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Embracing Risk
"The core of a traders role is making decisions under conditions of uncertainty and risk."
"It is widely recognized that trading is a difficult job that places enormous pressures on individuals - in terms of the complexity and the flow of information, the major consequences that can flow from decisions, and the limited time frame and resources they have to make decisions."
Traders, Risks, Decisions and Management In Financial Markets, Fenton-O'Creevy, Nicholson, Soane and Willman
A Challenging Cocktail
To become a successful trader you need to embrace risk and uncertainty as they are an integral part of the trading world. You need to develop approaches to help you to accept and manage your risk in a way that still enables you to make profits and you need to learn to cope with the uncertainty that trading brings.
Embracing Risk
"Psychologically most of us prefer comfort and safety to risk taking."
Ari Kiev, Psychology of Risk
Do you consider yourself a risk-taker?
Do you accept that a trade has a non-guaranteed, probable outcome?
Do you believe you are taking a risk when you put on a trade?
Have you accepted the possible consequences?
If you are going to embrace risk then your answers to those questions all need to be a resounding 'YES!'. To be a successful trader you need to embrace risk and this means that any trade that you enter no matter how much you may want it to be a winner, or how confident you are, still has a non-guaranteed, probable outcome. Even if you have an established trading strategy with a 70% win ratio you are still going to lose statistically on three out of every ten trades - although because we do not know the distribution of the outcomes of our trading it could easily be a lot more than this in any given small sample. Every trade you place has a risk. It is easy, especially when trading is going well, to focus on reward - however a key to sustained trading is risk management! When you place a trade if you accept that there is risk then you should also be accepting that there is the chance of this trade being a loser. Only when you totally accept that you are taking a risk, your outcome is non-guaranteed and that outcome could be a loss, can you experience trading in a more positive and free state of mind, reducing fear, hesitation and stress and enabling you to achieve your trading potential.
Practical Strategies : Embracing Risk
1. Develop A Risk Mindset
Embracing risk is really all about developing a mindset, a collection of beliefs that are empowering and useful to you as regards risk and trading and these might include:
" I accept that as a trader I am taking risk/I am a risk taker
" I accept that every trade has a non-guaranteed, probable outcome
" I accept that I can lose on any given trade
" I am a trader. I am trading based on the principles of risk and reward. I have to be willing to take risk to capture my potential rewards
If you have less than four Yes's take some time out and reflect on what you are increasing the propensity for an emotional and stressful trading experience!
2. Identify Your Risk Comfort Zone
It is also important to be aware of your own attitude towards risk taking in terms of how risk averse or not you are. This is of particular value to you when you are developing your trading strategy. If your trading risk profile and your personal risk profile are not aligned then there is the potential for conflict.
Only trade with the amount of risk that you're comfortable with. Positions that are excessively large can affect your perception and decision making, which makes you far more likely to make mistakes
RP, Trader
3. Take A Risk Inventory
Make a list of all the possible risks that are possible within your trading and then write down next to each one how you will deal with that risk. This can help you to plan for and manage your risk.
I think we go no lower than /ES 1025. The rally, despite the high volume, petered out quickly.
However, my volume measurements tell me that the morning rally had a greater magnitude of buyers than the afternoon selloff and that has me leaning on the bullish side as we carve out this ST bottom. Could be wrong of course, but that is how I am leaning. I will abandon this this idea if we take out /ES 1025.
I bought small OTM call options in the following gold/silver stocks AEM, GOLD, ABX, AUY, SLW, GG
I bought small positions in the following gold/silver miners: EXK, BVN, CDE, HL
All the positions stated are small and have very tight stops. Holding these overnight.
. http://screencast.com/t/nFfHsJN6ZHuM
I have followed BPI’s for years and have learned to heed their advice..So how do we follow along and gauge what this internal indicator is trying to tell us??? After all these BPI’s can turn down and yet the markets don’t plummet for several months. I take a short cut and follow a chart that pretty much mirrors what the vast majority of stocks, as a single price, are doing and that is the S&P stock weighted index, “RSP”. This differs from the Cap weighted S&P by giving each stock within this index equal weight with the rest versus having a few high cap. stocks control the direction of the index. So for a quick check on the movement the BPI’s indicate can happen I refer to this chart..
http://screencast.com/t/1prNoB3vwv2a
It’s not the answer to all our questions but it has helped me in the past and present…
Anyway…….just a thought.....
