I have been trading equities and equity options for a while. I never had any clear strategy about when to enter and when to exit a trade. It was mostly driven be emotions. And I have lost quite a bit of my hard earned money doing that. A large number of my trades have been on the long side, and since I never had a good exit strategy I have hardly ever grabbed serious profit from any single trade, although there was a lot on the table at one time or another.
Recently I have been trying to find a reasonably reliable trading system. It is not supposed to be perfect, but good enough to protect my profits and exit the trade if it goes sour. After skimming a few books, which were recommended by Barry Ritholtz in his 'Apprenticed Investor' series, and scouring the web, I settled on MACD, with EMA(12) crossing over EMA(26). And I picked Ultrashort S&P500 as the ETF to apply it on, since I believe S&P500 will see at least 1000 mark, if not lower, before we hit the bottom in US equities. Why I believe so is quite simple - the S&P500 earning estimates have been coming down and the current estimates are around $60., which makes the current forward P/E multiple 20.7. For a bear market this is a very high multiple and from what I have read till now, bear markets end when multiples reach around 13-15. With multiple of 15 and earnings estimates of $60, the index comes out to be 900, which is 27% below where the index is today. I expect quite a wild ride ahead.
Anyhow, I entered the trade at $66.35 and set a stop at $64. The price jumped around for a couple of days and then penetrated $64 stopping me out. I put a re-entry order at $64 after waiting for 3 days, which never executed and today it zoomed up and is currently at $69.50. Now the question is what do I do now, should I wait for a pullback or enter here? I don't know. If you are reading this post by any chance, and have a reasonable answer, please drop me a msg.
Post-Trade Analysis: It is too early to tell if I am right in believing where S&P500 is headed, but in a very short term I think I was dead on. My mistake was not properly measuring the stop. Picking just a number was quite a dumb thing to do. I have just discovered a stop calculating method called ATR (Average True Range), which takes the max of 3 ranges - day's low to high range, previous low to day's close range and previous high to day's close range, and then takes average of 10 or 14 days. One recommended strategy is to use 4*ATR(10), which seems reasonable.
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