Difficult Not Dangerous

I was having coffee after the markets closed with another trader who trades his own money-(I am writing this note in the evening of Thursday) and we were chatting about markets in general and system trading in particular. I referred in passing to the fact that my STT Buy trade was triggered today. I also said that it was a very difficult to take. When Nifty crossed 5703, I cut my short positions but my entire being was screaming against going long. My mind was listing out all the negatives, including the fall of the Euro, Portugal downgrade, possible ripple effects in Italy, Ireland and Spain etc. I did go long but it was not easy, it was in fact extremely difficult.

It was then it struck me that the trade was difficult and therefore not dangerous! If going long was difficult not just for me but for a lot of people then most likely it was not a dangerous trade because it would in all probability not be a crowded trade. Even if the trade did not work out, the dangers of being long in this market was probably less than normal.

This is quite a Paradox. The fact that what is difficult is probably not dangerous. We normally equate difficult to dangerous because we think that what is difficult is more likely to fail. But when I thought about it I realised that as in trading this Paradox is true in many areas in life. The difficult path is most probably the path of Truth and the correct path and consequently less dangerous in the long run. The easier the option, the more the likelihood of the option being dangerous.

As the discussion with my friend ended and the second round of coffee finished, I actually left the place with a good feeling about my trade!

I am now long on STT and LTT. I will cut my long positions but not go short on the STT if Nifty falls below 5684. I will go short on STT only if Nifty falls below 5615. Similarly with LTT, I will cut my long positions below 5560 but not go short. I will go short only below 5447.

To summarise:      STT                       LTT                     Exposure                 

Current Position    Long                      Long                   100% Long

Probable Trades   Cut long < 5684       Long                   0 + 1/3 = 1/3 long

                          Go short < 5615       Long                  -2/3+1/3 = 1/3 short

                          Short                      Cut long < 5560  -2/3+0   = 2/3 short

                          Short                      Go short < 5447  -2/3-1/3 = 100% short