Thursday, 11 November 2010

Double or Nothing

Probably one of the most contentious parts of what I do is DOUBLING DOWN. I often am too eager and put on a trade at not the most ideal trade location - mostly outside-in trades. Usually, I do not have a 100% position on in these circumstances, as I know I am being eager - I do it anyway. I guess it's my nature. I then need to average my cost AS LONG AS I KNOW THAT THE TRADE IS STILL ON. Therein lies the rub. If you do this and you don't KNOW then you have a quick death in this business.

Years ago I noticed that many of my losses were due to me being stopped out of good trades; trades that went my way after I had been stopped out. I back tested the phenomenon and discovered that I entered outside-in trades at a logical spot, but that due to their nature (knife catchers) outside-in trades were, for me, harder to time. This meant I often had a better trade location after my initial entry. But by then I had taken a loss, so when I eventually made a profit (if I could enter the trade having just taken a loss), some of the profit went towards paying for the previous loss.

The only logical conclusion for me, as I could not do anything about the early entry, was to enter these trades on smaller size - 25% or 50% - and be ready, willing and able to double the position at the next best trade location. This is what I do, and sometimes I even triple down if the first entry was a 25% one. I then scale out as the trade goes my way, and bail if it doesn't. I do not often lose on these trades, as I am qualifying the trade at every bar.

CAVEAT: You really must be CP to attempt this. Willi-nilly doubling down will break you well before the market "does what it should".

Today's ES gap trade was one of those. I bought 1205s at my favourite Fib and sold all out 1206s. I bought 1205s again and then 1203.50s, doubling down. I scaled half at 1205s (I was at the top of the queue as I thought I saw the HFTs there and front ran them) and then waited with the other half. Some more went at 1205.75 at resistance.  Price was testing yesterday's VAL. I was ready to scratch the balance and start again. Once price was accepted inside the VA I was home and hosed, I thought. I bought back at 1205s and started scaling again at 1206s. I was out of bullets by 1207.50. A good time was had by all and off to the beach, figuratively speaking. Season tickets for skiing go on sale on Saturday. I can hardly stand it.

1 comment:

  1. For me, this is a great post since I also tend to enter too early. It's amazing that your trades were almost identical to mine. I first entered at 1204, took 1-pt profit, re-entered at 1204.25, got stopped out at 1203, and finally re-entered at 1203.75. But then I let it pull back about 4 points from 1209.50, got stopped out with only a 2-pt profit and missed the rest of the move. With your indirect guidance through your posts I expect to improve my trade management skills.

    I seem to be at a turning point in my trading and it's primarily because of your posts.

    Best online trading blog. Thank you.