Trading style - name?

[Carlos Un-shackled]

Hi all,


Friend of mine (no, not me, really!!) spread-bets the DJ without stops, basically he'll buy and sell it simultaneously, so as it goes in one direction he'll lose money with one trade, make on the other, as the market turns around he closes out the winning trade, opens another then waits until the first losing trade has made back its losses, rinse repeat.


What is the style of trading called, and what are the pros/cons?

Thanks,


Carlos

 

[tomorton]

Sounds like the traded options strategies, strangle or straddle - opposing simultaneous positions: so that a large move in either direction will lead to profit that outweighs losses on the closed position in the other direction plus dealing costs on both.

Its fails when a large move does not occur. Its difficult to be able to anticipate a large move but you have no analysis that favours a direction so can lead to extended holding time which is expensive. I wonder if its something that fee-hunting brokers recommend rather than successful traders?

 

[malaspina]

Tomorton is right. If a large move does not accour then you are in trouble.

 

[Carlos Un-shackled]

I think he's trading £10/pt - would that make it likelier he can afford to hold positions for extended periods?

 

[timsk]

Hi all,


Friend of mine (no, not me, really!!) spread-bets the DJ without stops, basically he'll buy and sell it simultaneously, so as it goes in one direction he'll lose money with one trade, make on the other, as the market turns around he closes out the winning trade, opens another then waits until the first losing trade has made back its losses, rinse repeat.


What is the style of trading called, and what are the pros/cons?

Thanks,


Carlos

Hi Carlos,
I've highlighted the key part of the sentence in your post in blue. If your friend is able to identify the turning points, then he has no need to open an opposing trade and suffer the loss and incur the cost of the spread.

His method sounds deceptively simple to do - and it will work well for extended periods - until one day when it doesn't. And that day will surely come sooner or later. What happens is this (and I know 'coz I've tried, lol!). Let's say the market moves 100 points. Also, to make the illustration as simple as possible, let's also assume that the long and short positions are entered at the same price (excluding the spread), so one leg is in profit by 100 pts and the other in loss by 100 pts. So, you detect a reversal is taking place - or about to take place - so you bank the 100 pts. You then enter another trade in the same direction as the half that's left open and in the red. Effectively, you've averaged down and doubled (or more) your original position size in the process. If your 'read' on the market is correct, it'll move up 50 pts to break even. If you're lucky, it may even carry on and then you'll make a profit on both legs of the trade. However, what will happen sooner or later is that the market's not read the bloody script and, instead of turning around as expected, it continues to move in the original direction. Your losses then start to compound - and quickly. Needless to say, that tends to lead to panic, pain, tears and regret.

Having said all of the above, I believe there are those who trade successfully by simultaneously trading multiple positions in opposite directions and, in some cases, average down as well. However, it's a real art and most certainly isn't recommended for the novice trader.

Tim.

 

[tomorton]

Wait a minute - we do think the strategy of having opposing positions is wrong but are we being too hasty to dismiss the idea of opposing orders?

e.g. Looking at the Dow - given the high and low of day 1 as H1 and L1, usually if price breaches H1 on day 2, it will close higher than H1: and usually, if price breaches L1, it closes lower. So isn't there a possible mechanical system here? - after the close, place a buy order at today's high and a short order at today's low: set a stop for each at the other end of the range: exit at tomorrow's close if stop not triggered. You don't have to use any subjective TA or judgement, you don't have to predict tomorrow's direction.

Is anyone doing this?

 

[tomorton]

Somebody needs to tell me this one day range trading strategy won't work because my rough and ready 3 month backtest on the Dow suggests I could have made 3,600 points using this. How is that even possible?

 

[Carlos Un-shackled]

Hi Carlos,
I've highlighted the key part of the sentence in your post in blue. If your friend is able to identify the turning points, then he has no need to open an opposing trade and suffer the loss and incur the cost of the spread.

His method sounds deceptively simple to do - and it will work well for extended periods - until one day when it doesn't. And that day will surely come sooner or later. What happens is this (and I know 'coz I've tried, lol!). Let's say the market moves 100 points. Also, to make the illustration as simple as possible, let's also assume that the long and short positions are entered at the same price (excluding the spread), so one leg is in profit by 100 pts and the other in loss by 100 pts. So, you detect a reversal is taking place - or about to take place - so you bank the 100 pts. You then enter another trade in the same direction as the half that's left open and in the red. Effectively, you've averaged down and doubled (or more) your original position size in the process. If your 'read' on the market is correct, it'll move up 50 pts to break even. If you're lucky, it may even carry on and then you'll make a profit on both legs of the trade. However, what will happen sooner or later is that the market's not read the bloody script and, instead of turning around as expected, it continues to move in the original direction. Your losses then start to compound - and quickly. Needless to say, that tends to lead to panic, pain, tears and regret.

Having said all of the above, I believe there are those who trade successfully by simultaneously trading multiple positions in opposite directions and, in some cases, average down as well. However, it's a real art and most certainly isn't recommended for the novice trader.

Tim.

Hi Tim, sorry I'm late back to my own party!!

Update - fella was up to 115 bigguns within 2-3 months, and I think he was locked in both ways when the market plunged in August - pretty much left him with his original 20k account I've told him several times it's a technique for the older kids on the block, but he won't listen....

Lost 16k last week just by 'pressing the wrong button', I presume he meant shorting not buying or vice-versa, but all in all now he's basically only 5-10k up since starting in May...and he's still at it. I'm waiting for his shop to be boarded up but, I hope I'm wrong...good luck to him!!

 

[arigoldman]

Be careful, this is a double edged knife.