The Wednesday before a USDA report is upon us tomorrow. Whippy Wednesday should live up to its name. As a floor trader, I learned to exit the pit after 11:30 AM, double check all of my trades and vamoose from the floor ASAP. I never wanted to be around for the afternoon chop fest, especially, because the risk of a very detrimental out-trade was heightened prior to these numbers. Of course on any day, as a trader, we ran the risk of walking into a 3 to 5 cent loser from an mistake from the previous day. That was acceptable. What was not acceptable was walking into a potential day where an mistake from the previous day could result in a 15 to 30 cent (if not worse loser).
An out trade, fyi, was just that, A trade between two traders or two different brokers which did not match up. Buys match with sells. Quantities match with Quantities, Prices match with prices.
Out of these three potential areas for mistakes, a buy vs a buy or a sell vs a sell could be most detrimental both mentally and to ones pocket book.
A buy vs a buy, resulted in both traders being short from that particular trade. A sell vs sell, makes both long from that price.
In general, if the out trade was between two locals, both assumed the position and covered the trade usually on the opening bell. This was a 50/50 split.
An out trade between a broker and a local was different. Ever effort was made to make the customer, or paper order, whole. After that, it was between the local and the broker to assign blame and either split it or, if one party knew he was in error, to swallow the whole mistake.
However, good out trades, (those where the resulting accidental position was profitable) were always amicable. Both sides have a profitable position. Its like taking your pants to the cleaners, and before you turn them in, checking the pockets and finding hundreds, if not thousands of dollars. Not a bad way to start the day.
However, the flip side, if both were faced with a loss; those could get ugly. Imaging walking in to start the day and immediately being on the hook to write a check for hundreds, if not tens of thousands of dollars. Not much fun.
So, given the odds were good that, on the day of a USDA number we would have increased volatility, I generally did not want to do a whole lot the day before. I came to this realization after a few times I did not follow this advice. There will be plenty of action the day of a report. Why needlessly put yourself in a position where there was a possibility of an error.
Of course, with electronic trading, those errors have greatly diminished. They don’t exist for pure screen trader. However, I still like the general tact of not doing a whole lot the day before either a USDA number, and Unemployment number, a Fed number, or any major announcement which is being anticipated by the trade as a whole.
Thursday morning will be plenty busy. I suggest taking it easy Wednesday. But that’s just my preference after years of living through the trade numbers.
Of course, if you want to flip a coin, or put 100 down on red vs black, by all means go home long or short coming into the number. Just be ready to lose that money completely, and perhaps more, if you have to chase the market on the opening. Worse case scenario, you could lose a limit move on a future, before you would be able to go and do a synthetic position with options to cap your losses.
As for the grains, I would rather be long beans, short corn and short wheat. We’ll see how that plays out Thursday Morning.
Good Trading
