We also trade on our own account, EUA futures and CER futures on ICE. Our trading is done mainly based on technical analysis. This is just one of many approaches one can take, but it happens to be the one we find useful. As our clients have substantial natural positions in the EU ETS they are interested in trading opportunities around EUAs and CERs. Therefore we have begun to document our technical analysis of the market and share trade ideas. We do believe that it can help our clients when making their trading decisions.
These ideas aren’t trading recommendations. But they describe positions which we actually take, therefore we are putting our money where our mouth is, for better or for worse.
We feel it is important to point out that our goal is not to predict where the market is going, or when it will top or bottom. We believe that nobody can do that consistently in the long run. Our quest is about finding trade opportunities that have a good risk/reward (R/R) relationship and we try to keep our winning ratio somewhat above 50%. This means that whenever we enter into a trade we put a stop loss (S/L) order so we know how much we will lose if the market goes against us. Let's assume that this happens 50% of the time. If on average we win 1.7 times the stop loss amount or money at risk (this is the R/R) in cases when the market moves in our favour, we end up making money. Given the above statistics, if we have 20 trades and the average S/L distance is 1% from the entry point, we make a return of 7% of the average exposure.
The position size we trade with differs from case to case. We risk, say, 1%-4% of our equity in any given trade. From the entry and S/L level we can calculate how much we can lose with one lot. If we divide the 2%-4% of our equity with this potential loss we arrive at the number of lots we should trade with. The equity at risk is somewhat more subjective. If we have strong fundamentals or news that underpins the price action we might risk more. If we have a very nice signal, but it is opposite to the main trend we might risk only 1%.
The only outstanding question is where the stops should be placed. In most cases we put them below relevant resistance levels rather than a fixed percentage distance from the entry point.
The following example illustrates this approach:
Total equity: €10,000
Amount ready to risk per trade 2%
Amount ready to risk in € €200
Entry price €13.15
Stop loss distance 1%
Stop loss per unit 13.15 cents
Number of units to buy (200/0.1315) 1,521
Units per lot 1,000
Nearest lot to trade 1