This entry was posted on Tuesday, January 22nd, 2008 at 2:36 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
You MUST size your positions accordingly so that you do not need to use stops or worry about margin calls. I’m sure most of you have heard/seen about High Probability Trader, and what can happen if you’re trading too large of size with this type of size. As one of the commenters on his site relates:
“i feel your pain.
IB auto-closed my position of 8 NQs 1/2 point above limit down.
my realized losses came up to nearly 30k.
after the fed cut and bounce, i could not get back in to reduce losses as my excess liquidity was only enough to open 1 position.
so we learn …”
When Dave and I enter trades, we distinguish between the type of trade it is, the size and what the exit strategy is. Do we sometimes use large amounts of margin? Yes, but primarily in the intraday timeframe with tight stops. For example, for ever 100K in my account, I might buy 5 ES contracts (approx 3:1 leverage) for an intraday trade with a stop 4 points away, for a fixed risk of $1000. Those trades are mostly short term momentum based so they either work or don’t and you’re out with an hour or so. In no circumstance would I add to that position if it went against me or move my stop.
But I would NEVER use that type of methodology in any of my dip buyers (ie our collective system) or my NQ system. In fact, I’ve been long the NQ off and on since the first of the year including this past weekend. I was actually at a casino with my wife over the weekend and heard that everything was going down big Sunday night. Since I wasn’t over leveraged and all my systems are tested in volatile market conditions, I really wasn’t that worried about a 4-5% drop in the market at the open Tuesday morning. I was actually more worried about if I should split 8’s against a dealer’s 9 at the $15 blackjack table we were at. I wasn’t worried about my account going to 0. I wasn’t worried about a margin call. I wasn’t worried about IB auto liquidating my positions as I’m never anywhere close to using all possible margin overnight.
The vacation continued as usual and upon returning back home late Monday night, I fired up TWS for the first time since Friday and saw my NQ positions alone had my portfolio down about ~3%. Pretty much par for the course. I fully expect to see drawdowns in excess of 20% from time to time based on market conditions. These are obviously the type of conditions that cause them. The one thing I knew NOT to do was to either sell or try to go short near the open. When you’ve looked at as many charts and run as many backtests as I have, you know that the biggest up days always follow the biggest drops. With the S&P being down well over 10% in less than 3 weeks, the odds of a big bounce are high.
This is always the paradox of dip buying and why so many people blow up doing it. The further down market goes, the higher the probability of a big bounce which is what makes it so tempting for people to keep adding at lower and lower levels until the eventually blow up. Instead, what I do, is predetermine my max exposure and at what levels and stick to that. I was already at max exposure last week, so regardless of how bounceable the open looked, I was not going to violate my money management rules and take a risk of getting into real trouble. I’ll just let my current positions play out and take the exits as they come.
Remember, trading is supposed to be fun, or at least financially rewarding. If I was ever in a position where I have to worry about what the futures are doing on a Sunday night versus playing blackjack with my wife while drinking some beers and watching a great NFC championship game, I’d close my account the next day and dump all my money into an index fund.
- John