A little while ago, I received a good question from a new trader being mentored. I ended up writing an essay on it. He wrote:
“So at around 10:20pm tonight the market shot up out of nowhere for no apparent reason I could discern quickly. I was short at the time and got burnt.
My question is this: I had two orders fairly close together that were filled that subsequently contributed to the burn. Do you take an ‘event’ like this as a ‘it happens now and then so get used to it’? Really any insight would be appreciated. Went from nice little profit down to a loss.”
OK, there are a few points to make here.
- Know Your Market
Years ago, my options trading mentor used to say that to me over and over and over.
The move was not “from out of nowhere”. The trader just did not know what happened at that time. 10.20pm (Sydney time, non-daylight saving) is when the US Treasury options market open on the floor. While the futures and electronic and 23 hours per day), the options still have a floor trading session. Big flows at the open and close can move the market. The same goes for when US stocks open and close – and when other related markets, local and abroad open and close. Knowing your market means knowing how it can be influenced by other markets.
Knowing your market helps you know what kind of trade to put on. There is a time and a place for everything as they say. Fading and tight stops is for quiet markets. When a market has potential for volatility, you trade differently.
- At A General Level, These Things Happen
The comment on the email was right: these things happen.
They will be a part of your entire trading career. That is because as traders, we are risk takers. Any trade you look as has some type of risk. Risk means downside, not potential downside. These things happen.
Poker players know their edge is small. There are a lot of ups and a lot of downs. As long as the ups beat the downs, they are ahead. Trading is the same.
We all need to think of losses as just part of the game.
- Old, Bold and Different
There is a saying in the market: there are old traders and bold traders, but there are no old bold traders. I think it’s a pretty negative thing to say as trading often requires you to be bold. Perhaps it suggests old traders sit around and worry about too many ‘what ifs…’ instead of just getting a trade on.
I could say: “OK, just don’t let that loss happen again”. However, that feels akin to saying don’t take risks and don’t be bold.
Trading does require you to minimize risks when the unexpected happens. There are two approaches:
- Cut and run: Close the position and start over.
- Do something about it: Add to or alter the position.
The ‘do something about it’ approach is very much an ‘option trading’ way of doing things but is also applicable to futures spreads.
When I received that message, the US rallied while the Aussie market stayed flat. If you were short the US, one trade to make here was to get long the Aussie market.
Will the Aussie always follow the US? No, but it does most of the time. So that alone makes it logical. It’s also a low risk trade. This is because the Aussie is very much unlikely to fall while the US was higher. So a long position in the Aussie is unlikely to lose much unless the US turns around and plummets, and you are short there anyway.
As it turns out, the Aussie did not rally, but the Tnote came back down. Holding the spread would have resulted in a scratch (breakeven).
I once had a seasoned trader explain a similar trade to me. It was in the European fixed interest markets. One market moved, the other didn’t. He immediately averaged into a spread and eventually the trade came good.
I asked “didn’t you want to look at why one was moving while the other was flat?’. He said no and explained that the correlation was still going to be valid and hesitating would have seen him miss the opportunity.
Shoot first, ask questions later? That’s for sure, and that different but bold strategy can often work.
- One Last Thought…
It is trading frustrations like these that create the need for a trading simulator or demo account.
Most people out there use a demo account to just trade like they think they should be trading. In a way, they are testing their forecasting ability or following a moving average or some other indicator.
Doing that is an inefficient use of time. The time a new trader spends ‘training’ should be well planned and productive. Each moment in front of the screen should have a purpose.
I learnt this approach back when doing motorcycle racing lessons. On training days, each track session carried with it a single and focused task. We switch off everything else and focus on one technique at a time, be it braking, vision, body position, corner style, racing lines, throttle control etc.
That idea is how we deliver the DOM Trading Bootcamp on TradingCourses. The course is a series of self-paced drills that teach one thing at a time. The drills I have written are designed to teach you things. They are designed to make you think about things differently and learn by doing (as opposed to listening me on my soapbox all the time). Spend less time thinking about the P&L and more time thinking about what you are learning. The good P&L will follow naturally…
If you haven’t done the course, check it out here: www.TradingCourses.com