Making the right decision in limit up or limit down
Posted: Mon Feb 11, 2008 6:14 pm
At the risk of exposing my own weaknesses (my pride talking) but in the hope of learning from this body of experts, I am seeking to get some points of view on a specific trading issue that I faced today.
By way of background, I am trading a long-term trend system using TB with Moving Averages, Portfolio filters and ATR stops. I have been trading this system live with spreadbetting houses (as my ‘live test’) since October and have seen quite good results to date. From all my research (Trading Tribe books, c.f. books, van Tharps books, this web site, Leonardo’s forex challenge and others) I made a decision to trade the system strictly (no ifs or buts).
To date I have managed this quite well (with one or two execution errors that I have hopefully learnt from).
Over the weekend my system gave me a signal to enter Chicago Wheat (Long) at 1094. All weekend I tried to place a stop order through my online broker at 1095. The market had closed per my broker at 1094. The broker was not accepting orders on this market all weekend but was on other wheat markets such as London.
I held out until Monday morning first thing (7 am UK time). At this time, I could still not place an order online and the market had moved to 1184 (give or take). I called the broker to be told that the market was limit up and that is why orders were not being taken online. However, I could place an order on the phone.
I was now faced with two dilemmas:
1) Do you enter the trade? If so: at market or do you place a limit order somewhere closer to where the planned purchase price was? From all the literature I think the right answer is - NOT TO MISS A TRADE, so enter at market. Well I did not. I entered a limit order at 1150. In isolation I knew this was wrong at the time but I made this call due to dilemma 2 below.
2) With the market at 1184 and my stop fixed at 1026.25, my risk had effectively doubled or I had to halve my trade size (give or take). (As I am using spreadbetting it is simple math: the difference between planned entry and stop vs. potential entry and stop divided into the amount of capital I would like to risk per my risk algorithm.) Thinking of another golden rule (ie money management rules always take priority in order to stay in the game) I was faced with another problem. If I reduced the position size to match the risk I could tolerate, then the position was too small for any of the spreadbetting brokers.
Not a very sophisticated solution then emerged in my brain. Settle somewhere in the middle: increase the trade size to the min allowed by the broker but do not take all the risk on by buying at the market. Put in a limit order at a price that is acceptable to your risk level and let the market decide if it fills you. This way I thought prudent money management would take precedence over following ALL system signals.
The truth is I still risked 50% more than I planned on this trade as I set the limit price at 1150 and not at 1100, the price at which my risk limits were ok.
After having this little mental and emotional gymnastics I jumped on a plane at Heathrow to land in Philly 8 hours later (2pm US time). I could not wait to get to an Internet connection to see how the market had treated me. I got filled at my limit. So I complied with my system trade signals and made the trade but took on more risk (3% instead of 2%) than I should have.
I recall a point c.f. makes in his book about judging a decision based on its outcome as the wrong way to think. One should rather judge a decision based on the quality of the thinking/process/discipline at the time.
The reason I put this on this board is to get some discussion from some of you seasoned pros on the thought process you would have gone through. I am not looking for personal validation at all, so please be as brutally honest as you like. I really would like to hear how you would have handled this situation. For what it is worth I think I should not have taken on more risk. I should have set my limit at the level of risk I could tolerate end of story. BTW I would have got filled on that trade too but that is not the point I think.
By way of background, I am trading a long-term trend system using TB with Moving Averages, Portfolio filters and ATR stops. I have been trading this system live with spreadbetting houses (as my ‘live test’) since October and have seen quite good results to date. From all my research (Trading Tribe books, c.f. books, van Tharps books, this web site, Leonardo’s forex challenge and others) I made a decision to trade the system strictly (no ifs or buts).
To date I have managed this quite well (with one or two execution errors that I have hopefully learnt from).
Over the weekend my system gave me a signal to enter Chicago Wheat (Long) at 1094. All weekend I tried to place a stop order through my online broker at 1095. The market had closed per my broker at 1094. The broker was not accepting orders on this market all weekend but was on other wheat markets such as London.
I held out until Monday morning first thing (7 am UK time). At this time, I could still not place an order online and the market had moved to 1184 (give or take). I called the broker to be told that the market was limit up and that is why orders were not being taken online. However, I could place an order on the phone.
I was now faced with two dilemmas:
1) Do you enter the trade? If so: at market or do you place a limit order somewhere closer to where the planned purchase price was? From all the literature I think the right answer is - NOT TO MISS A TRADE, so enter at market. Well I did not. I entered a limit order at 1150. In isolation I knew this was wrong at the time but I made this call due to dilemma 2 below.
2) With the market at 1184 and my stop fixed at 1026.25, my risk had effectively doubled or I had to halve my trade size (give or take). (As I am using spreadbetting it is simple math: the difference between planned entry and stop vs. potential entry and stop divided into the amount of capital I would like to risk per my risk algorithm.) Thinking of another golden rule (ie money management rules always take priority in order to stay in the game) I was faced with another problem. If I reduced the position size to match the risk I could tolerate, then the position was too small for any of the spreadbetting brokers.
Not a very sophisticated solution then emerged in my brain. Settle somewhere in the middle: increase the trade size to the min allowed by the broker but do not take all the risk on by buying at the market. Put in a limit order at a price that is acceptable to your risk level and let the market decide if it fills you. This way I thought prudent money management would take precedence over following ALL system signals.
The truth is I still risked 50% more than I planned on this trade as I set the limit price at 1150 and not at 1100, the price at which my risk limits were ok.
After having this little mental and emotional gymnastics I jumped on a plane at Heathrow to land in Philly 8 hours later (2pm US time). I could not wait to get to an Internet connection to see how the market had treated me. I got filled at my limit. So I complied with my system trade signals and made the trade but took on more risk (3% instead of 2%) than I should have.
I recall a point c.f. makes in his book about judging a decision based on its outcome as the wrong way to think. One should rather judge a decision based on the quality of the thinking/process/discipline at the time.
The reason I put this on this board is to get some discussion from some of you seasoned pros on the thought process you would have gone through. I am not looking for personal validation at all, so please be as brutally honest as you like. I really would like to hear how you would have handled this situation. For what it is worth I think I should not have taken on more risk. I should have set my limit at the level of risk I could tolerate end of story. BTW I would have got filled on that trade too but that is not the point I think.