Bulletin 31 Preparing for Dangerous Reports and "Price Shocks"

The Traderclub Forum: Traders Club Bulletins: Bulletin 31 Preparing for Dangerous Reports and "Price Shocks"
webmaster (Admin) on Tuesday, September 7, 1999 - 04:37 pm:

September 7, 1999

Third in a Series of Articles about Exits

Exits - Preparing for Dangerous Reports and "Price Shocks"

Although we were scheduled to continue our series on exit strategies with a Bulletin about adaptive money management stops, I wanted to interject this Bulletin with a brief bit of advice about handling important reports and potential "price shocks" when trading. This topic was brought sharply to mind only last Friday when the monthly employment report caused the bonds to rally more than a full point in just a few minutes. I thought it would be best to write this Bulletin while the subject was still fresh on my mind.

On Thursday's close we were short the September bonds in the Sidewinder Bond system and we told our Signals Service subscribers to exit the short position on the opening Friday and avoid going through the report. This advice proved to be quite timely because the bond market rallied well over a point from the opening once the employment report was released. We received some thanks for the timely advice and many hearty congratulations for correctly forecasting the direction of the report which most bond market observers anticipated would be bearish. The truth is that we made the correct decision without any forecasting. I thought that an explanation of the logic that lead to this timely profit-saving decision would be a valuable lesson to our members who are concerned about trading during reports. Here is our general philosophy about handling reports and news events that may impact our positions. We think it is sound and practical advice learned from more than thirty-five years of futures trading experience.

If we are holding a position in a long-term trend-following system we will usually ignore reports unless they are expected to be of such impact that our protective stops will become useless in their critical role of preserving our trading capital. The most dangerous reports are usually those that are issued while the markets are closed and result in overnight price gaps that leap over our protective stops and cause losses much greater than we are prepared for. If a dangerous gap-creating report such as we have just described is scheduled, we will exit our position prior to the report and then perhaps re-enter the trade after the report data and its impact on the market is known. The logic of this exit strategy is simple. We are always willing to forego windfall profits in order to avoid catastrophic losses. In the long run the probabilities are that half of these dangerous reports would go in our favor and the other half would go against us. This might lead us to assume that an exit procedure for reports will have no impact on our trading but this would be a very mistaken conclusion. Since the outcome of these reports is a 50-50 proposition, by making it a policy to sidestep the danger we do nothing to reduce our profitability but we manage to dramatically reduce our risk. The advantages of avoiding potential gap-making reports is very obvious. We are greatly reducing our exposure to catastrophic risk without any reduction in our profit potential. I wish all trading decisions were as simple as this.

Last Friday's employment report was not of the dangerous gap-making, stop-hopping variety and had we not already been in a profit-taking mode in an expiring contract that needed to be liquidated soon we would have held through the report and relied on our system stops to get us out of the trade. However, since our open profits were modest and we needed to liquidate the September position very soon in any case it seemed clear that we had little to gain by gambling on the short term impact of this report. Successful trading is about profiting from our "edge" or the advantage offered by our system. Gambling on the outcome of reports has nothing to do with successful trading.

It is interesting to note that the employment report last Friday was expected to be bearish and the bond market declined sharply on Thursday in anticipation of a bearish Friday morning employment report. However, when a report is expected to be bearish, this bearish sentiment adds substantially to the risk of a bullish report. Because a bearish report is already factored into the market, any bullish report would be a big surprise. This is exactly what happened and we were not suckered into holding our position through a report whose potentially bearish impact had already been factored into the prices by Thursday's decline. The more the outcome of a report appears to be forecast or "in the market" the more dangerous it becomes. If a report is expected to be very bearish and it turns out to be only modestly bearish, the market is likely to rally on the bearish report. If the anticipated bearish report turns out to be neutral the market is likely to rally strongly and if the report is actually bullish the market will rally by leaps and bounds. Its almost a no-win proposition to be holding a short position through a report that is widely expected to be bearish. If the report is indeed bearish as predicted there will be little reaction and many traders who were on the short side will take their profits on the bearish news thereby dampening the impact of the report. The most dangerous reports are almost always the ones where the outcome seems to be well known before the report is issued.

Like most professional traders we keep an eye out for various reports that may have an impact on our positions. In most cases we simply ignore them. However when we are near an entry or an exit point we will carefully analyze the situation and take measures to reduce our risk. If there are major news events pending that might create large overnight price gaps we will move to the side lines. Our "edge" is intended to give us an advantage in normal markets. Trying to forecast major news events and dangerous gap producing reports is for gamblers, not system traders.

Had the employment report on Friday been bearish instead of bullish we would still argue that our decision to exit on the open prior to the report was the correct decision. There was no forecasting or astute market analysis involved. We simply applied tried and true risk-reduction techniques and got lucky (which mysteriously seems to happen 50% of the time).

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Thanks to all of you who have been active on our FORUM the last month or two. The traffic there has increased substantially over the last few weeks and we have one of the best discussion groups available for traders anywhere on the web. Paul Lasky who wrote a very informative article in the August issue of Futures magazine has shared some very interesting ideas with our Forum participants. If you haven't visited the Forum on a regular basis you are missing out on a lot of worthwhile discussions. Check it out and join us. http://traderclub.com/discus/board.html

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The Traders Club Signals Service is up and running. Our first week was off to a very good start where it really counts (the bottom line). If you would like more information about the STC Signals Service go here: http://www.traderclub.com/signals.htm After our announcement last week in which we also announced the 1999 Systems Results Report we had a request for an Equity Chart of 1999 trades. We now have this chart online at: http://www.traderclub.com/systems1999results.htm This chart and the results on this page are updated after every closed trade.

We have also posted a Combined 10 year historical portfolio with Equity chart of all 14 of the Traders Club Systems. This data is up to date to September 1, 1999. You can view it here: http://traderclub.com/systems_combined_all.htm

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Speaking engagements: We have several appearances scheduled over the next few months. Go here for information and details: http://www.traderclub.com/events.htm

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Last but not least: I wish to thank all of you who sent personal messages regarding the recent death in the family. Your kind words were very touching and very much appreciated. Thank you one and all.

I'm back in the office and nearly caught up on things. Don't hesitate to contact me if you need.

Good Luck and Good Trading


Chuck Le Beau's System Traders Club
ph 310-265-9776
fax 310-265-9556

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