Reviewing and Managing
A market analyst is an expert who will know tomorrow why the market reacted as it did today and why the things he predicted yesterday didnt happen today. Apparently put on this earth to make weather forecasters look good.
So far Ive showed you how to plan for getting into and out of a trade. But what about the time while you are in the trade or trades? This is the time you cannot let your guard down and you must constantly re
view and manage your positions. It doesnt matter if you are day-trading or keeping stuff for weeks. You need to constantly evaluate your positions, the market, your money management, your exits, and ultimately your plans. Ive already touched upon this in Chapter 9 on scenarios.
AFTER THE TRADE IS ON
If you want to be a great trader you need to be on top of your trades all the time. Its not just putting on a trade, picking a stop, and placing an order for an exit. There is a lot of work to be done before you get out. Yes its important to have a predetermined exit before getting in. But the markets are so dynamic that you need to constantly update your plans. Every night as you are going over the day and preparing the next days strategies, take the time to go over and review your trades in detail. Look at the charts and check the news if you like. And then start drawing up those scenarios, moving stops and targets and making any adjustments necessary.
I got out of my short trade yesterday with an okay profit. I had gotten in at 12,712 and made over 400 points on the tradenowhere near the thousands of points I was hoping for. But things had changed and I was getting concerned the market might bounce back and I didnt want to wait to be stopped out. Im currently looking for a new shorting opportunity, but I believe I will wait until the Federal Open Market Committee (FOMC) meeting and its interest rate announcement later in the week to do so.
I bring this up because I exited the trade only because of constant reviewing and managing my position.
Where last I left off, the market had had that huge intraday reversal move and that was my first concern. As I was going over my position that night, the short was still within my original stop level, but I was concerned because many times this type of move is indicative of a market reversal. Another indication of the end of the move can be seen. Its the weekly chart showing that five-year trend that just got broken. But what Im looking at here is how wonderfully the market bounced at the 38-percent Fibonacci retracement level. For you skeptics out there, these levels do really hold a large percentage of the time. There were a few other factors that got me to get out. I was concerned that the stochastics might be breaking above the oversold level and that the trend lines I had were telling me maybe its time to get out.
Trend Line 1 is too far away and a snap back could be possible and Trend Line 2 is too steep to be good for a trailing stop and could easily be broken. The same held true for the moving averages, because of the previous big drop the market was too far away from them and very likely to snap back to them.
My real stop had been placed above a congestion area (the oval marked Stop), which is the only legitimate place to have a stop on a long-term trade. But with the huge drop in the market recently, it is a little on the far side now. Even though it is pretty much where I entered the trade, I didnt want to give back too much profit.
Though we were below every place I would put a stop, my concern now was to play it safe and not turn a winner into a loser. This didnt mean necessarily getting out, it just meant being very sensitive to the trade and getting out if I didnt believe in it any more (and I was starting to have some second thoughts about it). There was one more thing looming in my mind and that was that Fed was expected to announce a rate cut in two days at its FOMC meeting. The consensus was another 50 basis points and if that happened there was potential for the market to really go up, but in the interim I believed the market might go up on the rumor and then we could sell the fact once it happened if it failed to follow through. There are other scenarios involved which Ill get to soon.
I also decided to look at Fibonacci retracements from the high in October to the low just made . I figured the market had a good chance to go up and test the 38 percent level, which was about 340 points away. I didnt feel like giving that up if I didnt have to.
The night of the big intraday move as I was analyzing my position, I reverted to the 60-minute chart to start fine-tuning my potential exit. It was here that I drew the downward trend line and decided that if the market broke this level Id be getting out before my major stop level was hit. Though this trend line may look like an obvious place to have a stop, do not forget its a 60-minute chart and a trend line here is not as strong as in a daily chart. This same trend line in the daily chart was much too steep to use and can be easily broken, but because Im having doubts, I need a tighter place to get out.
Though the market rallied the next day (1/24), it was a congested rally (see the shaded area), and barely closed above the trend line. It reached close to, but below, my stop, which is always cushioned from the actual indicator.
The following day was the crucial one. That morning I knew the market was called to gap higher by about 100 points (level A), which would put it above my stop (Stop 1). As I made my game plan I decided I was going to cancel the stop and use my 30-minute gap trade to get out.
