{"id":10405,"date":"2011-03-15T11:45:20","date_gmt":"2011-03-15T15:45:20","guid":{"rendered":"http:\/\/www.smbtraining.com\/blog\/?p=10405"},"modified":"2023-04-25T13:09:37","modified_gmt":"2023-04-25T17:09:37","slug":"extraordinary-situation-ordinary-trade","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/extraordinary-situation-ordinary-trade","title":{"rendered":"Extraordinary Situation; Ordinary Trade."},"content":{"rendered":"<p>In <a href=\"https:\/\/www.smbtraining.com\/blog\/market-reactions-to-acts-of-god\">yesterday&#8217;s post<\/a>, I made a case for a bounce play in the Japanese stock market. Last night&#8217;s extreme move makes this call look kind of silly in retrospect, but I want to highlight some important points and lessons here.<\/p>\n<p>First of all, this really highlights the difference between &#8220;armchair quarterbacking&#8221; or &#8220;time machine trading&#8221; (as we like to call it on the trading desk!) and actually executing in real time. Anyone can pull up the chart after the trade is over and say you &#8220;coulda, woulda, shoulda done XYZ&#8221;, but the best we can do in real time is identify good risk\/reward opportunities, execute the trade, and then manage the risk. When we trade, we make our decisions based on what is &#8220;normal&#8221; or what usually happens (not exactly, sometimes we may play for a low probability play that has a high potential payoff, but the concept is sound). This move in the Nikkei is literally unprecedented in the entire history of major equity markets, so there is no shame in taking a loss on a trade like this.<\/p>\n<p>There are two places, in my opinion, a serious problem can emerge. One is position sizing. Yesterday, I wrote: &#8220;Lastly, I would suggest you spend a lot of time thinking about how a trade like this might play out. Perhaps the disaster is worse than expected and the market drops much faster and further than expected. In this case, you take a loss on the trade, but it was a &#8220;normal&#8221; size loss and well-calculated. Fine, we lose on about half our trades anyway, so this is no problem. &#8221; When I wrote that, I honestly thought there was less than a 10% chance of a much larger drop, but the possibility was there. If you are a trader who scales into positions, this is a possibility for position management that we don&#8217;t discuss very often. If you hold a partial position, you can elect not to add the remainder, give the trade a larger stop, and still take a no-larger-than-anticipated loss on the trade. This technique should be reserved for those rare situations (less than 1 out of 100 trades I would say) where a market is more volatile than you had anticipated and you decide it needs more room, and the key is that you must be able to limit the loss to your initially planned loss.<\/p>\n<p>The second problem emerges if you don&#8217;t execute at your stop price. Why might this happen? Newer traders will often see a stock get to your stop price and then decide to &#8220;give it a little more room&#8221; or &#8220;just wait a minute and see what happens&#8221; or &#8220;decide to get out when it comes back above my stop&#8221;. I can tell you where this road leads \u2013 to a blown out account! (Think about the difference between this scenario and the one I outlined in the previous paragraph. The key is the actual size of the dollar loss on the trade.) It is also possible, in futures, to be locked into a limit move against you. Nikkei futures did lock limit down last night, and I made sure beforehand that my stop level was in front of that lock limit price. If you are moving to futures from stocks you will probably make this mistake at some point in your career. I know I did once and I can tell you it was painful enough that you&#8217;ll make this mistake <em>exactly once<\/em>. Another thing to consider is that many people like to trade ETFs. If you&#8217;re holding GLD, SLV, USO, UNG, EWZ, UUP or whatever overnight, think about the consequences of having 8 hour access to what are, essentially, 24 hour markets. Look at the chart below. The ETF trader had to deal with nasty overnight gaps which where mostly filled in (with the exception of the weekend) for the futures trader. Over the course of a career, these things can add up to a big difference in the bottom line.<\/p>\n<p>So, yes, this was a losing trade, but proper position sizing and risk management is key. Not to downplay the enormity of the tragedy unfolding in Japan, but, even in this most extraordinary situation, if you manage your risk correctly a losing trade is simply business as usual. Extraordinary situation. Ordinary trade. That&#8217;s not a bad goal, actually\u2026<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/www.smbtraining.com\/blog\/wp-content\/uploads\/2011\/03\/031511_1541_Extraordina1.jpg\" alt=\"\" width=\"545\" height=\"406\" \/><\/p>\n<p><a href=\"http:\/\/www.twitter.com\/AdamG_SMB\"><img decoding=\"async\" src=\"http:\/\/twitter-badges.s3.amazonaws.com\/follow_me-c.png\" alt=\"Follow AdamG_SMB on Twitter\" \/><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In yesterday&#8217;s post, I made a case for a bounce play in the Japanese stock market. Last night&#8217;s extreme move makes this call look kind of silly in retrospect, but I want to highlight some important points and lessons here. First of all, this really highlights the difference between &#8220;armchair quarterbacking&#8221; or &#8220;time machine trading&#8221; (as we like to call &#8230; <a href=\"https:\/\/www.smbtraining.com\/blog\/extraordinary-situation-ordinary-trade\" class=\"more-link\">Read More<\/a><\/p>\n","protected":false},"author":388,"featured_media":10404,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[943,3],"tags":[321,361,188,637,303],"class_list":["post-10405","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-adam-grimess-blogs","category-technical_plays","tag-bounce","tag-fade","tag-risk","tag-stop","tag-stop-loss"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.1.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Extraordinary Situation; Ordinary Trade. | SMB Training<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.smbtraining.com\/blog\/extraordinary-situation-ordinary-trade\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Extraordinary Situation; Ordinary Trade. | SMB Training\" \/>\n<meta property=\"og:description\" content=\"In yesterday&#8217;s post, I made a case for a bounce play in the Japanese stock market. Last night&#8217;s extreme move makes this call look kind of silly in retrospect, but I want to highlight some important points and lessons here. First of all, this really highlights the difference between &#8220;armchair quarterbacking&#8221; or &#8220;time machine trading&#8221; (as we like to call ... 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