Trading Journal #3

Hello fellow forum financiers and laconic lurkers. Recently I have restarted paper traded with minimal profits (read: I am in the red). I have what I believe is a solid viewpoint of the markets already, so now I need to figure out how to turn the resulting perception into profit. Aka the hard part. The quickest way to turn things around is to document everything to see patterns and open everything up for discussion, so here I am and here it is.

Trading Mission Statement:

Simply wanting something is not enough: You cannot will change to come about. You have to define, refine and focus on a plan in order for change to come about. Goals can and will change over time but if I haven't defined them to begin with, I sure as hell won't be able to figure out what I want midway through the process. Mission statements guide decision making in businesses and work in journaling as well:

Goals

Recent reading has shown me that structuring goals makes the road to success much more tangible, and also makes setbacks easier to identify and eradicate. Every goal I complete brings me a step closer to trading for a living and every step I ignore adds another step in my quest. In this way, self-discipline and trading go hand in hand: the short run eventually turns into the long run. All that I can do is address mistakes/reinforce success, and stay positive and patient while waiting for the results to skew in my favor. Here are my Dec Goals

Trading Goals for Dec 2011

- Continue to use the 15 or 60 charts for set ups. Use the tick chart only for entries

- Use the market's perception of value as a reason to enter a trade as opposed to merely volatility

- Remember that the opening range is a good indicator of potential volatility intraday

Miscellaneous Trading Goals

- Study how traders you respect size up a trading chart: JLC, Ichi, timmyb, FatTails, etc

- Reread notes you have taken on trading books you've previously read

- Be in the green after 5 sim-traded days

- Read/Take notes from The Daily Trading Coach

Journal Goals

- Accurate assessment of reasoning for entry/exit ASAP before bias sets in. Also, make it concise and structured or else I will not want to reread it later

- Have a bias/expectation every trading day. Each day is unique but it is also related to the recent chart history as well. Create a plan and a back-up in case it is incorrect.

Thanks Hikapo!

I got a job right after I made that post so I haven't been as active as I'd like but I'm getting back to where I need to be mentally. Hope you are still trading as well.

What I have my eye on

I have been brainstorming a theory for the last few hours that still needs to be ironed out. My theory is that regarding short term option trading, the closer the strike price with a 0.8 delta is to the underlying as a percentage, the greater the return on my investment is potentially. For example, with KBH, I might need to buy an option that is 8% in the money to achieve a 0.8 delta. However, with Apple, I would only need to purchase an option that is 5% in the money to achieve a 0.8 delta.

What I am still working out is exactly when/how this is beneficial. I think it is because I can wield an option that mimics the underlying using less capital (as a percentage of the underlying anyways). The high delta allows me to get the same returns as someone who owns 100 shares KBH, but by putting up 8% of the cost, whereas with AAPL, I can get the same returns by using only 5% of the cost of 100 shares.

I might be incorrect, but the conclusion I have reached is that high delta limits the time premium (risk) in the option, and the small % of investment to reach a high delta means that the leverage is increased (or perhaps more optimally in the Option Traders favor is a better way to put it). So all things being equal, finding the underlying with the lowest % difference between the underlying price and what you believe constitues a high delta (0.8 in my personal analysis) would optimize rewards and minimize risk.

Originally I thought the reason for the discrepancy of % was because the strike price as a percentage is smaller with more expensive underlyings but then LVS allows for greater leverage than AAPL so that argument is dead in the water. Perhaps it has something to do with the remaining intrinsic value in the option?

Comment if you have any ideas or you see anything I am overlooking in my reasoning.

Hey traders. I am restarting my journal this week to bring forth some accountability and also to document my progress. In retrospect, I think I was putting off trading because subconsciously, I knew it was going to take dedication/hardships to be successful and I was not mentally committed at the time. I have been reassessing my previous attempt at trading and one issue I have recognized is that previously, when it came to setting goals, I was too vague or my goals were too big to gauge progress daily.

After reading and experience, I realize that the point of goals is to track and gauge progress, not to reach a plateau like 'increasing my account value by X%'. Consistently winning the small battles leads to eventually winning the war so every week, I will have goals to accomplish that are connected to the larger trading goals.

Being that I haven't been involved in the markets in quite some time, my goals are going to be starting out pretty basic. I have no misgivings about how unprepared my trading prowess is currently... Charts don't tell a picture like they used to, and I do not know what the prevailing sentiment of the market is for traders and whether it has recently shifted or not. I have set goals for these areas as a result. Also, I just ordered Technical Analysis Using Multiple Timeframes by Brian Shannon which I believe will assist with both of those goals as well. The book is too expensive for my likings, but I have learned much from Shannon's online analysis and I enjoy his minimalistic approach to trading so I will begrudgingly part with my cash.
 

