The Trading Digest

Dave and I both exited our T2108 trade into the close today for a profit of ~+50 ES points. What I wanted to do with this post was talk about how I handled this trade from start to finish.

(Pre Trade)

After that ugly, ugly close on Wed., Dave and I ran our usual nightly scans and saw that many of the “T” indicators (including our favorite T2108 - percent of NYSE stocks above their 40% MA) were at historic lows. Now I’d posted before what the stats look like when T2108 gets below <15, after the close Wed. it was below 10, 7.74 to be exact. Dave and I started going through the historical cases this had happened, 2002, 2001, 1998, etc.

We also kicked around scenarios of what type of news events could possible occur. What if a large mortgage company went bankrupt? What if Goldman had to close one of their hedge funds? What would the Fed do if things got uglier?

Based on historical precedent, we felt that in addition to the technical setup, there was a good chance that another large down day would cause more intervention from the Fed. I still remember the Fed surprise rate cuts in 2001 and we talked about how careful we’d need to be on any intraday shorts as a surprise rate cut can cause a huge instant move in the futures.

(Sizing)

Once I decided that this was a trade I wanted to do, I had to decide how much size to do it with. Keep in mind that prior to this, I’d never held any emini contracts overnight. The first thing I did was determine how much I was willing to risk on this scenario (remembering that if it was a loser all my swing stocks would be getting hammered also).

I decided I would risk ~8% of my portfolio on this emini trade. Since I had set a max loss of 6% that meant I needed emini exposure to be about 135% of my total portfolio value. So for every 100K, I’d buy 2 ES contracts. The combination of this and my 90% long I already had with my swing longs meant my total exposure would be 225% long. Prior to entering the trade, I calculated what I thought my account balance would be if we went straight down 6% (another 85 ES points). I actually spent a fair amount of time visualizing this number to make sure I was comfortable with it. I discovered I was so everything was set for the next morning.

Notice at no point did my calculations involve the margin requirements of an ES contract. I always do position sizing on the total value of the contract I’m buying, not the margin amount (which is irrelevant to me). In fact, I don’t even know what the overnight margin requirement is for an ES contract except that it’s ridiculously low.

(Entry)

Prior to open, Dave and I saw the futures gapping down big, which was the perfect setup for this trade. I received a phone call right at the open, so actually entered a few minutes later as ES was creeping up from the open.

(In trade)

After bouncing around the open, everything started dropping and I think at the lows of the trade was ~25 points against me, and of course swing stuff was down too. The total losses were nowhere near what I’d already visualized as my max loss, so I didn’t get too worried. About 2pm EST, I went to a birthday lunch for a coworker that lasted past the close, so I had no idea how things had done the last 2 hours.

Shortly after the close, Dave called and told me the futures were around 1420 so were up about 20+ ES points. This was obviously good news and we confirmed that the T2108 was still below 12, so no reason to worry about an exit the next day.

This morning I awoke to see futures down 14, since we already had a nice cushion, I wasn’t too concerned. On my way to work, Dave called to tell me the Fed had just cut rates and everything was gapping up huge. Nothing much happened during the day and near end of day we confirmed that T2108 was well above 12.

(Exit)

Although we had tested with exiting at the next open (easier to test that way), we had decided after the rate cut to look for an exit near end of day, assuming T2108 was still above 12. All I did was wait until about 3:58 and sell the contracts. Nothing fancy.

(Results)

This one trade added ~4% to my total portfolio value, a huge number. The most important thing, was not that the trade worked (that was good too), but how I spent way more time thinking about how I wanted to frame the trade (sizing, stop, how much could i lose, etc) than I actually did making the trade. This insured that even if the trade went horribly, horribly wrong, I would still be in a very good position to keep trading and not be looking at a huge drawdown.

Now if only opportunities like this came along more often :). But as our testing showed, we went 5 years between setups like this and will probably go another 5 before we see it again.

- John

2 Responses to “T2108 Trade - Post Mortem”

1. Jon Says:
   August 17th, 2007 at 9:57 pm

   Great trade and great explanation John. I went through a similar process for sizing and decided I wasn’t even comfortable with 1 ES contract. I was so long with my swing stuff that I just wasn’t comfortable going “extra” long here. Instead I elected to do it via SPY shares. Obviously, I didn’t come anywhere close to a 4% portfolio gain, but I slept pretty good last night. Guess I’ll have to wait a few years to trade this one with some size.

2. The Trading Digest » Blog Archive » T2108 Says:
   March 10th, 2008 at 6:13 pm

   [...] another example of how we’ve traded from the T2108, here’s a post from last August « One year anniversary of our collective [...]

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