Trade The Journey

Trade The Journey

Trade Review IEF: iShares 7-10 Year Treasury Bond ETF (IEF)

Trade Review IEF:  iShares 7-10 Year Treasury Bond ETF (IEF)

The 15-minute chart of IEF highlights the gap up on the losing trade.

 

Hypothesis: Bond prices would elevate higher because of a cooler CPI report. My hypothesis was that bond prices would rise as participants looked to lock in higher rates, as the risk of higher and larger rate increases decreased. Bond prices move inversely to yields meaning if people start buying bonds, yields will fall. There are several reasons bonds may fall or rise in price. Participants may be looking to shift from risk-on to risk-off during a time of instability, or participants could be looking to lock in higher rates.

Trade Entry Price: $0.83

Trade Exit Price: $0.38

Equity, Index, or Trading Asset: iShares 7–10-year Treasury Bond ETF looks to track the investment results of an index composed of U.S. treasury bonds with maturities left between seven and ten years. The ETF seeks to track the investment results of the ICE U.S. Treasury 7-10 Year Bond Index.

Factors affecting Assets: Interest rates, inflation, economic instability, and economic growth.

Trading selection process: The typical process I undergo when selecting a trade involves several steps. The first step involves assessing overall market performance, recent economic reports, and current news events. The most important part of this step is deciphering if the market participants are bullish, bearish, or neutral. The next step involves looking at the market performance, specifically assessing sector performance.

Sector performance assessment comprises of observing the different sectors for trend formation, continuation, or a trend’s conclusion. This part of the step, also consists of taking note of which sectors have the highest amount of stocks above or below their short-term averages. If this trade had a longer timeframe, I’d be looking at the stocks above or below their longer-term averages.

The third step involves selecting stocks that have a clear trending or neutral pattern. I avoid stocks in which the pattern is hard to decipher, or the trend may be unclear. Recently, I added the ADX and RSI to help identify stocks with a strong trend, and preferably momentum that is clearly over brought or oversold.

The final step involves looking at the pattern and structuring the trade around the best entry/exit price. My goal is to identify three potential trades and narrow the three trades into one trade with the highest probability. Below is an excel spreadsheet I created to track potential trades and existing trades.

I selected a call bull debit spread, by buying an in-the-money call and selling an out-of-the-money call. The spread was two dollars wide. I included a chart of IEF.

Risk: $0.83

Reward: $1.17

Trade Management: There wasn’t much management involved in this trade as I exited soon after the market opened. The CPI report is released before the market opens and being that inflation is a top concern among the market and economy alike, any news involving the CPI is likely to move the markets. As soon as the market opened, I knew that I made a serious mistake. I was supposed to go short the bond ETF not go long.

I looked at the report briefly and remarked to myself, “What was I thinking?” A brief backstory to this trade might provide some explanation for this ill-advised trade. My initial trade was to place a bullish put credit spread on Gold because I thought that Gold would rally with a positive CPI report. Gold did rally but for several reasons which included investor concern that bank failures would spread beyond the initial banks.

Dollar: $DXY

GOLD: GLD

Unfortunately, I couldn’t get into this trade because GOLD gapped up on the open, rendering my entry price null & void. My only option was to adjust my entry price and I chose not to do this based on my trading rules. One of my trading rules includes completing my homework or due diligence the night before entering a trade. The second trade I favored was Apple which I thought was oversold due to the fear of contagion from the bank failures. This trade also did well.

So, I decided that night that I wanted to be in a trade to take advantage of the CPI report which I felt would show a further moderation in rising prices. I was tired that night and didn’t feel like finding two additional trades in addition to the bond trade I had planned on entering. 

I didn’t think about the trade or the various scenarios that could play out. I haphazardly filled out my spreadsheet and then proceeded to relax, taking satisfaction in the fact that I completed my homework the night before entering the trade.

To make matter worse, in my spreadsheet I identified the correct way to trade IEF and I entered the position whose outcome was completely opposite to what I had entered for my strategy.

When the market opened, IEF gapped down, I begin to panic and immediately entered a closing price for the trade to exit the position. I exited the trade soon after.

The next day, IEF rebounded after fears of contagion were reignited as the top investor in credit Suisse refused to extend funding to the beleaguered investment bank. Normally, I try to avoid looking at positions soon after I exit depending on how the trade turned out.  I can’t think of a worse feeling than knowing that you exited the trade prematurely.

One aspect of my trading plan that is missing, is forming a hypothesis on how the asset will perform in the short-term and medium-term in various situations.  Forming the initial three trades took a bit of time because I critically think of all the potential scenarios that could occur and their likelihood of occurring.

Lesson: The fear of missing out is what led me to place this trade. I thought about the trades I was unable to enter and felt I had to be in a trade. I also didn’t want to miss out on the potential profits from a positive CPI report, so I forced the trade. I didn’t think about the trade in detail and to make matters worse, I placed the wrong trade in the wrong direction.

These last two losing trades were largely the result of trading mistakes. The trade before the current trade I am reviewing suffered a bigger loss than I anticipated because I clicked the wrong button when exiting the trade. Instead of closing the position, I opened another position with the same strike and expiration date.

These are trading errors that are completely avoidable but they happen. It’s always best to track these trading mistakes in your trading journal, so you don’t repeat them.

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