Trade The Journey

Trade The Journey

Trade Review: Week of December 16th


Enhanced Trade Analysis: SPY (S&P 500) and QQQ (Nasdaq)

Trade Summary:

  • Asset Choices: SPY (S&P 500) and QQQ (Nasdaq)
  • Selected Strategy: Vertical Call
  • Duration of Trade: One Week
  • Premium Paid: $7.30 for SPY / $3.30 for QQQ
  • Overall Profit or Loss: $7.20

Specific Trade Actions:

  • First Leg of Trade:
    • Purchased a $459 Call on SPY
    • Purchased a $393 Call on QQQ
  • Second Leg of Trade:
    • Sold a $459 Call on SPY
    • Sold a $400 Call on QQQ

SPY: 5-minute Chart

QQQ: 5-minute Chart

Underlying Hypothesis:

The basis of this trade is the assumption that the market’s upward momentum could persist, with investors re-engaging as the Federal Reserve concludes its rate-hiking phase. Nevertheless, a retraction is anticipated due to the indices being predominantly in an overbought state.

Detailed Hypothesis Explanation:

In light of the Federal Reserve’s rate decision and press conference scheduled within the trade week, I anticipated these events to be pivotal in propelling market growth. The indices were positioned at or close to overbought levels, suggesting potential for a reversal, especially if the Fed’s announcements were contrary to market expectations. Additionally, forthcoming CPI and PPI reports were set to offer further insight into the Fed’s efficacy in combating inflation.

The majority of data signaled a deceleration in inflation from its previous summer peaks. Market sentiment was leaning towards a shift in the Fed’s approach from hiking rates to introducing cuts. The S&P 500 had been on an ascending trajectory, consistently ending days at or near its peak levels. The RSI for both the Nasdaq and S&P 500 had breached into overbought territory, stabilizing above the 70 mark.

Observing parallel trends in both Nasdaq and S&P 500, which were influenced by their exposure to technology and information technology sectors and their sensitivity to interest rate fluctuations, I opted to take a greater risk on what appeared to be a highly likely scenario.

Approach to Trade Management:

Strategic Market Monitoring

In scenarios like this, it’s crucial to diligently monitor the market’s fluctuations, as it can interpret data in diverse ways. A key insight I gleaned from Linda Bradford Raschke’s workshop was the importance of focusing on the market’s response to data, rather than the data itself. With this in mind, I strategically entered the trade a few days before the scheduled Federal Reserve rate decision.

Given the backdrop of slowing wage growth, increased productivity with lower labor costs, and previous lackluster CPI & PPI reports, a trend of declining inflation seemed probable. While both CPI and PPI indicated reduced inflation, housing costs remained a concern. The market responded positively, and my positions in both indices showed healthy profits. However, the critical factors influencing the continuation of the bull run were the rate decision and the subsequent press conference.

Post-trade analysis often reveals clear price formations, raising questions about missing ongoing trends, such as the bull run. In the midst of trading, however, there’s a distinct difference in perception. The day following the CPI & PPI report release, my positions appeared somewhat unstable. Daily market volatility can dramatically impact positions, sometimes leading to losses.

Recognizing the importance of the bigger picture is key, especially when not deeply in the red. This perspective guides my entry timing, aiming for optimal pricing. I typically wait to purchase options during a pullback, benefiting from lower premiums and a cushion against rising volatility.

This approach has generally been effective, with pullbacks resulting in minimal losses or modest profits, allowing me to maintain positions through turbulent market phases. While constant chart monitoring might seem advisable, especially during active trades, I usually refrain. Over-fixation can lead to premature closing of positions due to mounting losses or impulsive decisions driven by impatience.

Successful trading demands emotional fortitude; lacking it can lead to undue stress and hasty decisions. I maintained my position in anticipation of the Federal Reserve’s rate decision, despite the challenge of being unable to monitor the market due to a work trip. Fortunately, the Federal Reserve’s dovish stance during the press conference, hinting at potential rate cuts in 2024, played in my favor.

I liquidated my QQQ position prior to the rate announcement, keeping only the S&P 500 position. Upon revisiting the market, the S&P 500 showed a significant uptrend. Capitalizing on this momentum, I secured a profit of $5.03 and exited the trade at a slightly higher point.

Post-Trade Analysis:

Initially, I considered my success partly due to luck. However, upon retrospection, I realized that I had effectively captured profits throughout the uptrend. While contemplating contrarian trades, I ultimately decided that aligning with the prevailing trend, as strongly suggested by the ADX, was more prudent. Persisting with the trades could have yielded full profit potential.

An alert from my trading platform regarding a potential call on the higher strike of the S&P trade induced a hasty decision to exit the trade, reflecting my unease with managing substantial profits, as historically, my earnings had been comparatively modest.

Reflective Insights and Future Considerations:

  • Decision Making on Profits: Weighing the options between setting a fixed profit target versus actively managing the trade.
  • Assessing Market Velocity: Understanding the speed of the market is essential for deciphering its trend amidst inherent volatility.
  • Emotional Balance in Trading: Striking a balance between satisfaction in profitable outcomes and acceptance of losses is critical. Emotional responses to trading results can adversely affect trading psychology.
  • Progressive Trading Journey: This experience underscores my capability as a trader. While fortunate circumstances, like the announcement of potential rate cuts, played a role, various factors could have turned this into a losing trade. Revisit my previous trading reviews to see the many trading errors made in my journey trading.

This trading week has been a journey of discovery, underscoring the significance of recognizing market trends, maintaining emotional equilibrium in trading, and embracing the continuous learning process inherent in the trading landscape.

Trading Journal:

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