Trading Sardines - Lessons in the Markets from a Lifelong Trader by Linda Bradford Raschke

Author:Linda Bradford Raschke [Raschke, Linda Bradford]
Language: eng
Format: epub
Tags: Trading, Stocks, Financial Markets
Amazon: 1532395620
Publisher: Riddler
Published: 2022-02-15T18:30:00+00:00

Trading Places—“Sell, Mortimer, sell!”

You know it hurt your feelings when you still remember the trade 25 years later. As always, much of my learning came from bad trades.

It might sound easy to initiate or exit a trade when there is a breakout from a chart formation. But try doing this on size in a New York futures pits through a broker when there is no liquidity in the early nineties. With electronic trading, orders are Executed in microseconds with one mouse click. The worst-case scenario is nasty slippage, but at least you are filled immediately.

Order execution on the New York markets worked both ways. If you showed a size offer as the market was rallying it would most likely get taken and vice versa. An old expression from the floor was, “stock goes to size.” The ticker tape for the individual transactions ran beneath the option quote board in the pit where we stood. For example, the bid for Amerada Hess, one of the stocks I traded, might be 24⅛ x 24¼, 5,000 x 50,000. Pretty good odds that the 50,000 shares offered at 24¼ were going to get bought. Of course, this does not mean much anymore. Over the years, the average transaction size has gone from 1400 to 1000 to 100 shares. But, there still is something to this. We used this trick many times in the New York futures markets. If we offered out 8 sugar contracts 40 cents above where the market was,trading, nobody cared. But if we offered 100 contracts and everyone knew they were there, it was likely the offer would be taken. And the market could drop right back down afterward.

Rick was instrumental in setting up our technique for position sizing. It allowed us to grow methodically without thinking about the number of contracts we were trading. It also is a super way to manage risk. Each quarter, we calculated the average daily dollar range per market. If gold had a 20-dollar average daily range over the previous 30 days, this translated into a $2000 average daily dollar range. If the SP e-minis had a 14-point average daily range, this is a $700 average daily dollar range. Gold sizing might be 4 contracts per million. If we had $100 million in AUM, it meant that 1 unit of gold equaled 400 contracts. In the SP e-minis, 1 unit might be 10 contracts per million or 1000 contracts.

I never thought about how many contracts I was trading. It was easier to say, “Buy one unit.” As we grew in assets under management, it was simple to increase the unit size accordingly. We used ¼ and ½ units too, to adjust for market correlation. For example, gold and silver are correlated, so we traded ½ unit of each if we had positions on in both. I used Steve Moore’s site, MRCI, for its free correlation tables which he still publishes today.

Another benefit of trading with a predetermined unit size is that it is one less decision needed during the trading process.

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