Trading the Indices on Fundamentals

[NotKnown]

The DAX started to turn over but was again pulled back to my mid. Often happens. Not much of interest happening on the daily but thought I would post the DAX and DJI just to see the comparison. If another major down leg starts, they will all look more or less the same in terms of price action.

Bwick: Reading 54 pages is a fair effort.

 

[Bwick]

54 pages on this forum, not sure if over a thousand posts on w-pool, but over the two threads, FX's trading indices on fundamentals, and the day trading thread, there were plenty.

After sitting on the side lines for the past 5 years, It was speed reading to get up to speed.

The hedging strategies both you and FX use caught my attention. I've previously made attempts at holding two opposing positions, I felt there was something in it after death by a thousand stops, but by no means was able to master it. After reading yourself and FX defend the strategy with vigour I was keen to learn more.

 

[NotKnown]

I was keen to learn more

Ask any question.

For me, you have to be careful hedging short positions as markets tend to rise over time. The way I use it is if I go long and it turns against me, I may take out a hedge waiting for another long signal. When I do get another long, I might take that as well and then close the short as the market starts to move up. When the overall position is in the green ie they two long and maybe a short, I will close all of them. I treat it as if it is one trade with sub parts.

 

[Bwick]

Thanks Notknown. I understand, it's the minor details that i'm trying to work through.

Just as a back ground, I've been in/out of the market for past 10 years in various forms, pennies, share CFD's, got caught in trading halts, dividends etc so then gravitated to indices for intraday moves. Blew up the odd account or two, have had a 5 year lay off, now home quarantine, timed with the volatility has me back in the drivers seat.

Before we get into the hedge strategy, based on your years experience on the DAX, could you help me get a feel for what a profitable trader's strategy look like.

Take for example intraday trading the DAX, what would you advise as ball park figures to try and build my strategy around?

1) Stop loss from entry
2) Average Time in a trade
3) What % of entries do go in the negative, don't hit the stop and end up being profitable. ( I keep playing the "never let a winning trade turn red" getting 6 points up, then getting out at break even, only to see my analysis play out with no profit!
4) Profit targets in points
5) Amount of trades per session.

"For me, you have to be careful hedging short positions as markets tend to rise over time. The way I use it is if I go long and it turns against me, I may take out a hedge waiting for another long signal."

How far away from entry are we talking? The larger the gap between entry and hedge, the more difficult it will be to make up these points when unwinding the hedges and positions. If it's too close, then you end up with the hedge getting hit on every other trade?

When I do get another long, I might take that as well and then close the short as the market starts to move up. When the overall position is in the green ie they two long and maybe a short, I will close all of them. I treat it as if it is one trade with sub parts.
How long on average do you normally have to ride this out with the hedge in place. 10 minutes? 1 hour? Ideally you have to be pretty sure of the second long, so that signal might take some time to arise.
I could see myself taking a 2nd long, to only have this turn into a losing trade also. If one can be wrong once, one can be wrong twice can they not?

I can see it getting equally problematic as in one example today, price went back and forth over the hedge/stoploss level multiple times. So in reality, i'd be seeing both in the red, one green, then both in the red, one green..etc etc.

 

[FXtrader8911]

Fri was a bombshell day, price action wasn't too far outside the recent volatility but the news was dramatic. When Trump wanted to start re-opening the economy on Easter, Medics & State Governors were shouting lunatic but now, just a few days later, the same call was endorsed by the previous opponents... this is the bombshell that changes the outlook of what markets may do. Starting to reopen the economy from now greatly reduces the previously anticipated damage to the economy, it might even more than halve the 20m unemployment figure as most businesses will be able to re-start not far from where they closed a month ago and rehire the laid-off workers. The wild card is what this does to the infection rate, but if it does not increase with the measures proposed by the medics, then indeed the economy and markets have a good prospect to recover fully by the end of 2020.

It must be noted that this is an "experiment" that could go either way, however, if the medics are on-board then the odds are stacked in favour of recovery much sooner than was previously anticipated.

What does all this mean to the investor? It means it's back to the drawing board to adjust the strategy. If re-opening business without a resurgence of infections, forward guidance will be able to be given with Q1 reporting and the "E" of the PE will again be able to be calculated.

My view is that guidance will show a drop in expected earning for Q2, perhaps by 20% to 30%, this will cause an initial sell-off from current levels but a recovery to above current levels by June/July is likely (I previously expected lows to be in June, I now think May will see lows that will be elevated from the March lows).

All eyes will be on Germany who is re-opening its economy on Monday, if that works, I think the US will follow within days.

the DAX and DJI just to see the comparison. If another major down leg starts, they will all look more or less the same in terms of price action.

Just to add to this comment... despite experts & analysts dissecting individual county's efforts in virus control, and even the IMF's country-specific GDP predictions, all major markets were surprisingly correlated over the last month... In essence, what the US markets did so did other markets.

General observation:
Although business will start to function again, social distancing will remain with us for some time yet. Environments and real estate usage will change, maybe forever, the cost of doing business will increase, perhaps an unintended outcome of the virus will be an increasing inflation rate. Changing environments and changed human behaviours will become a new normal.

 

[NotKnown]

intraday trading the DAX

ok

1) Stop loss from entry
2) Average Time in a trade
3) What % of entries do go in the negative, don't hit the stop and end up being profitable. ( I keep playing the "never let a winning trade turn red" getting 6 points up, then getting out at break even, only to see my analysis play out with no profit!
4) Profit targets in points
5) Amount of trades per session.

