I dipped my toe slightly into the water last night a little too early with a tight stop loss on a long position. I had the right idea but the stop did its job and took me out. When in doubt a stop is your best friend. The trade was in the right direction and at the time the FTSE 100 was down 3% which would have made me 300 Euro by this mornings opening prices. I don’t feel too bad and for the moment I’m going to wait and see. I think there are two scenarios that I will be looking at.

Scenario One
Today is options expiry day and I’m going to see what way the market closes. Based on previous trends this day can lead to a reversal. Depending on the size of the reversal I might do nothing and let this long play leave without me. If this is the case my next trade will be shorting the FTSE 100 at the previous high entry of 4300 – 4400 (assuming a Santa rally takes us to this). Based on Dell results the NASDAQ could also bounce as most stocks are at their 52 week lows including Microsoft, Apple, Yahoo and Google. I am even tempted at these prices but I think we have further to go and will be stepping in once new lows are reached.

Scenario Two
The DOW closes lower after a volatile session in which case I would be willing to go long on the FTSE at 3750. Anything around the previous lows would interest me in a long position. My reasoning is that markets on very little good news are willing to rally. Slightly better than disastrous sales over Christmas could lead to a short term rally.

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I can’t help feeling there could be a rally sometime soon. This is obviously the greed aspect of a trade as I’m up 800+. My exit target is 3700 but this is very close to Christmas and volume is relatively low which could indicate the possibility of a bounce should the DOW switch mode and do a u-turn.

There have been many days like this where the DOW pushes lower and then flips to rally a few hundred points after a few days of selling. The flip side is I know markets will push lower but before they do they may spring a pull back before retreating again in the New Year. A Santa Rally is a powerful thing and caught me completely off guards last year. Markets like these are manic at best and can have the most irrational mode swings that can wipe you out. If we rally I want to take my profits and then short again.

When I originally posted my trade diary I was expecting to have to wait a few weeks before I could short but in these markets bounces of 10% are not uncommon. No sooner had I posted that the DOW rallied and I jumped in (FTSE 100 MAR 4400 – Sell -2.50). I had intended a 5 Euro size but beggars can’t be choosers and I’m not complaining.

Essentially what I’m getting at is that the sell off whilst rational doesn’t feel right it seems too orderly. Maybe I’m just being emotional and should follow my conviction but then again maybe a trailing stop could be the tonic. Interested to hear any views?

Total Profit Week: 0.00
Account Total : 6,040.05

I have closed out the last of my bad ill timed trades that resulted from punts rather than market analysis. As stated in a recent post I have changed my ways and will be documenting my strategy before I enact it.

Strategy Going Forward
Whilst I have somewhat missed the boat I know that these markets have become somewhat schizophrenic and will forget the downside and look upward again. My strategy is simply to short the rallies, nothing more complex that that. My entry will be starting at 4300 on the FTSE 100 with 4500 being my optimum entry point. I’m going to wait for the next rally even if it takes a few weeks. The position will be based on March contracts and my exit strategy will be 3600. Here is a quick breakdown.

Entry: 4300 – 4500 FTSE 100 March 2009
Exit: 3600
Stop (Mental): 4700
Point Size: 5 Euro ( 2 x 2.5)
Return Value: 3500

Wow what a week. At the moment we have friends over and I haven’t been spending too much time following the markets. I had expected the Obama rally but had thought FTSE 100 would go to 5000 before falling back. I also thought the rally would merge into the Christmas rally and we would be looking at a happier Christmas. However markets had another idea and my shorts never went in so I’m sitting on the sidelines which I’m happy about.

I’m more focused now on making a few good trades and leaving them work. I’m in this to make money and after losing everything I made I’m not in the mood to give back more. I have one existing bad trade to close and once that is done I will sit back and re evaluate the recent market moves.

With an unprecedented cut by the BOE of 1.5 percentage points and .5 by the ECB there is allot to digest out there. Deflation seems to be the new favourite word on the street and should this occur things are going to get very ugly. For the moment I’m sitting tight.

I think with the losses I have incurred I have to have a sit down with myself and ask some basic questions. I think this is a good exercise in honesty and akin to a business plan. So here we go.

Do I think I can make money from spread betting?
Yes, I think it is very possible and consistency seems to be the key to staying in this for the long run. I need to consistently take money from the table and stop giving so much back.

What is my edge?
After one year of trading where I’m back at where I started it’s hard to identify if my edge works but dissecting it a little more I do believe most of my trades were good. The direction of my trades was for the most part good.

My edge is taking a longer term view of the market and scaling into the trade. Say for example I think we are headed downward on the FTSE. I would wait till a good rally occurs and fix entry points where I would start shorting the market using a contract for 3 – 6 months i.e. FTSE 100 March 09. The intention is to ride the momentum till the market has reached my exit point.

Does my edge work?
My trades for the most part have been correct in their outcome. However I have various failings that have led to heavy losses. When I have executed a good trade and left it alone to follow the plan it has worked. When I start interfering and adjusting based on current news I lose the big picture and get stopped out, close or otherwise destroy the trade. I think I need to formulate and write down my trade plan for trades and wait to execute and then leave them alone. I have taken profits too early on most occasions and left losses run. This strategy will lose me everything.

Going forward I will publish my trade plan with exit and entry strategy. This should keep me from changing it as current news should not affect my longer term trade objective.

Where have I been successful?
On the few occasions where I have left my trades to work they have been very successful. My last trade on the FTSE of buying at 3750 was a great trade and if I hadn’t messed around with the stop loss I would be sitting on nice profits. I generally spend weeks building up to a trade then execute well but close way too quick.

Where have I failed?
I leave bad trades get out of control and good ones get closed out for small profits. I execute well and seem to have a necessity to have open trades. I need to master sitting out and watching, the art of Zen trading. When my trades are read I don’t worry because my conviction is sound but once they go into positive territory I start moving stops which always get triggered leaving weeks of work gone. This is an ongoing trend.

What changes will I make?
At this stage its clear my current methods don’t work as I’m over exposed to risk and don’t manage risk well. I need to take more control of managing risk and take a hands off approach once a trade has been executed. I also need to stop opening trades on a whim because I have nothing open. Having no trades open is often a good thing and will save me money. Quick trades just make me a gambler.

That would have been a 1200+ profit if the stop hadn’t been hit. The stop was hit at the day low of 3825.

After the 900 points on the DOW it looks like I’m the last to the party after all the beer is gone.

Friday marked one year of trading and I thought I should mark the occasion some way but unfortunately I have been very busy at work and haven’t had much time to blog. To surmise the year it was a tough and hard experience that showed me there is no such thing as a free meal. After increasing my balance by 50% I end the year up about 20% with some appalling recent trades.

The bright side is I’m up by 20% and haven’t run my account into the ground. My predictions for the year ahead are a Christmas rally back to 4500 on the FTSE 100 and a test of 3300 in the New Year (I’m feeling March). So my current game plan is to offload the last of my bad trades on a decent rally and keep a long position open till Christmas. I will close down everything and take some time off over the Christmas period then back in January to start it all again.

Lesson of the year: Stop Loss is your best friend, you mightn’t like him for telling you some home truths whilst you raging drunk, singing on the bar but he will get you home safe.