Saturday, May 28, 2011
Mistake: Letting Losses Run and Taking Small, Quick Profits
This is one of the worst mistakes new traders make (I know from vast, often painful, experience in my youth). I remember playing the game of hoping my Dollar Index positions would turn around when I was first starting out in the trading pit; they rarely did. Wishful thinking is not a good trading strategy—being disciplined is. Not having a well-thought-out game plan and strict trading rules is truly a recipe for failure.
Often new pit traders in particular will get hit hard and then become overly cautious. They resort to taking small profits even though those miniscule gains might have turned into a large profit that could have offset all their losses if they had just been a little more patient.
I still find myself tending to let losses run rather than doing what I know is right and getting out of the position to reevaluate. As I mentioned in Chapter 1, it’s all too common for traders to talk their book, or live in denial, hoping against hope that the market will turn their way. This is almost guaranteeing that it won’t. Traders in the midst of losing tend to live on the misplaced hope that the market will retrace and then let them break even. Instead, this mentality actually leads to the opposite and creates even bigger losses. The markets can be cruel, and they seldom come back or retrace to let you off the hook. All of this can be avoided or dealt with quite easily. Simply use discipline and, more important, predetermined stop orders to prevent your losses from closing your account. Equally important is to have a plan to take profits at a very specific level and stick to it.
Often new pit traders in particular will get hit hard and then become overly cautious. They resort to taking small profits even though those miniscule gains might have turned into a large profit that could have offset all their losses if they had just been a little more patient.
I still find myself tending to let losses run rather than doing what I know is right and getting out of the position to reevaluate. As I mentioned in Chapter 1, it’s all too common for traders to talk their book, or live in denial, hoping against hope that the market will turn their way. This is almost guaranteeing that it won’t. Traders in the midst of losing tend to live on the misplaced hope that the market will retrace and then let them break even. Instead, this mentality actually leads to the opposite and creates even bigger losses. The markets can be cruel, and they seldom come back or retrace to let you off the hook. All of this can be avoided or dealt with quite easily. Simply use discipline and, more important, predetermined stop orders to prevent your losses from closing your account. Equally important is to have a plan to take profits at a very specific level and stick to it.
CRB ends up 3rd straight week as dollar wilts
The Reuters-Jefferies CRB index, a bellwether for commodities, posted a 1.4 percent weekly rise but remained on track for its biggest monthly decline since May 2010 when the European debt crisis roiled commodity markets.
Volumes were thin on Friday, with investors cautious heading into the long weekend that
includes the U.S. Memorial Day holiday on Monday.
Volumes for oil futures in New York were more than 40 percent below the 30-day average; corn 36 percent and U.S. copper 25 percent.
The 19-commodity CRB index rose nearly 1 percent on the day and 1.4 percent on the week. It had risen a total of 2.6 percent over the last three weeks.
A weaker dollar buoyed commodity markets. The euro rose against the U.S. currency as European officials said Greece should be able to shoulder its heavy debt burden without restructuring.
With two trading sessions left in May, the CRB was down about 7 percent for the month to date, which would be its biggest monthly decline since May 2010.
Analysts doubted that the index would make up those losses before trading for May closed on Wednesday.
"I wouldn't expect the CRB to jump that much in two sessions, though I admit we live in an extremely volatile and fluid world, where headlines can make everything look great one moment and like utter chaos the next," said Sean McGillivray , vice president and head of asset allocation for Great Pacific Wealth Management in Oregon.
"From the point of inflation and tightening supplies, there are grounds to pay more for everything, from gasoline to cotton. But we have to consider the larger backdrop of the economy and consumer demand as well."
This month's sharp losses in commodities stemmed from a particularly sharp sell-off on May 5, when crude oil posted a record daily decline of $12 a barrel on worries that global economic growth was slowing.
On Friday, benchmark crude on the New York Mercantile Exchange settled up 36 cents at $100.59 per barrel. For the month, it was down more than $13 or nearly 12 percent -- which would be its biggest monthly decline in a year.
The Commodity Futures Trading Commission posted data this week showing signs that May's sharp decline may be drawing investors back to the sector.
The CFTC data showed speculators loaded up in commodities adding long positions worth $4.7 billion in the week ending May 24. It was the biggest increase in net longs since early April, according to an analysis of data by Thomson Reuters.
While commodity bulls were hoping for the traditional spike in U.S. consumption of gasoline, or petrol, during the peak summer driving season, statistics did not yet bear that out.
"U.S. petrol demand ... continues to be slack ahead of the summer driving season, which traditionally kicks in over the coming (Memorial) holiday weekend," said Andrey Kryuchenko, analyst in London for Moscow-based investment banker VTB Capital.
In grains markets, spring wheat prices rose for a third day, posting their highest close since 2008 as wet weather delayed seeding of the high-protein crop. Strong demand also boosted corn.
Corn and wheat have made hefty gains in the last fortnight from bad weather that disrupted plantings in Europe and the United States.
Copper prices hit a three-week high, pushed higher in front of the long holiday weekend as the weak dollar and steady equity markets helped sentiment negative implications for demand from another soft U.S. economic data.
Volumes for oil futures in New York were more than 40 percent below the 30-day average; corn 36 percent and U.S. copper 25 percent.
The 19-commodity CRB index rose nearly 1 percent on the day and 1.4 percent on the week. It had risen a total of 2.6 percent over the last three weeks.
A weaker dollar buoyed commodity markets. The euro rose against the U.S. currency as European officials said Greece should be able to shoulder its heavy debt burden without restructuring.
With two trading sessions left in May, the CRB was down about 7 percent for the month to date, which would be its biggest monthly decline since May 2010.
Analysts doubted that the index would make up those losses before trading for May closed on Wednesday.
"I wouldn't expect the CRB to jump that much in two sessions, though I admit we live in an extremely volatile and fluid world, where headlines can make everything look great one moment and like utter chaos the next," said Sean McGillivray , vice president and head of asset allocation for Great Pacific Wealth Management in Oregon.
"From the point of inflation and tightening supplies, there are grounds to pay more for everything, from gasoline to cotton. But we have to consider the larger backdrop of the economy and consumer demand as well."
This month's sharp losses in commodities stemmed from a particularly sharp sell-off on May 5, when crude oil posted a record daily decline of $12 a barrel on worries that global economic growth was slowing.
On Friday, benchmark crude on the New York Mercantile Exchange settled up 36 cents at $100.59 per barrel. For the month, it was down more than $13 or nearly 12 percent -- which would be its biggest monthly decline in a year.
The Commodity Futures Trading Commission posted data this week showing signs that May's sharp decline may be drawing investors back to the sector.
The CFTC data showed speculators loaded up in commodities adding long positions worth $4.7 billion in the week ending May 24. It was the biggest increase in net longs since early April, according to an analysis of data by Thomson Reuters.
While commodity bulls were hoping for the traditional spike in U.S. consumption of gasoline, or petrol, during the peak summer driving season, statistics did not yet bear that out.
"U.S. petrol demand ... continues to be slack ahead of the summer driving season, which traditionally kicks in over the coming (Memorial) holiday weekend," said Andrey Kryuchenko, analyst in London for Moscow-based investment banker VTB Capital.
In grains markets, spring wheat prices rose for a third day, posting their highest close since 2008 as wet weather delayed seeding of the high-protein crop. Strong demand also boosted corn.
Corn and wheat have made hefty gains in the last fortnight from bad weather that disrupted plantings in Europe and the United States.
Copper prices hit a three-week high, pushed higher in front of the long holiday weekend as the weak dollar and steady equity markets helped sentiment negative implications for demand from another soft U.S. economic data.
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