We made several trades, which will term 'good', this past week. One being our short GBPUSD trade (to the pip). Of course we don't publish all our trades; time is better spent managing our books and generating new ideas as the markets move with great velocity. We've had our hands totally full this week but we wanted to give readers a glimpse of how we managed to bag one of our largest winners on the SPX (S&P 500 stock index) despite the highly volatile environment.
Before we continue, it is important that you understand all of the trading content we put out on these pages are real trades on a real account that we trade ourselves. We're using real capital and trading live prices. You can find out more about our trading system here. You can also view our entire trading journal here. In publishing such articles, we want to help traders from all walks of life better understand how successful traders approach the markets, and translate ideas into actions.
Continuing on, readers and followers must get where we're heading when we say everything has to be placed in context for long term consistency. Regulars will know we've been bearish equities in general since the start of 2016, that's for about 3 weeks. For reference, read about our views and ideas here, here, and mostly recently here.
We approach the markets with trade ideas which have been systematically generated and evaluated before we actually execute them. This process has gradually seen success, especially during episodes like the current one. Smart traders don't eschew the fundamentals when the sirens are ringing.
That being said, our path of action in reflecting our bearish view on risk was to gain a direct short exposure on equities. We wanted to achieve this at a tactical juncture when we were able to minimize drawdown, contain the risk of volatility cutting in the opposite direction, and maximizing our potential returns.
The SPX was our prime candidate: Price action was favorable, liquidity was present almost 24 hours a day (the contract we traded was based on the front-month S&P 500 index future), U.S. equity markets were still one of the most overpriced (relative to value) amongst DMs, plus other factors of less weighting.
On the 19th this week, we shorted SPX via a sell limit order we had previously set at 1907. As can be seen from the series of charts we've included, the maximum drawdown on this position was about 7 points 0.367%, well within our risk parameters originally set. SPX began to sell off precipitously but remained orderly. That was what we wanted to see, a linear decline and not a climatic capitation we usually see during bouts of mass margin calls.
Once again, subscribers to our Premium Signals Service were kept updated in real time on all of our positions and had exclusive first hand insight to our trading activity as it unfolded. Many of them were short SPX with us and made a good amount of profits. Congrats to those that did!
Our initial target was for 1834, and that came 1 point into reach on Wednesday morning. Yes, SPX printed an intraday low of 1835 on Wednesday morning during the Asian/European session. The hourly chart (top pane) clearly shows the bounce of about 22 points to 1857 at 1835 (initial target).
Were we disappointed that the market 'missed' our objective by a single point? You bet. But how did we counter that? 2 courses of action. The first was to trail our stop down to 1870, ensuring that we would at least walk away with 37 points should SPX rally hard. The second was to lower our take profit buy limit order to exactly 1820.
It does seem counter intuitive to why we would lower and not raise our objective when the market missed our first target by a single point. Well, it actually made all the sense in the world once the risks and potential rewards of that action were reviewed. We also had another additional tool in our arsenal when we made the decision to lower our target - the day's price action.
The bounce from the intraday low did little to alter the structural bearish bias price action was indicating to us. In fact, had we been more aggressive on our posture, we would have added a secondary short position inside of that minor bounce, which in hindsight was but a pullback.
Since 1835 was pretty much the 2015 August's 'Black Monday' lows, we were expecting a breach of that level if and when SPX re-attacks it. A couple of hours later, precisely that happened. 1835 was cleared, 1830 like hot knife through butter, 1825 presented some resistance but never had a chance. Then came 1820 in a matter of minutes. And we were out.
SPX went 10 points below our 1820 final objective before reversing sharply for the rest of the U.S. session, spilling over to Asia and Europe, in what we believe was mainly due to the sudden disappearance or lessening of technical correlation selling by momentum and volatility strategies.
The key takeaway for traders is to always understand your personal and unique risk profile, and set in mind an objective for every trade you make. Not know either is trading naked, and setting yourself up for lingering trouble.
All in all, an excellent trade on our part. We're happy with the risk and money management we exercised, and also how we dynamically readjusted trade parameters in light of new circumstances and information.
Again, if you wish to profit along side us and receive many more of such trades on a daily basis with no lag, join us as a Premium Subscribers by clicking the button below. We await you aboard.