U-Turn Trading

• Posted by DynamicHedge
• on January 6th, 2012

When I first started making intraday commentary on what I was seeing in the S&P 500 futures ($ES_F) I was worried about how my realtime thoughts would translate into words.  I wrote a post about a year ago called Making of the Sausage that goes into the difference between the messy inner thoughts of a trader and the outward representation of them.

Walking strangers through your trades is a little bit like the food network broadcasting live from the meat-packing plant (mechanical separators included).  No matter how refined the individual, the process is messy.  If you could eavesdrop on the inner monologue of your favorite trader it would profoundly disturb you.

The sausage factory analogy is what keeps my intraday posts to the Stocktwits stream short and to the point.  You don’t want to hear my stream of consciousness, believe me.  There are a lot of people out there that are concerned about appearing to be right all the time.  I’m frequently wrong, and with great vigor; I make no apologies for that.  Trade for long enough and the market will beat your need to be right right out of you.  In fact, I’ve been wrong so many times that I now enter positions the same way a kid lights an M80 with a short fuse.  Very carefully.  I’m thankful for this.  The feeling of half-expecting it to blow up in my face is what keeps my risk management sharp.    Today was one of those days where dealing with the market like live explosives with a short fuse paid off.  The trade I planned for did a u-turn on me and I had to adjust on the fly.

Here is the scenario I had planned for:

If you could have heard my inner monologue today you would have thought the world was coming to an end.  I had visions of the apocalypse dancing in my head.  Just look at this beautiful pattern with relentless selling from opening bell to the close.

Here was the backup plan:

Morning bear trap reversal?  Are you kidding me?  Boring.  I wanted blood.

Here’s how the day actually went down:

There was absolutely no way to know which scenario was going to play out.  Both patterns signaled a weak opening so as the market dropped early I was preparing for a washout, but I also had one eye on the possible reversal.  At 10AM I had to force myself to do an about-face (I posted this in real-time for those interested).  We designed our system to be very simple and intuitive.  While the math that goes into making the little blue line might be insanely complicated, the line itself is a simple and elegant expression of market probabilities.  Making decisions in this system is sort of like a Choose Your Own Adventure novel.   If you look at the two algo curves you can see that your first decision is on the opening.  The next decision point is 10AM (on the ISM non-mfg release).  If you’re short off the open, you should be stopping out after 10AM.  If you’re flat, you can consider going long after 10AM.  If you’re long off the open, you can’t follow a simple blue line very well and you may also have trouble tying your shoelaces (or you’re trading on another timeframe).  At 10AM the market told me I was wrong to be bearish and it was time to start leaning the other way.

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