Monday, November 12, 2007

Day Trading Closing Comment

While today certainly did not pan out as the probability model had called for, we were still able to capture 15 S&P 500 points, mostly on the fade of the open.

Intra-day we were as high as 22 points captured, but the last half of the day caught me off guard as I tried to buy weakness and was stopped out twice before I let the rest of the day go.

Today is yet more evidence of exactly how important stop loss orders are and why they should be used, not only in very short term trading like we are doing here, but also on an intermediate term basis as well. Had I not utilized stops when trying to establish my longs as the market moved lower then the outcome would have been giving back ALL of the profits from the first half of the day and maybe even going negative on the day.

There is no question that at times you may get stopped out only to see your position move in your favor almost immediately after the stop is executed. There may also be times that you get stopped and it continues to go against you, but eventually breaks hard in favor of your position.
These things are going to happen and for every one move we get stopped out of and ultimately miss, there will be thousands more trade opportunities in the future.

When you will really appreciate using stops is when you get stopped out and the S&P continues to move against what your position was 10 or 15 points in short order. It is at these times that they are a lifesaver and the advantage thereof far outweighs any of the negative effect of being stopped out prematurely.

Trust me, even after being involved with the equity markets for 20 some years, it is still very frustrating to get stopped out of a move early or at times the top tick before the market moves in your favor. I just keep reminding myself of all the times that stops saved my butt and the times when I was young and new to these markets and did not use stops because I was smarter than the market! (Yeah Right!) I could tell you a story that would break your heart about some of my early options trading when I was 19 and was on the streak of a lifetime. Alas, youth got the better of me and I lost it ALL, and I am not talking about chump change either, I am talking about a starting stake of $2000 that I managed to turn into $275,000 in a little over 8 months!
I was the smartest Mail-Boy the firm ever had as that is where I was working at the time. I had veteran brokers, traders and market makers coming to see me every morning to get the skinny on what I was buying or selling or shorting or boxing or whatever. But I will tell you that I went from the smartest mail boy at the firm to Zero in exactly 1 weeks time. The $275,000 evaporated to zero as I put it all on the line with the option trade of a lifetime with NO STOP!! After all, stops were for wimps. Not to mention that I got tunnel vision brought about by the potential payoff of the position. I had figured that if the market went where I thought it would I could parlay my $275,000 into a little more that 3.25 MILLION! In the end, there was no 3.25 Million. There was no $275,000! There was a big fat goose egg. So to make a long story short, it was one of those veteran traders who had told me time and time again to not risk more than 10% and to ALWAYS us a stop that finally got through my thick scull. He never said I told you so to me or chastised me or snickered. He simply wrote on an index card in red magic marker NO MORE THAN 10% OF YOUR TRADING CAPITAL IN ANY ONE SPECULATION AND ALWAYS USE STOPS! I still have that index card. I had it laminated and from time to time when my head starts getting a little too big and I find myself assuming to much risk I get that card out and I read it over and over and over again.

So there you have it! A short story about why stops and capital restrictions are so important.

So if I can be so bold as to make a suggestion to you. Make your own index card with just those two simple rules on them and read it from time to time. I will guarantee it will be well worth the small amount of time it takes to make it. Also, feel free to print out this story or ask me any questions about it because if I can stop just one speculator from eventual ruin then the story being told will be well worth the typing.

I will be posting the daily market comment, later this evening so come on back and check it out.

1 comment:

Anonymous said...

Thanks :)
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