All traders must figure out the style of trading that best suits them in order to survive and profit in the markets. I quickly discovered that my style was best suited for placing leveraged intraday bets on the S&P via options. When I would describe this to other traders they would look at me and derisively say, “oh, so you’re just a day trader.” This absolutely infuriated me at first, but then I came to not only be ok with this label but actually embrace it. Why? Simply, I find that my safety is my trigger finger.
One of the most important facets of trading is to manage risk. Traditional risk managers will speak ad nauseam about beta weighting, hedging, implied volatility, and other mind numbing garbage. Bottom line, if risk managers knew what they were talking about, funds wouldn’t blow up. But funds do blow up, so we must look at other ways of managing risk. Very simply, I believe that any exposure to the market is risky; therefore minimizing the time exposed in a trade is the same as minimizing risk.
Yesterday, I posted my Theory of Time and Price. Simply it states that price movements in the market are now happening in decreasing periods of time. This is fundamentally tied to my belief on risk management. Here is my point. If a trader can capture 10 to 15 points in one day in the S&P there is a significant risk to carrying the position overnight. We are taught to cut losses short. However, the market has to be OPEN for us to exit a trade. Therefore the corollary is very simple. If the market provides large intraday moves, a trader can capture these moves and nullify risk by going to cash while the market is closed. My risk management is my trigger finger; I cut losses, but I need the market to be open to do so.
Above is a perfect example of what I am talking about. How many traders have experienced the thrill of the closing bell sounding while sitting on a huge profit and then seen the overnight action absolutely destroy their position. There is no way to take the profit, or worse, stop the profit from turning into a loss WHEN THE MARKET IS CLOSED. The above example shows a 20 point range in the S&P or a two point range in SPY. Plenty of profits can be booked in that intraday range. Now for our bullish friends:
Same exact occurrence. Bulls went to sleep on a beautiful mattress of support only to wake up and see that the entire floor had collapsed. Profits instantly turned to massive losses.
Since markets now make price moves that used to take weeks or months in the matter of a day, why not embrace this and cash out at the end of day? One way to minimizing the risk of losing money is to not be in any trades. Our current environment is wrought with uncertainty. While the markets are closed rouge announcements from the world’s central bankers hit, nation default rumors arise, traders in Asia and Europe pound away, major corporations announce scandals, etc. Simply, when the markets are closed, no trader has any control over their trades. And CONTROL over a trade is the best form of risk management. Therefore, my safety is my trigger finger.