Sunday, August 31, 2008

The importance of a good start

In sprint race, swimming or any speed sport, the start is one of the most important part of the performance. I have begin to realise that as a trader it the same. The first trades are mentally the easiest to take at least for me. My losing trades are statistically more concentrated in the starting trades as well. In the majority of days I find myself in the zone after the 1st trade or couple of hours of watching the market action. If you take 3-4 trades a day, its like in a 4x100m race, where would want the starting sprinters to get you in comfortable lead to build upon - or at the very least not be far behind.

That's one of the reasons why I like to trade after I get a good grasp of the structure, bias and type of day. The initial balance gives you a good introduction to the day that might unfold.

Friday was profitable day for me, netting me my average profit. It was however, not an easy day to start with. I had the notion that we might balance based on where we opened and price action preceding market open. The 3 line break chart gave an indication of a low volatile day, the .75x3 Pnf chart indicated that we were flat lined to downside based on the moving average. I don't trade setups on these charts but they are a good barometer, that takes away the noise of time.

I took a long in the E period based on order flow. As I did further research,
it was a trade that could have been taken but not the good quality (refer back to news etc. -consumer spending higher) and frankly better stayed out and waited on a direction. However the most important thing about trades like these is that you have to manage them very conservatively. Then came the news on income which was the lowest fall in 3 years. It was a profitable trade that instead of scratching at break even I let it stop me out, as the selling momentum went from a trickle to more desperate short terms getting out.

The interesting thing though is the effect of such a trade on your risk management and trades for the rest of the day.

I took a long in the F period after the news was absorbed and the selling dried up (dry up volume) and price found temporary support near DBY VAH. It was a half sized position (more conservative mainly because the buy response had not been seen yet). The order flow favored a retrace and when it initiated, I tightened my stop further. I took my profit near VWAP.

Now I recouped my loss and slightly in profit. I was looking at VWAP as possible shorting opportunity. But VWAP generally is close to the dynamic mean (which means chop). Finally the price is here where I want to get in the direction of the sentiment. The big contracts are delta more delta negative and the general market. Everything is lining up.

However I didn't want to end the day in a loss since the week's been descent. I entered 1/2 size short position 1 tick below the VWAP (90.75) on a down tick. Price went in my favor and then it stopped me out at even (generally mean requires a bigger breathing room). I reentered again when the general market parameters lined up again at VWAP (90.25) on a half size. Now under normal circumstances it would be full sized and perhaps an add to the position soon after follow through. I used a conservative strategy for the add as well.

I had order for 2 contracts add on a sell stop at 87.75 which was the swing low of this inverted M formation (double top). The reason is that the bailing out of late longs from the swing low often provides a momentum to the double top failure. However, due to the price action, I took out 1 add at entry (87.75) as it came back to me(again a conservative step). Took profit on another at 85.75 (preservation of profit) and I was all out at 83.75.

It was almost a 10 points move on which I got less that 1/2 the possible profit (all contracts). Simply because I let my guard down on the first trade and switch to conservative hat. Now this last trade was the best trade of the day in my opinion unless you shorted the 96-97 during IB. Like all good trades, it was the toughest to be in. The effect of a bad starting performance is that it puts you in a survival mode which restrains the rest of your trades working to full potential. Now, I have added to my strategy to be mindful to treat the first trade as the first sprinter of the 4x100m and focus on profit or breakeven.

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