Wednesday, October 27, 2010

What happens when you trade well?

Took my treasury short off with an 8% profit over 2 weeks, added to my oil short.  From what I see, it looks like the QE2 trade unraveling or am I seeing just a natural reaction to a longer term trend?  The global macro trade right now is short dollar long commodities.  Of course I am being an idiot getting short oil at this point, but I am seeing some strength in the dollar.  I trade on what I see not on what I think because markets react before the news and it looks like we will have a pull back in the next few days.  I am looking to get long oil at 76.50-77.50 (this is where I would cover as well, perhaps at 78.50 or so I would cover).  I am also looking to get long Citi at 4.06 and short again long treasuries.

The one thing I do know, when I trade well which is what I have been doing I tend to want to trade more.  This is what gets every trader in trouble.  It is seeking that next win, essentially a gamblers ruin.

From what I have heard risk management at Goldman Sachs proprietary unit encourages, if not mandates that traders that have great winning streaks are forced to take 72 hours off.  This is exactly what I am going to do for the rest of the week.

"The lesson here again is that speculation itself is a business and should be so viewed by all.  Do not permit yourself to be influenced by excitement, flattery or temptation." 
 -Mark Douglas

Here is what I am looking at next:

Notice the uptrend denoted by blue line which is underneath the market (support).  Also notice it broke through the months opening range (denoted by the green lines).

In my next post I will hopefully discuss in more detail as to how I purchase stocks and commodities.  As far as how I determine where and when to purchase that is defined by the opening range and the markets reaction to the opening range and whether the market is below resistance or above support.  In the case above, the market price of Citi is above what I would define as resistance (3.90).  This was determined by the prior months action and a forumla that I use.  Now the market held above the opening range (denoted by the green lines) for enough time to show that the market has stronger demand than supply that is the basis of the opening range trading strategy.

The more important question is, where would I get out of this trade?  If the market price of Citi holds below the opening range for an amount of time that is equal to half of the defined range of time of the opening range.  (opening range 5 days, therefore half that period of time).

Briefly, how I get in a particular trade is purchasing half of the entire position I am willing to take.  Once you have some skin in the game then you have to watch and see how the market acts.  If the market reacts in the direction you thought it would then you add to the position, or place your second half of capital into the trade.

Losers average Losers.  The concept is simple, in essence you want to add to something that is working, not losing.  Why would someone want to add to a losing business model?  If your uncle decides to start a business with some of your seed capital and a year later the business is falling apart and he asks to borrow more money for the business would you give it to him?  This is by far the most fundamental idea behind investing capital in markets.

Mr Bernanke, I hope you know what you are doing?  Mike Tyson went Bankrupt and I hope we don't.

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