If the market was higher than the open after 30 minutes I would get out regardless, hopefully though it would close the gap and go lowerwhich it did in a strong way. In my reviewing that night I decided my stop should now be slightly higher than it had been and used the high of the day, which was slightly higher then the previous days high. This is one of the few times I would raise a stop, and I did so because it was technically correct to do so.
Actually at this point, I started liking my chances of the trade working out well again. The next morning (B), though, the market was due to open only slightly lower. With that information I made a scenario where, if the market took out the lows of the previous day, I would add to my trade by one-third the amount of my original trade, with a stop if the market went positive. With this trade my stop was so close that it was well worth the chance. I liked that the stochastics on the 60-minute chart were heading lower with room to spare and maybe that the recent rally may have just been noise. I also liked that yesterday was a downward reversal. I wasnt taking chances though, I had my stop in for my current short, and if the market did go up after the open I would not add to my short. If the market rallied a bit and fell I was prepared to add to the short as well when it took out the low of the day.
So what ended up happening was that the market went lower at the open but turned around soon after and rallied the rest of the day. I added to the short as it broke yesterdays lows, but then quickly got stopped out with a 55-point loss as it went positive. And a little later I exited the rest of my position when the stochastic turned back up. The trade ended up having a 435-point profit on it. Not what I was hoping for but still it was a nice trade. I got out at a decent level as the market had a strong rally that day and the next (C).
This all leads me to tonight. I know that tomorrow the Fed is expected to announce a rate cut. I still want to short but its a crucial point and I have quite a bit of planning to do before I can do so comfortably. I have to draw up all the scenarios of what could happen and how to react if the market does one thing or another. Ive done this already once in this book so I wont spend five pages doing it again. But the main possibilities were:
That they cut 50 basis points and the market rallies or it fails to rally. If they cut 25 basis points, the market should plummet. If they cut 75 basis points, I believe youll see a quick, huge jump up and then a sell-off is possible as people realize it was done because the Fed is really nervous about the economy and a recession is a coming.
The only tricky scenario is if they cut 50 basis points as expected. My reaction will be to look for a place to short if we sell off or if we rally Ill look for a stall in the rally to short. If we just go straight up, Ill sit out. Ill use the Fibonacci retracements as my initial stop areas. Its late and Im off to bed now. Ill let you know tomorrow what does happen.
Its actually two days later now, I didnt have time to write yesterday, but the news was as expected with a 50-basis point cut and the market rallied about 230 points off that initial news. However, it failed to hold the rally and closed down 35 points, selling off a couple of hundred points in the last hour of trading, as people feared the economy was in danger. See of a five-minute Dow futures chart. I ended up getting short at 12,592 because of the break in trend line X, and the trade was looking good going into the close so I held overnight.
I did my usual reviewing the night before, and Ill spare you those details except to say that I placed my new stop above the high of the session. This morning, however, I had stuff to think about as the market was going to open down 150 points or so.
My first reaction was to do a little Im in the money dance with my daughter, but then I realized that the market would most likely close the gap and rally. So I decided to use a 30-minute breakout trade for a stop, which should give me a profit but nowhere near what I was looking for. If I got stopped out, Id reevaluate and look to short again. I ended getting out at point Y, which I was happy with and then, sure enough, the market rallied and closed the gap and then rallied another 200 points closing really strong as investors now thought the interest rates cuts would make a difference. These fickle traders are making this one tough market to trade long term. The intraday moves have been pretty damn big every day and the news has become really wishy-washy. I really believe that analysts just make up the reason the market has moved after they see what the market has done. I have noticed, however, that the opening gap trade has been working like a charm. Im going to start trading this set up more aggressively until it stops. Now most of what I just wrote may seem to you like it belongs in other chapters like drawing scenarios, getting in, or getting out. But what you can get out of it here is that by constantly reviewing the market and your trades, you can start to see things more clearly. I have just noticed that those gap trades in the morning are working like they were textbook examples. When you can find patterns that are working, trade then and dont be scared to be aggressive. The stops in these trades are not that large and they have been paying off. So keep reviewing and when you pick up gems like this take advantage. Although you can probably bank on the fact that now that Ive decided to trade these more aggressively, theyll stop working.
As for my long-term opinion, it is still short, but I need to wait out this recent up move.