Are You Held Prisoner By Risk?
Stock
index futures opened Tuesday’s session with an upside gap after
positive earnings news and the strongest Retail Sales report in over a year.Â
The euphoria was short-lived, though, as the futures faded the initial TICK move
up and the gap-and-trap players wasted no time in putting on the pressure.
Small-caps, as measured by the Russell 2000, took the worst of it throughout the
session. A late round of position-squaring ahead of Intel’s earnings report
helped to pare some of the bleeding.
The June SP
500 futures closed Tuesday’s session with a loss of -15.75 points, and finished
right off the lows of the expanded daily range. Volume in the ES was estimated
at 828,000 contracts, which was over twice Monday’s anemic volume and above the
daily average. Looking at the daily chart, the ES broke the recent range off of
Monday’s NR7 as 1150 remains the line in the sand. The contract posted a
bullish engulfing line and broke its 50-day MA to settle just above its 38% Fib
retracement of the recent up move.
June bonds
(ZB) broke to a 3-month low as the 10-yr yield broke through resistance to a
3-month high and inches closer to the 4.5% area.Â
The Banking
Index (BKX) may be offering a prelude of bank earnings to come as it broke back
through the neckline of its daily Head-and-Shoulders pattern, and settled just
above its 100-day MA
Intel was
able to squeak out a small gain before its earnings report, but after the
company reported that it had missed revenue estimates and confused the world
with its bottom line number, the stock was having a “bad hair” after-hours
session, and putting some additional heat on stock futures. Wednesday morning
offers more economic data including the March CPI at 8:30 ET, with an estimate
for a 0.3% increase, before the schedule really picks up on Thursday and
Friday. On the earnings front, we have a pre-market earnings report from BAC,
followed by AMD, AAPL, RMBS, SNDK, and TXN after the closing bell.
Is Risk a Positive For You, or Are You Held
Prisoner By It?
Many traders will differ in their appetite
for risk. With regards to volatility, many times, the greater the risk point,
the better the trade seems to be. An active, swinging market has more to offer
than a narrow, quiet one. If there’s a positive expectation for a trade, then
the risk should be quantified and assumed. A positive expectation is not based
on a win/loss ratio. You could risk 3 ATRs to make 1 ATR and win 66% of the
time, but still come out a loser. Once you’ve quantified the risk, then you
have to become consistent in your approach. There are more “outlying” events
than most people and models can take into effect. Much risk-taking rests on
opportunities that develop from deviations from the norm, or market
inefficiencies.
Risk can be controlled by the amount of time spent in the
market. The shorter the time in the market, the less the risk. We want to
maximize the areas where we have control over risk, and minimize the areas where
we don’t. We can control leverage, time exposure, and fixed stops. We can’t
control factors such as volatility, overnight events, and liquidity. One of the
keys to good money management is the degree of leverage used. In other words,
we manage our risk with the size of the position. The majority of the “big
problems” come from situations where too much leverage was used. When managing
a trade, take off a piece and “push” the other piece. Always think about
putting yourself in a win-win situation. Taking some type of action will do
this because complacency is our worst enemy.Â
Becoming profitable isn’t really winning the real game.Â
The real game is the mental side of this business. This is the game of
understanding risk, the importance of having and sticking to a game plan rather
than running from 1 method to another every other day, the important role that
patience plays as we wait for conditions to be right for entering a trade, and
the tremendous amount of mental fortitude it takes to endure the slow, boring
times. You must determine the overall market environment and whether it even
favors your play. It would be the same if you were going out fishing on the
ocean in a 20-foot boat, but there were 10-15 foot swells. Are those conditions
favorable for your fishing? Only if you want to risk getting your brains
scrambled or worse. It’s hard work to stay focused and push aside all the
distractions that try to come between you and success. Concentration, routine,
and ritual are the most powerful tools at our disposal to help ward off the
distractions, and help temper the emotions and anxieties that hinder good
performance. Obviously, being consistent is hard work, otherwise everyone would
be a winner in the markets and that’s certainly not the case.
Please feel free to email me with any questions
you might have and have a great trading day tomorrow!