It happens – was quite busy yesterday (you know, work gets in the way of trading sometimes) and since it was only a day since the long position was opened, I didn’t pay enough attention to the signal and missed to switch to a short at the close. The reason to bring it up here, is that this situation does happen for various valid reasons (outages, software bugs, etc) and one needs to account for it.
Before considering a solution, let’s consider the options available. First, one can simply stay in the “wrong” position for the day, switching at the close if necessary. Alternatively, one can correct the position at the open. A third approach is a combination of these two – try to convert the position at the open, but only under some circumstances.
I usually go with the third option – yes, I know, that’s a discretionary decision, but it really does depend on the situation somewhat. Or it could be that the discretionary bug is still strong in me. Either way, the factors I consider are:
- Is the current position likely to persist for tomorrow?
- What is the open? Can I switch to the correct position at a better price?
If the current position is likely to persist for another day, then one avoids the trading costs twice by simply staying in the “wrong” position. The second bullet simply says that I am more likely to try to correct the position, if I can do so at an improved price – meaning that the move between the previous close and today’s open is against the correct position.
No exact science here, but certainly something worth considering. Happy trading!