Getting It Wrong, But Still Making Money

ESZ3 3 Minute 180913Good Evening, Friends. One of the great things about the methods taught by Todd Mitchell is that a view can be completely wrong, but the trader who follows Todd’s lessons can still come out well ahead. Yesterday was a case in point. If you’ve read my earlier posts on the FOMC, which on Wednesday startled the market by making no policy changes – resulting in a big run higher in the E-minis – you know that I was favoring the downside. My working hypothesis was that the Fed would begin the tapering process, and that since the market had generally pushed higher in recent days, profit taking and a dip, perhaps to a decent buying point, was likely. 

That was – what’s the word I’m searching for here? – wrong. I wasn’t alone, of course, which doesn’t make my view any less incorrect. Still, because I’ve learned a lot from Todd, I knew better than to simply take a position in the hope that I might be right. Instead, I placed buy and sell stops on either side of the range established in the half hour prior to the 2 PM announcement.

My buy stop was at 1697.75, which was executed at 1698.75, a fair amount of slippage. The move higher was rapid and significant, however, and even though I left my profit level far too low, as it turned out – my sale to take profits was completed at 1702.75, and the market continued racing up to 1713 on the first 3-minute bar following the announcement – I was able to make a profit, even though my expectations were way off base. 

Prior to my training with Todd, I might very well have gone into Wednesday afternoon long SPY puts, putting money behind my view, and most of that money would have been lost within a few minutes after 2 PM. Instead, I was prepared for both a positive and a negative reaction; since my sell stop was at 1694.75, there was only three points separating my buy stop and my sell stop, a very manageable risk.

Had the market reacted by selling, I was positioned to realize a profit, and even on an initial move that led to a reversal, my maximum potential loss could be calculated. The approach wasn’t without risk, but FOMC days are interesting to trade precisely because of the potential volatility.

The E-minis are back to 1717 as I’m typing this, as the markets continue to digest the Fed’s lack of action, and what it might mean for the economic outlook, and for corporate profits. Tomorrow is a quadruple witching day as equity options, single stock futures, futures, futures options all expire , which can be interesting. We’ll see how it goes, hopefully prepared to act appropriately in response to price action, even if it doesn’t agree with our views.

Best of luck!

About the Author kevin

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