As i was answering some questions I was asked-and having to think a bit more- concerning the trades I made Friday, I have to recognize that entering the trades i did- in the manner i did- was because of my tendency is to trade MORE aggressively when the trade direction supports my Bias. The fact that the market took a soured look at net wage growth in response to an otherwise positive jobs report - was a minor market negative day -following the 2 prior rally days did not warrant taking as large a bearish position(s) as i did. If I had not made those trades on Friday, would i still try to enter them long Monday with orders to fill at the open? Pent up demand will often end up with gaps higher- or lower- A positive open on Monday will have me positioned on the wrong side of the market. Potentially, I could accomplish the net same short term trade buying fewer shares of TVIX. Initially I bought the VIXY because i felt it was a more conservative way to trade the $vix- but I could have purchased fewer shares of TVIX and gotten 2x the movement. If the market looks set to open higher Monday, I will likely have to adjust these trades to market sell at the open, instead of allowing stops to be hit- because my stops are relatively tight. In the following response I outlined some position sizing/RISK approaches that may be of interest to those traders that haven't analyzed how much of their net portfolio they are willing to Risk- Useful if you hit a series of losing trades in a changing market condition-with increased volatility. ______________________________________________________________________________ I think we are likely entering a period of greater market volatility- I think the US market is highly valued- but will grind higher overall- but it may be more turbulent than what we have become generally accustomed to in the past 3-4 years. The market's growth the past years has been substantial, but slowing- Still- last year was well above the historic average of 7-7.5% . We are also well extended in duration, participating in (one of) the longest bull runs in market history without a substantial correction. By all standards, we are technically overdue- but the Fed has played a winning hand in controlling market fears- This run could potentially go on much longer - Moments & incidents that have disrupted it are very short lived - They were all called "Buying Opportunities" after the market resumed it's course.An Earnings shortfalls this coming week could be just such a market mover- Or a terror incident- or an Ebola scare- or The European nations going into crisis- or OIL dropping even lower....global growth fears- There can be any number of short term catalysts - Like the good jobs report but poor earnings- that set me up for these present trades as I watched the market Friday pm. I may have misread the market's reaction - and the good times will continue to roll on Monday- This is the usual outcome when I allow my negative Bias to influence my decisions. If the trades go in my direction for 2 days, I will likely be above B.E. "Are they more Risky?" Leveraged positions- YES, they move in multiples of their underlying-If the underlying moves down 5%, the 2x leveraged will move approx -10% - some a bit more. They vary. Also, due to their daily rebalancing , they can lose even when the underlying goes up. Are they soley for day traders? NO, but generally they are not to be considered as good long term holdings-Good for shorter term holding periods- if you are the correct side of them directionally. Perhaps they are somewhat similar to trading on Margin? Margin allows you to increase your exposure- and that is fine if you hold a winning position. Leveraged ETF's are beneficial if they are going in your direction- but doubly not so if you get the direction wrong. I do not want to simply match the market's return. If that was my goal, I could Buy the SPY and get that return in 1 trade. I want to be willing to Risk vs being so conservative on all trades and being safer. If I get my knuckles cracked and find i do not have a winning approach that I can effectively implement, I may change my focus. I'm willing to lose some to gain this market lesson. In other accounts, I am much more conservative. QID and SDS both initially went in my direction-, but then stalled and reversed. SDS entry $22.10 Sold @ 4% trailing stop $22.31 QID entry $ 39.57 sold $40.13 net 1.4% . Upon not behaving as i anticipated, I adjusted my stops higher Had they both gone against me initially , I would have had a relatively small % loss. I think the $vix etf's will move proportionately larger than the SPY leveraged ETF. I have to do some homework on that. In terms of leverage- QID and SDS are 2x the underlying. So, the potential volatility is twice as wide on average- If you are correct, the net gain in the short term is approx twice. For example- If you own the S&P 500 (the market) through the SPY - you own shares in 500 US companies. If you were long the leveraged SSO for the past 3 years (chart to be sent) - and you could withstand the 20% volatility swings vs the SPY 10% , you would have had a substantial gain over 2x the SPY. Continued in following post- too long winded!
