Hi guys,
I'm quite new to trading. I wanted to know what winding down a position actually entails and how would one go about doing something like this in equities in particular. What do you have to take into consideration when winding down a position, and the mistakes one could make.
Thanks in advance and any help appreciated.
Arsene
Arsene,
If I have understood your question right, the answer really depends on what vehicle you are using to trade.
If you are spreadbetting or using CFDs then you probably want to use a combination of fundamental and/or technical analysis to tell you when the market is going to reverse and then simply exit. Whether that be all at once or in increments is up to you.
However, if you are in the direct market, your biggest consideration when winding down a position is going to be how much you have to unwind.
If you are have a lot of contracts or shares then there is the possibility that in times of poor liquidity or times when buyers and sellers are not acting so agressively, you may push the price against yourself when exiting unless it is done cleverly.
I have found in my observations of others that deal in large size that you cannot decide where you want to get out so much as get out at opportunities where the market lets you get out.
So, for example, if you were long Crude Oil at around $140 upwards and decided that you wanted to get around $150 your best bet would be to wait for the first agressive move up towards that number and start selling into it. An excellent opportunity would be a large drawdown in inventories where the price spikes up several dollars as short term traders get on board to take advantage of what they perceive to be an excellent profit opportunity. If this happens at say $145 ($5 short of your target) then so be it because it may be the best chance you will get to exit in terms of getting the best price.
If you waited for $150 and the rest of the market decided they were going to take their profit there too and in addition short sellers were going to come in at the round number and you then started to offer, the lack of bids could well mean you have to keep offering down and with a huge number of contracts you may get a worse price than you would have done in the above scenario.
I read the other day that the sharp move down in Crude that occured last week (an $8 drop I believe) was due to a large position being unwound. Whether this was true or not it is certainly possible that it could be the cause.
This is what SocGen did when they had a huge number of long positions in equity indices to exit out of. They started agressively selling when there was the interest rate cut because large numbers of buyers were coming in and buying everything that was being offered. These are the kind of buyers that desperately want to get on board. The kind of buyers that hit market and if their bids don't get hit, they chase it higher and higher until they do get filled. This is the kind of market that you want to feed long positions too when you believe it has topped out.
So, your best bet is to define a target area and then buy on weakness and sell on strength as close to that target area as the market lets you get.
It will be of utmost importance to know your market inside out.
I can't be of more help because I don't deal in large size (10 lots max currently) but I have personally seen someone go from several hundred thousand pounds up on a position to several hundred thousand down because when they wanted to get out of a short position that was heavily in profit, the market started to reverse and they were then having to buy back their shorts in the midst of a very sharp rally where the offers had simply dried up. This is what you want to avoid.
