Daily Update - June 30, 2008

Sounds like it was a painful day!


Dan
---
Visit my blog UK Student News and Events

Jorge,

Let me preempt this by saying I was considering emailing you just a few weeks ago about getting some dialogue going in terms of looking for a trading partner when I saw your post on OA. I have been on the same ride as you trading roughly the same account size and strategy with about as much experience.

I am glad to see you are finally making some money, but I'm not sure it is clear what you have changed with your strategy. You say it is all about risk and money management. If I recall just a week or so ago you were having some of your worst days. I feel like the recent posts have just been an expression of the opposite side of pendulum. I don't mean this to be offensive simply because I have definitely had my own share of ups and downs, so I guess I am just more curious to know what it is that 'clicked.' It seems like not too long ago you were trading 1 or 2 contracts but you have changed that? How are you managing your risk? Perhaps you'd like to elaborate or dialogue some more. Let me know.

B-rad

Daniel,

Oh yeah.. Painful... for the bulls :)

B-rad,

Hah not a problem. The first thing that clicked was the "A-ha" moment I had a few weeks ago with regards to risk. The mistake I've made this first year of trading was not placing the same risk on every single trade. I was more haphazard with the amount of risk per trade. $100 here, $300 there. When my $300 trade would go awry, my $100 winner wouldn't make up the slack. That's been a huge help and what I consider better money/risk management.

With regards to contract numbers, I'm only allowing myself into options where I can afford at least 2 contracts within my risk tolerance. Having 1 contract becomes very inflexible especially if I feel the need to take anything off the table.

The second thing that clicked? Honestly, it's the post it note I have on my laptop. All it says it "Plan the Trade, Trade the Plan." It's cheesy I know but so far it's worked. I can pretty much sum up the past two weeks in a nutshell. Expiry week put my account near its highs at the time. Last week with the FOMC meeting, I lost about 30% of my account value. The key was the fact that everything was unrealized. On FOMC day when I lost that huge chunk of change, the only stock I sold out of was CMG because in my mind it clearly broke the trend lines I set. As of right now, I appear to be completely wrong in that assessment but it's done and over with. As for everything else, I did absolutely nothing. And that, honestly, was the hardest part.

I also figured out I'm a trend trader. I can't swing trade like others. As long as I have a well defined trend, I'm doing alright. I've tried swing trading, long term trading, futures, and day trading. I think my niche is the trend trade.

So I guess what's clicked so far was being constant in every single trade and, just like Jeff preaches, having patience. And trust me, I whine, bitch, and moan more than anyone else on that blog. But last week when things were rough (even Jeff was bleeding), I did absolutely nothing. And as a result, I'm positive for the year and in the past three trading sessions have made about $1200. I started with $3k. The next step I think is not getting overly confident. The second anyone becomes overly confident, I know the market finds a way to humble them.

so the question i have to ask is what is your defined risk tolerance? I opened w/ a $5000 account and traditional money management and options don't work. There simply isn't a way you can only risk 1R or 2R ($50/$100) on them b/c they are simply too leveraged. When you are talking about what you are risking, do you mean you are putting up $300 to buy into a few contracts and willing to risk it all or are you setting a defined stop, trailing stop, etc??

What I've done so far and worked fairly well, is that the maximum I'm willing to lose on any trade is 5% of my account since I have a small account. However, as some on the OA blog have stated or referred to indirectly, I put up 10% of my account per trade. This way, if the trade becomes a winner, I have a larger piece of the account running. If I lose that half the value of that trade, that's my max loss of 5%. More than likely if your option's down 50%, you were probably wrong.

Here's the current trade on XL that I have going:

About two weeks ago, I bought into XL. 2 contracts at 1.55 for a total of $310. XL started dropping and so I rolled those 2 contracts down a strike but in the same month. I sold both contracts for 3.00, giving me a total of $600, or a net profit of $300 roughly. I turned around and purchased 3 more contracts of XL at a lower strike for about $1. Right now, those contracts are worth about $3. I sold one today and left the other two on the table. Not only is my cost basis ($300) covered, but I have a decent profit on it. Had XL gone the other way, I would have exited the trade had the trade been down $150, or half of the initial cost to get in which is my max risk I'm willing to lose.

In terms of defined stops, etc. I don't use them. I've tried using trailing stops with little success. I'm going more with a discretionary stop position. I have my trend lines and if they're violated with a confirmation (volume mostly), then I'll exit. A lot of this seems to be how Jeff operates, but I have my own slight spin on things.

Now, if I get above $10k, I know the risk management rules will change. How I plan on changing them is still in the air though. I think at that point I'll end up going with a $500 position with a max loss of $250 but we'll see. Baby steps first :)