Trading Process

I have been thinking a lot recently about my trading process, and in particular about getting into a rally in equities like the one we have just had. I have talked before about the idea that the fact of the rally is a good-enough argument for why one’s stop should not get hit, provided one has a countertrend entry. But I find that I am still nervous, because in a pullback, it is hard to know how far is far enough. In fact, in the three pullbacks in the latest rally, a stop would not have been hit (even if I had traded on the first day when I considered getting in, before the biggest down day). Does this mean I should be more inclined just to go for it? Or was I right to avoid trading because I couldn’t make a good argument for why any potential entry point was the right one? Instinctively, I tend to favour the latter view, but the fact that I have missed an equity rally that I thought was going to happen argues for the former.

Perhaps a way of squaring this circle is to think about scaling in. I have never scaled into a position, because I didn’t have an argument for doing so. Many people do scale in, but I see entry points as short-lived opportunities to trade with an unusually good balance of risk and reward. The fact that such opportunities come along only rarely is an argument for exploiting them fully when they are available — i.e. for not scaling in. In the past quarter, however, I have been broadly right in my macro view and failed to make money, and the main reason for that is that no clearly superior entry points have presented themselves. I wonder whether, therefore, when I have a strong view and am trying to get into a market that I fear may not offer a good entry point — e.g. when I am expecting a strong trend — I should attempt to scale in by doing half a trade when a countertrend entry point presents itself, and another half if the market falls further. That way, if the market rebounds strongly from the first entry I will make some money; if it falls further, I will be able to increase to a full position; if the stop on the first trade is taken out, I may still make money with the second; and if both stops are taken out, my loss will be one risk unit.

For the first time I find I have a reasoned basis for scaling in, based on a demonstrable weakness in my process. I think there is a good argument for a process change.


Mr. Shirakawa has said that his is “committed” to continued monetary easing, and that the Japanese economy has “stagnated”. Perhaps the BoJ really is changing its mind on the subject of easing; perhaps this really will weaken JPY; I have to admit, after some time spent thinking this through, I do not know whether either is going to happen. I continue to watch the scatter diagram of USD/JPY vs. the 2-year interest-rate spread so see whether there is a break in the relationship.

Bank Downgrades

Several bank downgrades from Moody’s are apparently imminent, with Morgan Stanley being talked about as the bank that could suffer the most. Moody’s data suggest it could have to post an extra $6.5bn in extra collateral as a result. This is something to keep an eye on, although I think that a collapse of MS is far from likely at present.


  • Japan trade balance fell back, with the deficit back to its widest levels, d.e. Export growth was strong, which the market took as positive.
  • Spanish bond auction was 2.4x covered, with a yield of 5.74%.

Coming Up

  • Initial claims
  • Existing home sales
  • Philly Fed