Real World Trading Execution Quiz
Here’s a question for you. You’ve short the SPY. Your first scale-in is at 72. You scale in higher and then even higher getting to a full short position with an average cost of around 75. Since 1993, the SPY has never closed 10% above the first scale-in price using this high probability strategy. Meaning in this case, shorting the first unit at 72 has never closed at a price 10% higher which is 79.20.
A few days later the SPY hits 81. What do you do?
1. Short more since this is the most overbought the SPY has ever been since it started trading 16 years ago and this gets you a better cost basis on your position.
2. Short a partial position more here for the same reasons as #1
3. Buy in the money puts as you have predetermined risk and a high probability of the trade being successful
4. Do nothing
The people on television don’t teach real world trading strategy like this. They just tout stocks and pick market bottoms (one of the most famous was someone claiming two nights ago he told everyone to start buying at 6300. It’s too bad the low of the Dow was above 6500).
Since none of us have the brains to pick bottoms a few hundred points below where they ever traded, we need to be better with our risk management and strategy decisions. The quiz above is real. How you answer it will dictate what your P&L will look like this year and for years to come when situations like this arise.
I look forward to hearing your answers (send them to l.connors@tradingmarkets.com). The correct answer will be published on Monday.
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Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.