Tuesday, January 17, 2012


                             Tumble, Tumble, All The Way Down

I’m going to make today’s post short and sweet so as to drive home the most important element of trading. I seriously think almost all of you do not take into account the law of unintended consequences.

The most important element of trading, and ultimately your success as a trader, is entry into a position. Forget for a moment how you came to the conclusion to either buy or sell and initiate a position, and how you liquidate that position.

Proper entry is the most critical component of a trade. When you enter a trade poorly, you start the process of a string of dominoes tumbling down the line to an end you can only guess. In other words, dominoes start to fall; do you know what the consequences are going to be?

I have written many times of “The Power of $1.50”, and you can poo-poo my premise, but the math is on my side. The fact is, compounding gains with leverage leads to a very large trading account and the freedom that goes with it.

Money = information and vice versa, and if your entry is poor, it means that the information you have will lead to a poor price for entry, thus meaning that your stop loss must be wider than normal due to the poor price. If you keep the same parameters regarding the stop, you run the risk of a higher probability of getting chopped with “random noise”. 

And herein lies the rub: just from one little mistake, you have compounded the problem in ways you probably haven’t thought of before you decided to make the trade. Do it many times, and your account isn’t going to grow as you would wish.

It all starts with an inflection point where information is greater than money. Not all time/price moments are created equal! You need an algorithm that can pinpoint these moments and get you in the position at the right time and the right price.

Now, that doesn’t mean you have a guaranteed winner; it simply means you can then use tight stops. Losses by definition then will be small and manageable. As the trade becomes profitable, the market can then tell you when to liquidate and exit the position; letting profits run.

Avoid the falling dominoes.

Today’s Action & Wrap Up

Again today, the Asian session shines and the rest of the day is a bucket of slop. We came into the day in buy mode, and our first trade was at 3:25 AM [Chicago time] at 1662.00. Stop was placed at 1658.50, right at the most recent low of 1658.48. At 4:10 AM [Chicago time] we get a confirmation top at 1664.50 [discussed in the manual and Appendix IV]. Gain of this trade of $ 2.50 / oz.

Our second trade came at 5:05 AM [Chicago time] at 1664.00. Stop was placed at 1660.00, right at the support level from 3:00 AM [Chicago time]. About an hour an a half later, we got a confirmation top at 1665.00 [discussed in the manual and Appendix IV]. Gain on this trade is $ 1.50 / oz.

Looking at market action, it is choppy and since Asia closed the market has not been able to gain further traction. I’m up $4.00 / oz., and extremely leery of getting back into the market as long positions struggle to go anywhere.

At 8:00 AM [Chicago time], as the market is breaking down, I make the decision not to trade further for the day. I’ll keep what I have as we limp into the US session.

Gain for the day is $ 4.00 / oz., but the action almost makes me feel like I lost money. I took heat on both trades, and it sure didn’t feel like it was in Asia on the way up. Like yesterday, not enough for a Ka-Ching, but enough to keep the dog in dog food for another day. :J)

Have a great day everyone!


Update: it would be nice if I could add correctly. Some days I wonder how it is I don't work at the circus. Anyway, my gain on the day is $ 3.50 / oz., not $ 4.00 / oz I stated above. I made a 50 cent error when subtracting the prices on the second trade. Yes, you can trust me with math.

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