A Nice One-Day Trade

In this market, it is easy to get discouraged. You may have a string of bad
trades, and a significant drawdown to go with it. The desire “to get it all
back” is usually strong and WRONG. These are the times when you should be
reducing risk exposure not increasing it.

Keep in mind that the market is more volatile now, so if your take on
position sizes that are the same as they were a month ago, you are actually
fooling yourself. Those positions carry about 2-3 times more risk now because of
the increase in volatility in the markets.

Your position sizes should be at least halved and that is if you have the
same amount of money in your account.

It is also difficult for some people to pull the trigger in this environment
because so many trades may have gone bad recently, and it is easy to lose
confidence. Keep in mind that if you have a well developed trading plan and
strategy that it will not work 100% of the time. It is your job to reduce risk
and stay in the markets even your plan/program is having a set-back. You must
trade small and just try and get black ink in your account again.

In light of that, I want to share a great trade of mine. One that really
worked well. After all, with all of the negativity around us right now it’s
important to look back on some great trades to remember that they do happen. All
you have to do is control your risk so that you are still in the markets when
these trades show up again. They always do.

Here is a trade I took on IDCC on 4/26/06. It had all of the features that I
look for in a good set-up. I essentially found this trade as an “R5” which is
one of the systems developed by TradingMarkets. I have a few tweaks of my own,
but they are pointless (they just help me filter some stocks so that I don’t
have too many set-ups at certain times). The key here is that this stock had
pulled back for 5 days consistently with no let-up, it’s a trending stock as you
can see by the ADX being above 30. But what made it really nice is that you got
in and out so quickly which reduced exposure, freed capital quickly, and it was
a large move. I entered at 22.45 on 5/26/06 and got out at 27 on 5/27/06. One
day, 5 points, 20% in the stock. I trade primarily with deep in the money
options; therefore I was carrying the April 17.5 calls that cost 5.00 (or $500
per contract). Each of these contracts doubled in 1 day.

It’s trades like this that make trading fun.