Value Line Arithmetic index, also showing a steeper decline. This index had a near double bottom pattern in March.
Note that this index is got reasonably close to 2007 levels in this rally!
http://finance.yahoo.com/charts?s=%5EVAY#chart1...
-------------------------------
back in at 10.47 ... needs to break through 10.79 for me to hold ...
http://screencast.com/t/iqJE1JP8P
Point up....
After much complaining I got 25 free trades.
Stepped back from trading to get my emotions collected and resumed trading on a different platform.
Any ideas why TNA was moving against the broad market today? Even when all indexes turned positive, it remained down at least 1%. It was definitely not slippage as TZA was moving up by the same amount.
Thanks.
I've always thought that TNA was Russell 2000 (small cap) but never knew it was such a technology oriented group. Could someone confirm this?
http://www.russell.com/Indexes/characteristics_...
Financial Services 20.69%
Technology 17.06%
Consumer Discretionary 15.36%
Health Care 14.13%
Producer Durables 13.81%
Materials & Processing 6.99%
Energy 4.46%
Utilities 4.43%
Consumer Staples 2.95%
http://www.screencast.com/t/p2c5HwPF3teA
IWM up, TNA up. IWM down, TNA down. Period.
I've tightened up my system and haven't taken more than a $250 loss in 3 months. One trade a day or week for $500 is still my long term goal. I only need 4 a month to live off of.
Decided to update the 'ol blog (I know, right?) and included my probability analyses as well. I explain a little more about it on the blog, so hopefully you can find it useful. I plan to do some number crunching on my observations, so I will let you know when I update it!
www.inthepinktrading.com
dressed as Yoshi.... good times
DOWN first 15 mins
then trending day UP into the close
I will be LONG when we get above the open after the initial fall.
Of course this might not happen this way at all, but I am preparing my mind for this structure today.
Be careful. This market couldn't be more dangerous.
http://www.screencast.com/t/2U9aHfNOCeiP
And the SPX 20 year, with the same message...?
http://www.screencast.com/t/L7Er0VMWb
The second chart, 20 yr monthly, on the SPX.....I will draw for you again.....the green channel will show the uptrending zone and the red channel the downtrending zone.....hopefully this will make more sense.......remember this chart is a monthly and it's final formation is confirmed at the END of the month.....
http://www.screencast.com/t/cbYQ1Qzr
IWM support at 52-53?, hard to say!
So, if I were you, I'd look to buy PUTs to protect downside (e.g. Mar 17.5 Puts about $0.70 or lower) or keep tight actual stops (not mental)
on it @18.35 (too low?
good thing I have a head rest on my trading chair ...
SRS @ 10.36....
Regional banking (KRE) is finally rolling over a bit ... I am not trading that but it is thermometer stick for me in the financials ...
One last observation ... PnF sell signal on NASDAQ if we close below 2040 (which looks like a shoe in)
Also XLY just made lod ... my retail shorts are beginning to rock ...
Sorry...was going for a nice trade....but this posted....
Looks like we got a 63.96% chance of touching 1020 before close using 31.61% volatility
Myself, I missed a nice chance to add back to my PRU short earlier. These big, sweeping moves can be a blast to play.
BAC - Bought 2nd batch of Nov Calls as it is remaining above $15. Will buy last 1/3rd as it drops a bit more. Stop if BAC < mid 14s and profit target to sell when BAC > mid 16s
also if the $CYC makes a new daily high I will cover ...
I hope everyone had a great weekend.
Wanted to post 2 charts for everyone....
http://tinyurl.com/ykofwsc EUR/USD Daily
http://tinyurl.com/ykjjrew /ES Hourly
Looks to me like we are possibly flagging before another move lower.... I believe we are short term oversold....so either some time or a bounce can fix that measure.....
Flat for now.... no edge in either direction at this point in time...
Trade Well
Rick Edelmann said the DOW will reach 100,000 in year 2039! Isn't that good news moosters?
All my short positions are up from Friday already ...
I made a very long post on the weekend with some charts ...
