Trade Aptitude

Results of Monday’s Best S&P Futures Turning Points: Neither suggested trade triggered in a narrow range day. 

Today’s Best S&P Futures Turning Points (consider wider stops and less size in fast moving markets): 

Buy 4551.75 stop 4547.25. Short 4612.50 stop 4616.50. 

The World Sentiment Index: (+100/-100) jumps from +7 to +50 in a mostly Bullish world, especially Shanghai & H.K. 

Catalysts: Home Price Index @ 9:00. Consumer Confidence @ 10:00. MSFT & GOOG release earnings after the close. 

Quick Tip: Newbies Only Part 7

This is a multi-part process. If you didn’t read the prior six newsletters you can find them here. 

There are more risks in trading than the loss on any given trade. Here’s a couple 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. Choose wisely. 

Furthermore, the spread of SPY options can increase during volatile markets. Consider the FOMC release of an interest rate decision. Instantly most assets will see their spread widen considerably. You’re paying it, maybe you shouldn’t be trading then. 

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 answered 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 would be difficult to accept. 

In our trading room 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. 

More on risk management tomorrow. 

if you want help getting through the process from a team of skilled traders, join ours, learn several strategies, and watch us trade live daily.  Money back if you’re not blown away! Click here for details. 

Trade Fearlessly,

Mike Siewruk