Yesterday morning, I was really pleased at the ease and profitability of my overnight short position.
This morning, I would have been pleased at the ease and profitability of my overnight long position, had it not been for a simple, stupid mistake on my part. To explain………
As I've pointed out, over the past few days we seem to be bouncing between about 670 and 690 on the /ES. Late yesterday, as the /ES was hovering around 672, I bought 10 contracts (indicated by the arrow). It inched a little higher, so I bought 10 more. It inched higher still, and I bought 8 more. So I was long 28 /ES in a market that was, 0.25 by 0.25, creeping higher.
Once it got to 680, the position was up about $5,000, and I started to wonder how successful the market would be in pushing through all the cruft in the 680-690 range. My stop had originally been set to 671.75, but I tightened it up to 676.75. At the time, my reasoning for this was (a) the market was slowly creeping higher, so a sudden move was unlikely (b) I wanted to protect my profits.
There was a fatal flaw in this decision, though, and it was this: there was no technical basis for changing the stop. The "support" at the 677 level was barely a few ticks! If the market had been trading there for two hours, sure, there might be a good reason. But the stop price was practically arbitrary. The only appropriate stop was the one I had already set, at 671.75, which was below a meaningful low.
Well, you already know what happened (see the tinted area above). The /ES swiftly made a quick dip, blew me out of the position for a minuscule profit, and then flipped around and resumed course. As of this writing, the /ES was up 13 points. The bottom line is that I made $1,000 on a position which, were it not for my error, would have yielded about $18,000 in profits.
Stops are not just important in my trading – – they are an absolute requirement. But "protecting" your profits with an unnecessarily tight stop can sometimes have the opposite effect of blowing up profits that are apt to materialize.