I was well health-wise for about 3 day and now I think I caught something new...Hoping this is a 24 hour thing. Nothing like what I had last week thankfully.
the week so don't know how active I will be. This might be my Big Deal of
the week.
Good luck today, Taz!
http://www.gold-prices.biz/agnico-eagle-mines-l...
I hope you feel batter, if no medication works sex is the best way to recover from any minor sickness.
Cheers!!
http://www.chartsandcoffee.com/2009/11/f-pzza-p...
"How about a 6% swing in Shanghai? From a gap down to 2929 and finish the day @ 3076. This is only 30 points or so from the Oct high. Amazing."
Here's my charts and market expectation..
http://eminitrends.blogspot.com/2009/11/market-...
Comment and critics are welcome.
Thanks!
http://www.forexfactory.com/calendar.php
10am market moving numbers come out...
Already this morning it looks like the financials are outdoing the small-caps.
So, probably FAS, but i'm very interested to hear any other opinions.
And congrats to fellow HGSI longs! ; ) Trade well.
http://finviz.com/quote.ashx?t=bac
There is a not so insignificant amount of crash risk so I am not going strong long on any thing.
Also long OIH calls this morning, JAN125.
Can't help but expect a curveball or two before it's over. Still have some shorts left over from Friday, and I might add to IWM or IYR shorts if we do trend up today.
It was the weekend reading on the COTs which actually got me to play safe. With PTJ also banging the drum on gold the entire spec world is frothing about gold which could be the recipe for a not so insignificant run out of PMs.
I'm just watching so far and may wait until after the ten o'clock reports moo mentioned to do anything.
Wow! What's happened to YRCW?
WOW ran @ 2.13......stopped out @ 1.95.....DAMN
Pending Home Sales Rise for Record Eight Straight Months; Construction Spending Up .8%
US Manufacturing Activity at Highest Level Since April
AEM is absolutely crushing it. Friday's 4x volume was a washout.
BAC - Bought a starter small position of Nov calls. Will buy more if BAC < $15 next hour or so. Stop when BAC in mid 14s and target sell when BAC in mid 16s.
SRS @ 10.00 even.....
I am monitoring the $TNX to break its morning low (33.88) ... and then SRS is a hold ... if the $TNX breaks through 34.50 I will probably exit my SRS position ...
Now, if we could just get a bit more profit-taking in the stock and IV crush in the options, I might just buy back my calls. Not looking like it, though.
Nice add @ 9.82, bottom tick so far. Looks like you should bank some coin on SRS today.
You were covered by 22s, yes? Were yours called away?
Any PM trading for you lately?
called on OpEx week.
I'm not doing much these days. I bought some TZA a few weeks ago about
as close to the market top as I'll ever be lucky enough to get.
Didn't sell any longs. I'll consider that if we get a lower weekly
swing high.
Might consider selling naked puts ( as you mentioned) on miners in an
account that is otherwise 100% cash.
Good morning Taz. How hot is it in Tampa?
Ford results were BS....on hit song....IMO
Currently in DO as I love the MACD cross, the RSI (7) and the STO on the 60m chart but will jump ship quickly if need be.
http://stockcharts.com/h-sc/ui?s=do&p=60&yr=0&m...
The boys in the Pits are just on another level with this stuff. Sharks in them waters.
As you said, the Pros SELL the Volatilty and I got caught in the crossfire. Had some decent trades in them, but overall not a positive experience.
I like your approach of giving yourself a 4 or 5 month window.
"Buying out of the money options is gambling, but selling them is a business"
Strange.
I'm hanging it up for a while, but will continue to monitor the blog.
Thanks to all and good luck!
If a trade is working, why futz, esp. when you get to be short front-month options at a juicy premium. My calls are about to go red with the stock up 35 percent ... how awesome is that?
Fun coincidence that Barry Ritholtz reprinted a line from Jesse Livermore the other day, “It never was my thinking that made the big money for me. It always was my sitting.”
HERO @ 4.88.....day only....tight stop
Is this a cannot go much lower than $5 (price of the 20% diluting secondary in Oct) trade? Chart doesn't look that great for a bounce. http://finviz.com/quote.ashx?t=hero
I was too slow thinking this. May join you and buy if it drops back a bit.
http://finviz.com/publish/110209/Cc1dl1159.png
Looked @ SRS @ 10.36....did not go....for an exit
http://www.livecharts.co.uk/pivot_points/pivot_...
