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I got a question this week on C2 asking about risk management and how I would trade in a falling market. It was a good question and one that is not easy to answer because every “falling” market has its own unique behavior. Yes, I could give the standard answer like “I use tight stops” or whatever lingo we often say here on C2. That wouldn’t be a bad answer. But it doesn’t really answer the question - what WOULD you do in a falling market? Stops, as commonly used here, deal with the risk “at-the-moment”. What would a trader do the next day? What entry rules would he/she use? Is a series of stop-outs day-to-day really accomplish good risk management? If you do some “what-if’s” with 2008 data, you’ll see what I mean. Subs should ask their managers this question.
In addition to stops, I mostly prefer the use of OTM puts. It allows the strategy “ride the market” with a known loss without the possibility of being stopped out only to see the market zoom back up. It also gives the trader a chance to catch his breath while assessing next steps.
An issue for many people, including me, stops aren’t an option in my 401k. Neither is closing a position until the end of the day. I agree with you about puts.
You’re right, David. When I had a 401K and stock options, I often bought puts to manage risk apart from what the company was doing (or not doing) whenever it made sense. That was in the late 90’s which is very reminiscent of what seems to be playing out now. For record though, I think we have more room to move up.
I’ve posted in another thread I think the crypto drop might be a leading indicator. On that same note, yesterday ZeroHedge had an interesting chart (the last graph at the following link) that shows bitcoin drops lead drops on the DOW by about 8 weeks. Based on bitcoin’s recent drop and that timeline we’ve got about 2 weeks left.
HStops wouldn’t do crap for you in an 18 month bear market.
You will be chasing it all the way down. This is where subs are misinformed
about stops. A system that is diversified is the best plan.
You have to identify a trend reversal as close to the end of a trend as possible, and if your system is only trading XIV long, you are screwed.
Say goodbye to your subs.
I think anyone naive enough to follow a strictly Xiv long system, will lose any profits, and then some.
I agree stops generally work poorly in a down market as they tend to get hit more often and cause losses. My strategy for SystematicBlue is to use volatility scaling to reduce position size in a volatile down market.
David, I think that’s an excellent point and important (and valuable) feature to your strategy. Some trend following systems may think they face more of a binary situation - for example, if a system trades 1 ES at a time, either 1 or 0 may seem to be the alternative. “Fractional” contracts can be synthetically created using options. For example - depending on delta - 1 ES contract can be "created with 5-10 SPY options. I think the bag of tricks is bigger than we think. Great food for thought…
