Newbies Only Part 7
Happy New Year! The next few blogs are part of a multi-part process to tune up your trading plan for the coming year. If you haven’t read the prior six posts, you can find them here.
There are more risks in trading than the loss on any given trade. Here’s a few to consider.
Liquidity risk. You’re buying and selling. That means someone needs to be your counterparty at a fair price. The difference between the bid (buyers) and ask (sellers) is called the spread. If this is wide enough it will ruin the edge your strategy has.
Spread changes not only with the asset itself, but during changes in volatility. For example, the spread on the most popular ETF, the S&P Index (SPY) is less than 1% in the options market. Similarly priced stocks can have spreads of 10% to 20%. The spread is your cost of doing business with that asset. Avoid assets with a wide bid/ask spread.
Furthermore, the spread of any assets can increase during volatile markets. Consider the FOMC release of an interest rate decision. Instantly most assets will see their spread widen considerably. Another risk during volatile markets is slippage. Price could be moving so fast that your stop loss gets filled much worse than you expected.
You’re paying the spread and slippage, maybe you shouldn’t be trading in those market conditions.
Strategy risk. Every rule-based strategy, regardless of how profitable it is over the long term will go through periods of losses called Drawdowns. If you were told a strategy earned an average return of 50% annually you’d likely be excited. The question you need to answer is what are the drawdowns and how long do they last? Earning 50% per year and having several month periods where you were booking loss after loss waiting for the big gain might be difficult to accept.
In our trading rooms we monitor the equity curve of several strategies and have rules to halt and re-start trading. We’re always looking to minimize the drawdowns. Having multiple strategies to trade allows for this. You should too.
Our trading teams focus on multiple strategies for day trading futures and high-probability candidates for swing trading options. You can learn either or both risk-free. Join us.
To your trading success,
Mike Siewruk
PS: Feel free to forward this invitation to your trading buddies. Share in the wealth!
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