far, because I considered it extremely difficult and to tell the truth sometimes very boring to trade. This has definitely changed.

Not being able to add at a loss, means you have to use stops and the ES is the first contract I trade, which is not as fuzzy with stop levels as other contracts I'm used to. After you have identified a short term support or resistance, that S/R level either holds or it's down to the next S/R level. That means the ES is the first contract where my add-on strategy really works.

I wait for a trade signal, I take the trade at a level, where I can use a 17 tick stop, which means the initial risk is 220 $ (incl. comm). Now I place an add-on 1 or 2 ticks above the last S/R which has to be nearer than the 17 ticks. EG: Long ES 847.5, Stop at 844.25 Add-on at 845.25 assuming 845 was the low tested and rejected on the last move down. The Add-on moves my trade risk to 330 $ and the average comes down to 846.5.

You can ask, why not enter at 845.25 in the first place after you get a trade signal? Well, I miss the trade if I don't take the signal when it occurs. That's why I usually also have a Add-on at 1 or 2 points above my entry. But to tell the truth, in the current environment these add-on's in the profit have proven to be extremely difficult to manage, as the current volatility in ES means in about 99% of all trades, that this trade will be down under at least for a time and the trade risk has considerably increased. There is no new S/R level to place the stop, meaning the stop has to remain at 844.25, while I added say at 850.50, bringing my average up to 849. That means the trade now carries a risk of 490 $ compared to the 330 $ I was willing to take initially.

As it stands now, I will leave the profit Add-On's until I can trade more cars in the ES. If ES runs right now, it's worth to be on the ride even if it's just 1 car. And if it first trades down only to be rejected and driven up again then I have added at the optimal spot 1 or 2 ticks above support, if I want to go long.

My Fib-lines continue to work real nicely. Here is a new picture for the weekend: