Is Your Trade Management Active Or Passive?

April 7, 2004
Chris Curran

Stock index futures were
pressured at Tuesday’s open after a Q1 earnings and revenue warning from tech
giant Nokia. Also adding heat was the Challenger report that indicated that
corporate job cuts are subsiding, but companies are still reluctant to take on
new people. Daily pivot resistance capped the attempt to fill the opening gap
on the ES and after testing and holding S1 support 3 times, the session started
to look like a repeat of Monday. But, a break of the session high and a strong
close in bonds wasn’t enough to attract any new buyers, and the contract spent
the last hour chopping in a downside channel.

The June SP
500 futures closed Tuesdayâ€™s session with a loss of -3.50 points, and finished
right at the mid-point of the tight daily range. Volume in the ES was estimated
at 469,000 contracts, which was just under Monday’s anemic pace and well below
the daily average. Looking at the daily chart, the ES posted an inside market
structure high as well as a “NR7” day, so I’ll be looking for some range
expansion. I’m leaning to the short side unless we can get a close above
Monday’s high at 1149.50, which would set up a test of the March high.

On an
intraday basis, the broken 30-min uptrend line capped the upside while the
60-min uptrend line held as support.

June
bonds (ZB) posted a technical bounce with an inside market structure low and
settled right at 200-day MA resistance. The U.S. Dollar posted a market
structure high after testing the upper end of its 1-month trading range. The
Banking Index (BKX) extended Monday’s reversal off of MA support, but needs to
settle back above 102 to temper the near-term bearishness. The Semiconductor
Index (SOX) posted a market structure high just off of weekly resistance and
settled on its 100-day MA

The
futures were seeing some after-hours pressure after Alcoa’s earnings report
triggered some plain old “selling on the news.”

Is Your Trade Management Active or Passive?

Trade management is ACTIVE management. My stops fall into 3 main camps. The
1st type is the worst case scenario of the amount that I’m willing to risk. This
means that I want to use as wide a stop as possible so that the market can move
without hitting my stop. The 2nd type of stop is a technical one. It’s placed
where the market shouldn’t go. In other words, it’s placed at the point that my
original analysis would probably be proven wrong. Using the Average True Range
for the time period I’m trading is especially useful in setting a stop.
Money management decisions should be automatic
and mechanical. Don’t subject yourself to making risk judgements under
pressure. A person simply performs differently when under pressure. Once I
have a resting stop in, I like nothing better than to turn the trade over to the
“market gods.” It relieves the anxiety and I don’t feel compelled to watch each
and every tick. I can let the trade do its thing, and when I’m stopped out, I’m
normally glad that I was stopped. Sometimes, I find that by placing a resting
stop in the market, it allows me to stay with the trade a bit longer. Another
type of stop I use is a time stop. I give the trade a certain amount of time to
do its thing, and if it’s not working after that period of time, I start
reducing my size. Limited time exposure in the market equates to limited risk.
The main point is to start thinking about where you’re going to place your
orders BEFORE the market gets to your price.