TRADE ALERT
went long ES @ 1039.75, looking for a point or two
BAC - Bought last batch of Nov Calls. Stop if BAC < mid 14s (it made on Friday) and profit target to sell when BAC > mid 16s
Left SRS @ 10.57....that was a sweet trade 3K shares.....
HERO @ 4.86....
76.12 the key level now on DXY
HERO - Going long @ $4.77. Joining Taz (thanks for the idea)
76.30 now a key level
http://chart.ly/twd3a2
didn't like the way it was acting.
EXECUTIONS FOR THIS TRADE
Date Time Price Quantity Total
11/02/2009 02:06:26 PM $4.62 100.000 $462.00
11/02/2009 02:06:49 PM $4.62 200.000 $924.00
11/02/2009 02:06:49 PM $4.62 200.000 $924.00
NET TOTAL 500.000 $2,310.00
Edit: Though you have rich company: http://online.wsj.com/mdc/public/page/2_3022-mf...
MDVN @ 25.80 long term 1-3 yrs 1k shrs.
no stop could trade @ $75 end of 2011
Dip @ close?
A few small losers....but a good day.
Nice trading with you all.....
Going out to the feed the "Big Dog"....left him a meat bone prior to open....
If he thinks he is going to trade her 9 REESE'S peanut butter cups (covered in delicious milk chocolate) for some silver......I will kill him.....I was set up on this trade.....FWIW
And whaddaya mean, "quiet?" I've been shooting my mouth off all day, certainly more than my trading prowess would merit (though today was pretty nice, it must be said).
Taz-- sorry I didn't get back to you about doing a chart of DOG. My weekend caught some headwinds and I was short on time. Do you still have questions about the chart?
* Edit -- just for the record, I typed the above before I read your post that follows. ; )
BTW....did you dress as an inverted H&S as we heard?
Moo came to my house as a 100 OZ bar.....we could tell right away.....tail sticking out.
a gap and go tomorrow confirms.
The dailies for both seem pretty bullish at the moment, but that might just be a temporary imbalance the market has been known to erase with brutal speed. Silver has not jumped back into the higher consolidation zone the way gold has.
Probably just have to await events, but the recent action has been particularly intriguing to this country boy.
The decoupling process will likely take weeks maybe months to reveal itself definitively. Again. It will not be an event. It will be a process. So, trading this transition requires a leap of faith imo.
My course of action is will be to buy $1,000 way out of the money call LEAPs 1.5 to 2 years forward in gold/silver miners such as AEM, SLW, GG, GDX in one account and don't manage it too much. Maybe buy a little here and there to adjust for time decay and reduce my cost lower accordingly. The question is when do I start doing this?
I will presume that GLD will always hold $100 going forward, so any dips down to that area would be a good point to accumulate those contracts. Any sub $100 price shenanigans should be taken seriously and possibly abandon these positions.
Edit: Curious to see if we make new highs on the gold contract this week. Strong move today, and it's within spitting distance.
http://www.bloomberg.com/apps/news?pid=20601087...
http://www.screencast.com/t/7gSG2ygGwz
..../\....
"While up and down movements in the market are not uncommon, the specific pattern we've seen over the last few days is so rare that it has never happened before. Going back to 1928, the S&P 500 has never had a three day sequence where the index broke and closed below its 50-DMA one day, then snapped back and closed more than one percent above the 50-DMA the next day, only to sell off on the third day and close more than 1% below the 50-DMA."
http://bespokeinvest.typepad.com/bespoke/2009/1...
OIH is at its 50 Day MA and is also testing two trend lines.
_____________________________________________________________________
Cash on the sideline update
Investors holding the least cash in two years, AAII says
http://www.marketwatch.com/story/isms-new-order...
yeee ... haaa ... !!!
Points to watch out for with both are the S2 daily pivots at:
1.46047 - EURUSD (1.466 as I write)
1.62534 - GBPUSD (1.63005 as I write)
I'm thinking that there may be initial weakness on SPX today to touch 1020 - 1025 which may take both of these to those pivot support levels. If so, they both look like good long plays.