Moving further into the topic(s) brought up in my previous article, let’s look at some solid strategies to help you trade out of situations like the one discussed in the bond futures (ZBZ13:CBT).
The primary key is to “have enough bullets left” so if the trade ends up having to be “worked” you are able to do so. Therefore, initial entries must be the smallest, with the thought process, “If it just runs my way, at least I’m in.”
A bond arb (arbitrage) trader I knew used to explain part of his thought process this way: “When a fireman rushes into a burning house, he KNOWS where he is going to get out.”
I always remember that. As I initiate any trade I am already deciding my first target, my first “decision point” (defend or stop?) and my “where I am wrong” (abandon the trade) point. Mind you, this is all done in seconds, and my final thought is, “If it does go my way, where is any resistance/support that I need to pay attention to?”
In the article, “B” buys had to be larger than “A” buys- the “A” buys were only because we wanted to be long, but the “B” buys were because we wanted to be long AND the level was support. The partial exit below “C” was because we know the market will show us what prices it likes — and previously “C” was the price that the bulls were able to hold. So the thinking was, “We’ll give the bulls another chance to hold that (C).”
Slightly larger size is used at the pivot. Now, refer to the chart above of the E-mini S&P 500 Dec 13 (ESZ13:CME) contract and you’ll see that 1786 confirmed the bulls were going to hold the pivot. As a very good bond trader once said to me, “Sometimes you have to wait for the market to give you a reason to act on your idea.” Applied here that means, I’m bullish and as the trade passed through 86 the market has confirmed that I was correct at 81 — so now I can add to my position.
The final strategy applied to this trade is the awareness that “support becomes resistance.” Remember, we bought at “B” because it was support; we can’t tell ourselves it “isn’t there now” just because we are long and hoping the market continues through it. We must respect it and take some longs off.
>A lot of times I find myself telling new traders, “You can’t be a passive trader.” What I mean by that is: a passive trader gets him- or herself in a jam and does nothing but wait — and hope — and hope — and wait — for the trade to “Please let me get out of this.” Well, that’s being passive. If you like your position enough to hold it as it goes against you, show it and trade.
For Thursday the keys in bonds are: trade below 131.16 targets 130.07 (some support) and 129.30. Above 131.16 takes out late shorts; bulls can add above 132.04.
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