The collision of global markets and social mood

Thursday, January 31, 2013

Reframing And Hedging Trading Fears

Weeks ago, Ivan Hoff posted 10 market insights from Mark Douglas, author of Trading In The Zone, and I'm still thankful for it because I can't find my copy. Here's another installment:

The four trading fears

"95% of the trading errors you are likely to make will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table – the four trading fears."

I spend a lot of time trying to destroy these four topics (I won't even call them fears). I destroy them by reframing them (an NLP technique), and by intentionally participating in the actions that supposedly create them. I accomplish most of this by hedging.

The reframing part simply takes the negative emotions attached to something such as losing money and replaces the bad feeling with a good one. Once I am able to accept that testing my market opinions is simply a cost of doing business, and that a loss tells me when and where I'm wrong, I am able to use the loss constructively (many times making it back by doing the opposite trade). It then becomes a benefit to me, and more importantly, it feels like it.

Hedging is my bread and butter for this. Hedging exposes me to twice the opportunity with half the risk. It's not always that simple, but it pays great dividends by evening out the emotions and smashing fears.

Being wrong? Losing money? Missing out? Sure they still happen and always will, but more participation means experiencing more market information. And since this is an information business, more information can mean more returns. And by exploiting the protection aspects of hedging, that means fewer drawdowns while exploiting more opportunities.

I went long SPY calls yesterday afternoon and there is a large likelihood that I may lose. In doing so, however, the market will likely tip its hand finally. Also, I bought these calls as a partial hedge against a call position on the VIX which was way up on the day. So the SPY calls act as a hedge against the VIX calls in order preserve the gain should the market bounce. I have more time on the VIX calls, as well as more delta. I'm juggling ratios of time and velocity. The net exposure is set to gain from a market decline, while being able to profit from a bounce. This way I can welcome opposing market action which would normally be destabilizing to an unhedged trader.

Where will the market tip its hand? In my opinion, 1498.09 is the closest spot. Not only would it break the psychological 1500 level, but it would leave yet another three-wave structure inside of a three-wave structure from 11/16, and thus open the door to a test of the 1450-1460 area.

Higher levels do remain. I'd love higher levels. The market is getting weaker and weaker as it goes higher, and I'd like to add more VIX and create a larger put position.

Of course, the market could prove me wrong also . . .

No comments:

Post a Comment