Don’t Crawl Down That Rabbit Hole

It doesn’t happen very often but every once in a while the lowly Mole is handed a lucky break by Mrs. Market. A good portion of my original short positions are still in the running but had the bids pushed higher by just a tick I would have gotten stopped out. If nothing else the price action we have seen on the equities side over the past few days should serve as a learning experience on how to manage campaigns near price inflection points. And most importantly on how now not to let your imagination, fears, or personal biases take over your trading activities during interim periods I call information vacuums. So let’s review our ongoing campaign step by step:

Monday I posted this entry for my subscribers during my Tuesday morning briefing. The general idea was to exploit a temporary weakness on the equities side which had presented itself on the three major equity index futures. Many of my subs and of course yours truly grabbed a few short positions near 1968 with a stop above 1970. Mine actually was at 1971.25 – sufficient to sit out a quick spike higher. At that time I was not aware that Wednesday would be another FOMC day – probably better that way as I may have skipped the campaign altogether.

From the onset I was aware that the odds were mixed but the correlated price action across the three major index futures contracts convinced me to take the entry. What was working against us was this volume hole on the E-Mini near 1965. In my assessment a push below it was supposed to drive us lower.

We actually dropped below 1953 the day after (Wednesday) but almost immediately price recovered and launched what would turn into a slow grind to the upside. I watched it for a while and then decided to gradually take some short positions off the table around 1962 and to lower my ISL to my break/even point at 1968.5. I made it clear to my readers that this campaign had started out as a short term trade but given various momentum measures had the potential to turn into a daily campaign, perhaps even more. As a matter of fact if you read the intro blurb I post every morning – it says it right there:

Here we are reviewing short term setups ahead of the NYSE opening bell. If you are a scalper or swing trader then these setups may be of interest to you. As usual keep in mind that these are short term setups although they could be used as early entries for more longer term positions.

Otherwise there was not much for us to do. The FOMC announcement was due late in the session and our charts had not yielded us with any additional context which would serve us to manage our positions. And that right there is some of the most difficult learning experiences for any trader. You have your system rules,  you got your entry, you set your stop. And then you wait while the market just churns around, quite often slowly robbing you of paper profits. As I mentioned above – I call these periods information vacuums and they are a silent killer because the human instinct is to not sit idly by – you want to do something. You look around for clues and you don’t find much. So you head over to your favorite trading blog and start posting things like:

Anyone still short here?

Of course depending on your psychological make up what you hope to hear in response are reasons to either stay in your trade or  reasons as to why you should do what that little voice inside your head has been screaming all morning:

LOCK IN THOSE PROFITS BEFORE IT’S TOO LATE!!

Yes the rabbit hole is deep and it takes quite a bit of discipline to not be led down all the way. There’s no way to kill the rabbit – it’s always there at your weakest moments, just waiting for when things become so frustrating that you let your emotions get the better of you. Now if you were lucky smart enough to visit Evil Speculator instead then you may have been slapped in the face with some tough love, just as you would deserve:

As usual I did my best to remind ridingwaves to grasp the futility of the mental masturbation he was exposing himself to (or is it a her?). Seems he got the general idea but it’s also clear to me that he was fighting quite an emotional battle. I sincerely hope the evil rabbit didn’t get him in the end because…

… this morning I see equities markedly lower and my remaining short positions are quite nicely in the green. The GBP/JPY is pointing down which doesn’t guarantee success but it’s a step in the right direction. So far so good.

I also had to realize how close I had come to a stop out – fortunately I do use bids during my short campaigns as overnight b/a spreads often unjustly kick you out of good positions. That holds true in particular if you’re trading through brokers with trading desks that may actually trade against you. This is a subject we’ll cover in much detail here in the near future – in the interim I encourage you to start a daily log of what b/a spread variations you see on your respective platforms.

So what now? I did actually add a few more shorts this morning at 1960 but my stop for all positions remains in place at 1968.5. If I wind up getting stopped out I will happily live with that knowing that I stuck with the rules throughout this campaign. Frankly speaking I haven’t given all this very much thought – took me a lot longer to actually spell it all out for you. The reason why I’m logging each step on the way is for you guys to realize that trading can be a lot more systematic and relaxing than you probably have come to experience.

You don’t need to spend hours perusing the news for more clues. You simply monitor your watch lists and strike the iron when an opportunity presents itself. From there on it’s all about self management, which is the most easiest if you simply stay away and don’t futz with the established rule set.

Truth be told – I should have probably not even taken partial profits yesterday given that I had already decided to make this a daily campaign on Tuesday. Did I allow myself a quick stroll down the rabbit hole? Maybe. So as you can see – it’s an ongoing battle and nobody is completely immune to the evil rabbit. As a matter of fact it’s waiting for you right now. You cannot ever kill it but you can learn how to tune out its relentless voice. The best remedies against its detrimental influence are rules and discipline – so the more Vulcan you can become in your daily trading activities the better.

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

Cheers,