Another thing you can do after a strong counter-trend rally in the contract you’re looking to short, is to buy puts or longer-dated puts. The June 1250 puts on the S&P 500 emini are priced at $2,400 and have 91 days until expiration. Rallies can make put options cheaper and by owning puts you are still trading with the overall trend.

If you are wrong, and the trend reverses up, you have a defined loss with the puts that you don’t have with the futures. Plus, with 91 days until expiration, you have time for the down trend to resume, as well as have more information about Japan and the potential for QE3 to evolve.

Another benefit is that you are short over the weekend with the puts, whereas you are not if you are a day trader and go home flat on Fridays. This way, if there is bearish news released on a Saturday or Sunday, you’re already short and have limited loss exposure.

The key is to not over lever your account. With each option costing $2,400, make sure that you don’t put an inordinate amount of your equity into any one position. If you have a smaller account, there’s not much you can do about it, but you don’t have to let the premium go to zero either. You can risk 50% of the premium before you offset it.

You have to define your risk and know that trading futures and options on futures can involve loss. The professional traders know what they are going to lose before they put the trade on. I suggest you do the same and don’t risk what you cannot afford to lose.

Chaucer, Dante, and Shakespeare all used foreshadowing in their writing. One of Shakespeare’s most famous quotes is the title of this post “Beware the ides of March,” which appears in Julius Caesar.

It got me thinking with today being the Ides of March, that strong counter-trend moves are a bit of a foreshadowing in the trading world. Very frequently, the counter-trend moves provide great entries once they reverse.

(click for larger and clearer image)

Take a look at the large green candle in the Dollar Index chart. Once the high of that day is tested and fails, there are several places that a trader could have faded that counter-trend move. Can you name at least one of them? I’ve written about this rule before on MartinKronicle.

Seats for the April mentoring trading class are filling up. Learn to define you trading edge.

You are capable of controlling your whipsaws to some degree by monitoring you position size and adjusting it accordingly. This is true whether you run a computerized system or are a discretionary trader.

As volatility increases for the contracts you are long or short, you’re likely to see your equity get whipped around more. That can be trying on your nerves. If you don’t have a friendly, neighborhood Trading Tribe ™ to go visit in order to uncover what those nervous feelings are trying to teach you and where you may be feeling them in your body, you can read a little about them here.

If you are a systems trader, you are likely to be long several commodities listed in the chart. The “% Change ATR” column represents what has happened to the 20-Day ATR since February 1 through the 28th. If you are fully-loaded with cotton or crude oil, for example, you may find that your account equity is getting whipped especially due to either of these contracts. What to do?

Cut the position down to better keep a lid on your daily change in equity. You can do this by hand or you can program it to take effect once the ATR has increased by a specific percentage.

Did you say daily equity ? Yes, if you are going to approach an allocator, they will almost certainly ask to see your daily equity run. If it’s more that 0.50% you are considered very aggressive. It’s not bad, but it’s not likely to help you get an allocation. When I speak about his in the Mentoring Program, eyes start popping out of people’s heads. Allocators don’t need you to drive volatility: they can get that on their own without you and your fees. Low vol is an asset to an allocator as much as your alpha and small drawdowns.

If you are a discretionary trader, you are likely trading around core positions or swing trading. Seeing gigantic swings in your equity might be what trading is all about for you. Just keep in mind that if you see a one or a two-range day in the direction of your liking, you can absolutely see a two to four-range day against you. I have had them happen to me. Use your protective stops all you want, but when you wake up and the contract is off 2 big numbers, there’s not much you can do. Your first loss is your best loss at that point.

Regardless of your approach to risk management (what everyone else calls trading), the result and the shape of your equity curve that you garner can be controlled to some degree if you learn to “prune your hedges” and keep a position size on that if it goes against you, can’t kill you.