Continued from prior post.... MY 1st criteria- is getting the direction of the trade correctly-Ideally, I get in near a swing low for a lower Risk trade (P.O.F.) the 2nd is having a plan to get stopped out at a certain level if the trade goes against me- This defines the Risk- the 3rd is choosing how much of your account size you are willing to Risk, and how many shares you will take. Position sizing. VIXY is not leveraged- so it is 1:1. TVIX is 2:1 Why both positions? I could have simply purchased TVIX initially and gotten more exposure for less $$$$. For example, a FULL size position for me is $2500.00. I purchased $2,120 in VIXY and 200 TVIX for $564.00, so technically I exceeded my position size allotment-by $184.00 I made the decision to purchase the additional smaller TVIX position later in the day going into the close .Impulse to add at the close I will grant. Greed- Rationale?- markets were moving deeper to the sell side going into the close- Without knowing the outcome next week, but feeling that it is probable that volatility is appearing to increase, and not decrease, I thought it would be worth adding to the position to get some extra leverage should it go in my direction. I took only partial -entry positions in the remaining trades . Calculating RISK through Position Sizing: One can vary the parameters to suit their own situation- A conservative approach: Acct size $10,000 or ( $100,000.00) Take 10 positions of $1,000.00 each or ($10,000.00 ea) Risk 1% of port value ($100.00) or ($1,000.00 ea) The number of positions you can purchase in stock XYZ depends on where your stop-loss lies relative to your entry. If stock XYZ is trading at $50.00, and a stop would be at $45.00 (Risk $5.00) The $1,000 allocation allows for 20 shares to be purchased. Risk is $5 x 20 shares = $100.00 . This is acceptable. If a logical Risk level is a stop-loss at $41.50, each share is risking $8.50 - so the $100.00 max allows for 12 shares to be purchased. If I can set a logical stop tighter to my entry (lesser Risk), all the better.. This is a good method to 'test' a new approach, but is also dilutive with the many positions. For larger accounts, this makes more sense-For smaller trading accounts, the commission costs become a large factor- on numerous smaller trades. IB with it's $1/trade/100 is well suited for this. I used this approach to not ruin my account .for a number of years. In this account, I am under $10k presently. Now approx $9,750- I overdid the position size allocation on the combined $vix plays- For average numbers used $2,500 as a position size- with a 2% position Risk- This in itself is aggressive and comes with Increased Risk. There is a time and a place to be more aggressive, and a time to be more cautious- I'd love to know when that time is though. If i get a series of losing trades, I will be forced to reduce my position size and amount i can Risk going forward. TZA shorts small caps- - 150 @ $12.51 = $1876 entry- approx a 3/4 position. My stop loss on here will likely be There is an overlap here with the $vix play- They will most likely go generally in the same direction- Breaking down the specifics of TZA. a 'Full position " would be $2500. That full position could allow up to $200.00 in a single trade loss. My position $1876/2500 = .75% - That would "allow" for a $150.00 max loss on the position . with a $12.51 entry, , a swing low reversal at $12.17,, (P.O.F.) may be penetrated- -so perhaps I'll stay with $12.00 as an initial stop- or work a trailing stop off of that price range. If my stop-loss is hit- I will lose 150 x $ .50 = - $75.00 or 1/2 of the allowable stop for this trade (under 1% of the port value) I already made a decision at the time of entry where the Point of Failure would be on each trade- What is not as well calculated- is the width of the volatility -potential swing down intraday, with a higher close- have to consider the volatility and try to stay just out of it's reach to not get taken out inadvertently. May consider a multiple of the ATR under the P.O.F.. FCG is a play on Nat Gas- It's a diverse play- down with the entire energy industry- made a 2nd slightly lower bottom with a couple of days of sideways action- Possible oversold bounce may shape up at this level. Price is close to the POF, making it a lower Risk trade- I took this as a practical use of the 2 hr chart- will follow any move to the upside with a stop-loss and will get stopped out below the swing low ( $9.98) + a small amount for volatility. I only purchased 100 @ $10.31 so that is .41 of a full position- Max Risk for this is .41 x $200 = $82.00. If I use $9.90 as a stop- my Risk of $.41 x 100 shares is $41.00 - or just 1% of the port value- not 2% -but still giving me some elbow room. I don't have to keep this stop-loss- or any of the others- The stop can be moved higher- split on larger positions to trail- a portion. Too tight a stop- TVIX getting hit by $.02 serves no purpose-other than causing me to lose out on a larger move higher- Too loose a stop and it's giving up needless $$$ if the technical level was breached. Sometimes- good stops get reversed and whipsawed- just happens on occaision. The last partial position is IBB- The biotech sector. This is a sector that I think holds continued longer term growth- and greater than average potential for market beating gains.
