UPDATE 9.21.2021 After talking to Paul, I want to amend this post. There are actually two mistakes in this trade, neither of which is the one I identified in the original post (which I’m leaving unchanged in case it’s helpful to see the evolution in my thinking).
- Although I entered the trade at a good level (breakdown of monthly low), I entered when price was well above the 30-minute bands, which were moving upward. It’s always better to trade in sync with the bands. BONUS: Buying in sync with the bands would have given me to opportunity to buy a pullback into the bands, giving me better pricing, a tighter stop, and more DH opportunities.
- Instead of trying to trail a stop in order to protect myself from losses, I should have focused on DH’ing the trade to reduce original risk and delta.
For comparison, check out Paul’s /ES trade also on September 21st.
+ + + + +
I made an amateur mistake today — probably more than one, but here’s the one I noticed and wanted to share with you!
I tried to protect myself from volatility by tightening my stop, but I did it wrong and caught myself between two two competing strategies, getting the worst of both worlds.
When $SPY dropped below last month’s low of 436.10, I legged into a Mon/Fri 27SEP 435/24SEP 430 Put Diagonal. I was really happy with the setup and the trade structure. With FOMC tomorrow, I planned this as a day trade and did not intend to hold it overnight unless the market completely fell apart. To protect any open profits, I decided to trail my stop under 30-minute bars.
I got my move down and price started grinding through downside reference levels. I kept adjusting my stop behind 30-minute bars as planned, but I failed to notice something about the price action: the range of the 30-minute bars. So even though I was using a “fast” time frame, the distance to my stop was quite far. At the same time because I was trailing my stop behind an arbitrary interval (each 30-minute bar) rather than key structural levels, my stop was pretty likely to get hit on any sort of real retracement.
Of course, that’s what happened. Price retraced and tagged me out. Then it continued trending lower all day and into the after hours. I made money on the trade, but only about 25-30% of what I could have made if I’d managed my stop better.
What should I have have done? I probably should have kept my original stop (the day’s high of $437.91). If I’d have done that, I could have carried the trade into the end of the day for big profit. Or if I really wanted to treat it as a momentum trade, I should have trailed my stop much tighter and probably stopped out near yesterday’s HB.
Either of those options is a legitimate strategy. But by doing something sort of in between, I got the worst of both worlds. I increased my likelihood of getting stopped out while also guaranteeing that I’d give up a big chunk of my profits when my stop was hit.
You can choose one. Not both.