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Minyan Mailbag: Give and Take!


Emotion is the enemy while trading.


The following real-time exchange took place between Minyan Stephen and I. We share it for the benefit of ye faithful should anyone have similar questions about trading approach or risk management. His thoughts are italicized and my responses follow each of his questions.

Minyan Stephen: Hey man, I know you're busy and people are probably pulling you in all sorts of directions, but I'm wondering if I can pick your brain about managing trades. I apologize in advance on the length of this message; if you don't care to answer, don't feel obligated.

My friend, if this were an obligation, I would have stopped responding to emails long ago! Minyanville is a labor of love and if there weren't folks like you and questions like this, there wouldn't be a reason for us to come to work each day. Fire away!

MS: Basically, I'm wondering if you have any guidelines, or could point me to where I could learn some, for managing financial risk while giving a trade time to work.

You mean, other than the Ten Trading Commandments?

MS: Let's use your short position in the NASDAQ as an example. When you wrote about that trade, you first mentioned a one percent risk and then later two percent risk. So your trade started to work. Did you continue to risk the same amount of money? Did you tighten your stops (so you scratch the trade or lock in a small profit)? As you know all too well, the Fed could come out with a statement that sends the market soaring, only to have it reverse later in the day.

This is subjective, fluid and dynamic and as my friend Jeff Saut likes to say, "Where you stand is a function of where you sit." As I touched on yesterday, there were four alternative paths for the trade you referenced:

  • Continue to operate with the game plan in place (keeping the stop on my remaining exposure is 2% above where I initiated my risk).

  • Roll my stop down to NDX 1600 (2% below where I initiated my risk), which would set up the trade 'for a credit' (guaranteed profit with much tighter risk parameters).

  • Use NDX 1600 as a partial stop on an additional 25% of my exposure (on top of the 25% I covered into Tuesday's decline), leaving 50% of my risk with the original stop, essentially setting up a "push" as my worst-case scenario.

  • "Hit it to quit it," cut bait on the entire bet and humbly pocket 2%.

MS: I shared your recent view on the market and started trading the mini S&P from the short side last week, making a few bucks along the way. I used those proceeds to finance a Sept. 950 put purchase, which I'll conceivably hold to expiration. For now, here I sit with the market starting to move and my put collecting dust.

Again, to each their own but with my money, I hate front-month paper. One of the most important lessons I ever learned in my almost 20-year career is to sync your time horizon with your risk profile. I almost never purchase front-month paper unless there's an embedded catalyst (which is likely reflected by an inflated volatility).

With the VXO trading in the low 20's, it's my view that time is on your side by elongating your time horizon. That doesn't mean you have to hold your paper until expiration, it simply removes the dreaded gun-to-head syndrome.

MS: In my case, I tend to enter the market early and allow myself to get beaten up needlessly before throwing in the towel just before the train leaves the station. And I'd like to learn how to eliminate emotions while being willing to stomach reasonable risk.

You're early? You're preaching to the Pope, my friend! As any Old School Minyan can tell you, I'm always early, particularly around cusps. That was the case into all-time highs in the financials, preceding the top tick for the tape, with regard to the invisible hand, before the Bear Stearns bounce, into the crude top, prior to last summer's low, in front of the massive melt last September, fronting the March low, and so on and so on and so on.

Emotion is the enemy while trading
, we know, but to your specific point, it could simply be a function of sizing. Often times, if you initiate too much risk at once, you're not able to "sell up" or "buy down," also known as "trading around" a position. The best insight I can offer is to define a strategy before you step on the field and allow a margin for error. There will always be overnight gap risk but absent flattening your pad at the end of the day, that's unavoidable.

MS: Any light you could shed on this would be much appreciated.

White light right back, my friend!

MS: Oh, and I see you've made some more changes to the site. Looks good. Here's a suggestion: how about a recommended financial book list, maybe even book reviews? Or is that too old school?

Nah man, we're all about the old school in these parts. We did that a few years ago and we'll dust it off for you here and here. There's nothing like holding a good book in your hands and with all due respect to the digital media revolution, that creature comfort will never go away (it'll simply become a degree of rarity).

MS: Finally, I'll try to send a photographer to that fundraiser you're involved in next week-I might even send myself as I'm on call that weekend (I work for a small, shop; some days I even take out the garbage!) Have your friend contact me and we'll try to get an advance in the paper next week.

I took out the garbage too-heck, I even made salads! There's absolutely no shame in an honest, hard days work. And, I didn't even know there was a 'give' involved in this email until now. Sweet, I'll surely forward your information to my buddy who is running the event.

And, while we're on the important stuff, don't forget to circle Friday, December 4th for our annual Festivus to benefit The Ruby Peck Foundation for Children's Education!

MS: Regards and keep up the good work, Minyan Stephen

Thank you sir. Kind regards right back atcha and thanks for the grist!


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