During a good film session today with a senior trader I got to get a clear look at how quickly I lose control of my risk and put my trading day in complete jeopardy. The film was from Thursday of last week when I was daytrading SRS (the real-estate ultrashort ETF) actively. To give you an idea of how the stock trades, it probably finished the day up near 47 points with a high of $269.
I started trading the stock with 100 shares, which is fine considering the easy three-to-seven-point moves the stock will make according to decent future movement. At other points the stock will offer ten-point swings within minutes if the futures break a decent level of support or resistance and make a move to take out an existing high or low. So bidding or offering at good prices with consideration of levels that the stock is establishing during the trading day leaves way to highly profitable trades with small share size. But, with a stock with such volatility, doubling or tripling that share size and abandoning bidding for paying or offering for hitting bids quickly ups one’s risk considerably.
What is interesting about some points of my last thought are that those ideas apply across the board to just about all stocks. Therefore, the challenge in following those regimens for keeping one’s risk at bay are not based on a specific stock being traded, but rather the discipline involved in constantly executing solid trades over and over again. The senior trader who I was looking over my video with, and another guy who I know who day trades commodities, both speak of having a system that is applicable across the realm of “trading” and embodies all of the things done to consistently make solid trades.
One of the most important things mentioned in this system is being able to justify each and every move that is made from the beginning to the end of a trade. Today, I realized that I started trading with larger positions in SRS for no apparent good reason. The best excuse I had for a 300-share position that went against me was my feeling that more comfortable with the stock and some frustration from a couple of 100-share positions that did not work in my favor, though I had the right idea. While trading the stock I felt fine being able to work with triple my size in SRS. But on paper, I had not only tripled my risk, but due to a lack of bidding and offering maybe increased my risk at least nine-fold by taking from the market to get into those larger positions and reacting on a whim when I added the third (or fourth lot). What I was doing was making money with smaller size and less risk, and losing money with larger size and more risk. Now, I’m no genius (or it’s not documented yet), but I can guess that those are not any elements that help to build on a successful trading day, let alone a profitable week or month. And if you want to take a stab on how my day ended up, you would be right to guess that at some points I lost all of my profits.
My advice for learning how to manage your risk is not an option in the world of trading. What I thought was a misread or a dirty move by a stock was being compounded by my risky positions, leaving the fate of my trading day to something or someone completely out of my control. And in the end that is not trading. It’s guessing. And that does not make for consistent results which are the only thing that is going to keep you in this game.
Now, hopefully I can heed my own advice.
9 Comments on “Risk: SO Not Just A Game”
Can you explain a bit more what you mean by this:
“But, with a stock with such volatility, doubling or tripling that share size and abandoning bidding for paying or offering for hitting bids quickly ups one’s risk considerabily.”
I think I’d understand better if you could provide an example of how the mechanics of “bidding for paying” and “offering for hitting bids”
Great blog. Thanks for sharing the learning process from the perspective of a professional. Much appreciated.
Can you explain a bit more what you mean by this:
“But, with a stock with such volatility, doubling or tripling that share size and abandoning bidding for paying or offering for hitting bids quickly ups one’s risk considerabily.”
I think I’d understand better if you could provide an example of how the mechanics of “bidding for paying” and “offering for hitting bids”
Great blog. Thanks for sharing the learning process from the perspective of a professional. Much appreciated.
Hey. I’ll clarify that for you:
What I meant is that moving up to share sizes of 200 or 300 and also taking from the market (by paying and/or hitting (bids/offers))instead of providing liquidity by bidding and offering significantly increases my risk because then I am also losing the spread value of the stock. That spread can be near 75 cents on the high end because the stock moves so much. So before as I was bidding for my smaller size, getting hit and then managing my position in efforts to control my potential loss, my risk was low. When I started using more size I would get the extra lots by paying for them, immediately putting me out of the money if the momentum of the move is lost. That could easily be an extra 30 cents of risk just for paying for more size. That, compounded with the extra size quickly ups my risk exponentially, making my potential losing trades 4 times that of my winning trades.
Does that help?
Thanks, Mark. That helped a lot.
Thanks, Mark. That helped a lot.
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