AS I review my positions this Sunday pm, I have also looked at the ATR (AVERAGE tRUE rANGE) . Why ATR? what is "normal" and what is average? There is no point in making a good trade entry and get taken out on 'normal' volatility. The critical part of what i think is my trading Edge- is the application of a faster 2 hr chart in determining when a trade has reached a P.O.F. (point of failure) . This provides an opportunity to consider taking a smaller loss based on technicals, vs a larger loss based on a longer time frame- daily or weekly charts. I have not really applied this ATR approach- I typically will look to set a stop just below the recent swing low-so this is an experiment in setting this type of trailing stop- also an experiment- i get the ATR values in stockcharts by viewing the RENKO hi-lo Daily & 2 hour- There may be a much easier way. With my VIXY trade, the daily ATR value is $1.20- which puts my stop a bit lower than the swing low- As an experiment, I will split the position with 1/2 using the 2 hr trailing stop @ $.65. The chart is a 2 hr chart. The favorable elements are that there has been a prior reversal of the declining trend, a higher swing low, another higher attempt, and a minor mid point pullback from the trend line. Price action made a solid reversal move higher on friday- the 4 bars on the chart are friday's price action. Opening on a gap lower, price reverses and climbs solidly higher with a strong close. This could be viewed as a bull trap- and it may be- but this is market sentiment directly at work as buyers quickly sought more protection of options to cover their positions- Market sentiment can change quickly-. The TVIX position will essentially mirror VIXY-
TZA WAS an entry that was based on the market reaction to the jobs report- Small caps are vulnerable to economic weakness- and to rate increases as well. Small caps have underperformed large caps this year, but have reportedly started to rally. As i recall, small caps generally lead the market higher after a market pullback. Small caps take a leadership role following the market cycle- but correct me if i am mistaken- we have not had the tyical market cycle- seems to be a bit of an inverse going on here- But a 2 hour chart is but a micro snapshot- This trade may go in my direction- or not- but without a view of the larger time frame to get a sense of prevailing market trend and areas of support & resistance, it is a narrow shot in the dark. This has to be recognized- i tend to gravitate to the type of chart that 'captures' my attention- At the recent moments - it is the 2 hour chart as i feel it gives that early opportunity for entry and exit- with a very small amount at Risk- I made a quick decision on Friday that the market reaction would be bad for small caps and took the trade 1st- I'd look at the larger chart later.. As i move forward in this pursuit, I would expect I would get that step back perspective of a larger time frame .
I'd love to share here how my Friday entries were spot on- and went directly higher as anticipated. TVIX , VIXY, TZA all opened higher and moved up strongly! FCG did decline. Did anyone hear BAM! Bam! BAM! Those gunshots were me shooting myself in the foot this am prior to leaving for work. I saw that Europe was in the green, the US futures were up, and I expected a bullish open would occur some 3.5 hours after i left for the day job-I put in a market sell on TVIX 1/2 the vixy, and tightened the trailing stops on the remaining TZA and vixy position to 3%. FCG left at 4%- mistake there! Something occurred- US service twitter account got hacked?-Oil went lower- I was sold/stopped out on the open for small, minor gains in TVIX, $2.87, Vixy $21.43, later in the day sold 1/2 TZA as it hit the trailing stop $12.71, and Vixy $22.11 on the remaining 1/2 position 10:59. My net gains from all of these positive trades were essentially negated by the drop in FCG- The 4% trailing stop was much wider than i needed to protect price from the P.O.F. I'm still holding 75 TZA and the 3.5% trailing stop is at my entry $12.52. VIXY closed up 4%, TVIX closed up 7+%, TZA up .5% FCG will hit my stop at $9.73- i believe that was applying an ATR value under the swing low to stay outside of intraday volatility- Now that has occurred with a substantially lower closing price $9.85 - I will use today's close as my stop and not allow it to drop lower without becoming a market sell order. IBB gained fractionally. Had i been watching the futures up to the open, I likely would have determined that the open was not going to be bullish-and i would have stayed in the positions- Where i shot myself in the foot- was having made a determination that the market was going to rally, I put in market sell positions to execute at the open- A better way to handle that possibility- would be to understand that if the market was going to rally, it would automatically open higher. I could have simply adjusted the trailing stop-loss to 1%-and that would have become a market sell order almost automatically on any rally. That would have also kept me in the trade in case it went in my direction. By not giving myself any leeway with a sell order-at the open- I got a minor gain . I don't fault myself for taking the available information on Monday am and determining that the outlook was not positive- just that I could have handled it in a manner that gave me the potential for some unforeseen upside move- which is what occurred.
10.13.15 Stopped out today TZA $10.73 FCG $9.85 9:30 am What a day- Market rallied and then sold off hard- $vix dropped- then climbed higher- On what news? OIl sold off further- VIX is up higher- after a big pullback lower- This is similar to the volatility - no -mans-land of several years ago- Good time to sit on the sidelines and not try to make a bet too early! "CASH" is indeed a position- See where this turns-higher-or lower- SD
Wed 1.14.15 Will be going in late due to icy roads. Futures looking like a big down open- Retail sales report came in low, JPM appearded to have excess legal costs, didn't meet estimates on earnings at first glance reportedly. This will start off as an across the boards decline in the major indexes. Volatility is on the increase, will gap higher at the open as will as the short focused trades. I'm looking at VIXY, QID, SDS- but will not try to get in at the open- I will see where they open- I've put in an order for IBB to add 5 at $296 limit in case it breaks lower-