1. I do not use them. I take a different view on such things. It is better to manage your drawdown hence the need to hedge.
2. Depends on time frame and volatility
3. Hard one to answer because it depends where and when it goes negative. If you are in low volatility it might be best just to ride it out or take a small loss. Low volatility and hedging is not a good idea.
4. I moved from fixed points to probable targets so it varies. In this environment there have been some large trades.
5. That depends on time frame and which market. If you trade 2 min charts there can be many but if you trade 1 hr charts there maybe just a couple. For me, the ASX can be between 1-4 anything outside of that means it is too choppy. DAX more or less the same maybe between 1-6. You have to be able to spot the choppy crap. No point being in that. I tend to trade 10 min charts but can switch depending on volatility. My system is more or less time frame independent hence I can look at a daily the same way as a 10 min chart.

I would not worry about hedging yet as that comes with experience on where and when to use them. Account management is so important. You need to be able to plug a hole when one develops.

In terms of how long to hold a trade? That depends on targets or if something does not go as expected. On a slow day it might take 1/2 a day to hit a target while on fast days it could be hit in 5 mins. Just depends. Having said that, you also have to be aware if your target is not going to be hit and you need a way to measure that. Likewise, you also need a way of holding the trade until a level is hit. This is not an easy thing to do and takes a while to know the difference to some degree of certainty. I have my method but there are a number of ways to do such things.

Using a hedge takes experience so you have to be careful. Look to see what the daily is doing and is it better to just ride it out and look for a possible double up or should I hedge myself. It also depends on the day of the week. If I am caught with a trade on late Friday and looks as though it is going to be a weekender, it might be wise to hedge that trade. You have to have a global look as to what the market is doing. This helps with your intra day decisions. Most major markets follow each other though intraday there might be some differences. You can see that in the charts I posted above.

I think the thing I have learnt doing this for so many years is be adaptive and trade the current climate. Having a good reliable tool set is also useful.

If you want, you can PM me your current strategy and I can have a look as to my thoughts on it and I can give you some feed back. Remember trading is a very individual thing. I can tell you what I do and you may not achieve the same results. Why? Because we all have different emotions and emotions effect our decisions.

 

[Bwick]

That would be most welcome Notknown.

I'll put something together and send it through. Thank you.

@FXtrader8911 Not sure if you saw the last post on page 54? I've been catching up on the, to put it in crude terms, "hedge longs and buy the dip" strategy over last few years of posts. With the level of honesty, analysis, detail and live calls your threads provided a unique opportunity to study.

I do note you were accutaley aware of the imminent corona correction and called it, even positioned for it prior.

I recall a previous correction where you regrettably cashed in hedges too early. How have you fared trading through this one? Don't need to provide specifics, good, bad, better, worse than a normal month will suffice.


After suffering prior draw downs myself due to letting losses ride, averaging down etc., against my own better judgement, (i was making trading decisions in a partnership which i strongly advise against!,) account preservation is high on my list as I re-enter the arena.

So I'm very interested to follow your trading through this correction and on the other side.

 

[FXtrader8911]

I've previously made attempts at holding two opposing positions, I felt there was something in it after death by a thousand stops, but by no means was able to master it

The first rule of hedging is that the hedge needs to have a purpose and an exit strategy, particularly if the hedge is a short... if things, after a small set-back, eventually go in your expected way then you are likely to double your profit by using a hedge rather than taking a loss had you used a stop, however, the primary objective of the hedge must always be to protect capital rather than making profit. I will put a trailing stop on the hedge (no stop on the original position).

If things go my way in a straight line then I don't hedge, if things temporarily go against me then I hedge with a trailing stop, this way I'm likely to make a profit on the hedge (using the trailing stop) as well as reaching the profit objective of the original position. If my view was totally wrong then can, at anytime, either marry the 2 positions or if clarity emerges down the line then double-up on the original position. The hedge needs to be used as a disposable capital-protection tool, not a trade in itself. In essence, hedging gives a double bite of the apple... if the apple turns into a pear then marry the 2 and move on (or scale to recover), but if the pear again turs to an apple then take the 2nd bite and profit twice.

 

[FXtrader8911]

I do note you were accutaley aware of the imminent corona correction and called it, even positioned for it prior.

I recall a previous correction where you regrettably cashed in hedges too early. How have you fared trading through this one? Don't need to provide specifics, good, bad, better, worse than a normal month will suffice.

Indeed, I was positioned for sell-off even before the virus, after the virus I added to the positions, made close to 7 fig profit from it, but then I screwed up by going short a 2nd time during the DOW's >2,000pt reversal (Read the post a few posts up from here). I expected the economic shutdown to last 3 months or more, long enough to cause serious economic damage that would send markets to beyond the March lows when the stimulus euphoria evaporated, but now it looks like the shutdown will end within days from now, if so and if it works, my shorts will lose money. I still think a "W" recovery will happen but do believe the March lows won't be revisited. I am hedged with longs but I entered these some 2,000 DOW pts away from the shorts so unless the leg of the W sell-off is over 3,500pts, I will lose up to half of what I made on the way down.

As for the previous instance were I unhedged too soon, it was one of those market traps were I waited and waited and waited for my view to materialize. At that time I used the VIX as a hedge, it was costing me $20k a month to roll-over so I closed the hedge off at small profit (after costs), as destiny goes, within 2 weeks my view materialized so I got caught out. It happens but it also taught me not to use the VIX for long term insurance and also to remain convicted to my views unless circumstance change.

 

[Bwick]

What are you preferring to use as the long term hedges these days?