Disclaimer: I am not an investment advisor. When I describe my own trading activities, it is not intended as advice or solicitation of any kind.

26 February 2011

CiG Finally Closed

As I mentioned in my previous post, the Collaboration-is-Good trade signalled a Buy on S&P Futures on Tuesday at the close.  This is a fade trade -- others might call it a mean-reverting trade, but it isn't really, since there is no "mean" we're reverting to.  By fade trade, I mean that it buys on strong dips of otherwise up-trending markets, and sells on strong rallies of otherwise down-trending markets.  So when S&P Futures shed 28 points on Tuesday after trending up quietly and strongly for months, CiG jumped on it. 

I bought S&P futures in my fake-money account at the close on Tuesday for 1314.50.  Wednesday close was 1305.25 (down another 9.50) and Thursday was 1302.25 (down another 3).  If I had simply held that position throughout that time, by Friday morning it would have been down $612.50 per contract, or about 11%.  But I didn't. 

Wednesday morning before the stock market opened, I saw the hard sell-off at 2am from the mess in Libya, and I decided that although futures had come mostly back that night, I should move my stop up to 1312.  Sure enough right after the open, the S&P sold off and hit my stop.  I got a little lucky on the execution, and sold it for 1312.25, saving $12.50/contract in losses.

By the close on Wednesday, the trade was still signalled, so I rebought at 1306, starting at -$112.50/contract.  Thursday was quieter, moving mostly sideways and a little down, and my trailing stop-loss of 10 points ($500/contract) was never hit.  It was still a down day, however, so the trade stayed signalled.

Friday morning, my tour de force of trading skill failed me.  I saw that the rally had finally started, and I wanted to set a closer stop before heading off to work.  Somehow I mis-entered the price, and instead of putting in a stop order to get me out on another big sell-off, I accidentally sold at the market, then 1311, for a reversal in fortune to +$137.50/contract.  Nice to have a profit, for sure, but I didn't want out at that point.

After arriving at the office, I kept an eye on the market and managed to buy back in at 1310 about an hour before the markets opened.  I then set a 5-point trailing stop, which is generally way too little room for this trade, but I was pretty skittish of the stock market by this time; and got to work on my day job.  Somewhere around 11am, after rallying all morning, there was a little market dip that closed me out at 1313, for another $150/contract.  I saw no reason to press my luck further, and closed the trade.

Total profit: $287.50/contract, or about 5% on margin capital.  If I had not been so skittish with my stop order on Friday, the close signal would have come in the afternoon at around 1318.75, profiting $575/contract, or about 10%.  On the other hand, my discretionary trading had a positive impact: if I had just bought on Wednesday afternoon and held on, the trade-prescribed 100-tick stop-loss would have just barely not kicked in at the low on Thursday, so my open-to-close profit would have been $225/contract.  So to recap, my discretionary trading was good, but I got a little more nervous on Friday than I should have.

Making the decision to violate the rules of a mechanical trade in real-time is always a tough judgement call.  Mechanical trades are useful for finding entry and exit points when an emotional human might not be able to pull the trigger on his own.  But blindly following them is not a long-term profitable decision -- despite my active trading behaviors, I believe in an efficient market most of the time.  In this context, that means that if there were a profitable mechanical trade out there, someone has already done it so much that it has been used up. 

By carefully considering whether now is the time to stray off the path laid out by the mechanical trade plan, and using the plan to question his decisions and lend some objectivity to their logic, an experienced trader can enhance his returns.  I'm not experienced enough to do that reliably, but in this case I had the help of NeighborTrader to reason out the pluses and minuses of each individual trading decision, and it worked out very well.

Collaboration, it seems, is indeed good.

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