(Short term) Goals for 7/1 - 7/7:

- Look at charts for an average of 30 minutes every day

- Read affirmations and visualize reaching your goals daily to make the idea of trading successfully tangible

- Create an overall context of the markets by reading SeekingAlpha Articles/The Gartman Letter. Also continue to listen to Bloomberg Radio on a daily basis

- Knock out 2-3 chapters of Brian Shannon's book when I receive it and save your notes on the computer.

Review of (Short term) Goals for 7/1 - 7/7:

- Knock out 2-3 chapters of Brian Shannon's book when I receive it and save your notes on the computer.

I didn't receive the book until Thursday afternoon but I completed my goal by reading 3 chapters so far.

- Look at charts for an average of 30 minutes every day:

I looked at some charts a few times last week. The charts looked like noise still as I did not have a context to put them in yet so I shied away from heavy analysis after a few days. Now that I am reading the new book though, it is allowing me to look for certain things on the charts so I am going to jump back in to this goal next week.

- Read affirmations and visualize reaching your goals daily to make the idea of trading successfully tangible

I reread some of my notes on 'Market Wizards by Jack Schwager to tap into that winner mentality and some of the documented success stories but I did not visualize or affirm as much as I'd like. This week, I will write down trading-specific affirmations that will be advantageous to ingrain in my thought process

- Create an overall context of the markets by reading SeekingAlpha Articles/The Gartman Letter. Also continue to listen to Bloomberg Radio daily

 I have been consistent with this goal. and I will continue to keep my ear to the financial ground. The Gartman Letter is a little too one-dimensional for my likings and I find that they make judgments and take political stances too often which colors their perception of the markets too much for my liking so I might just stick to SeekingAlpha posts and maybe global finance/economy stories from my personal Google News feed.

All in all it was a good first week. Fell behind initially on my weekly goals but I was able to catch up on my reading on the July 4th holiday. The economy as a whole is making sense to me now as the question is whether or not USA will be affected by the Euro crisis and the uncertainty that is still present in Europe. Even after a resolution was reached, the effects look like they may not go into effect for about a year. I have a context for the economy as a whole and will continue to have that context as long as I stay informed by reading/listening to news. Now I need to work on getting a context for reading charts and individual stocks.

(Short term) Goals for 7/8 - 7/14:

- Create a list of trading affirmations that you can use daily and also figure out what the hell you want to visualize specifically. I was too vague when I set the goal last week and it was not achieved. I need to ensure that my goals are always

- Look at ETFs for the overall markets, currencies and the major sectors. Determine what market stage they are in, and log this in your Weekly ETF overview in your notes

- Read up to and including Chapter 8 from the trading book

- Continue to gain context of the market by reading SeekingAlpha, The Gartman Letter and another financial analysis tool daily

'Forgot' to post last weekend because I did not complete most of my goals. I was still reading up on the markets to get a good idea for how the economy is looking but I haven't completed the other goals to the standard that I want to hold myself to. I thought of affirmations to say but I didn't write them down and I sure as heck didn't repeat them until they became subconscious thoughts. I was reading the book but I didn't take notes as thoroughly as I'd like so I had to reread the chapters which I have been putting off.

I ended up going to The Taste Festival out here in Chicago twice over the weekend so I didn't have a chance to catch up.

I just sat down and created some trading affirmations to repeat and I will repeat them daily on the train ride to work instead of counting the grays on the back of someone's head for 40 minutes.

Short term Goals for 7/19 - 7/28

- Read trading affirmations @ least once daily on the train

- Reread all of the notes you have written about the trading book. Do not let the knowledge go in one ear and out of the other

- Read three more chapters of the book

- Continue to read Seeking Alpha posts daily.

- Size up ETFs at least once over the weekend, once during the week and then gauge your results by the end of next weekend

Quote:

Originally Posted by Bermudan Option 

Short term Goals for 7/19 - 7/28

- Read trading affirmations @ least once daily on the train

Completed

- Reread all of the notes you have written about the trading book. Do not let the knowledge go in one ear and out of the other

Completed

- Read three more chapters of the book

Incomplete

- Continue to read Seeking Alpha posts daily.

Up to date with this

- Size up ETFs at least once over the weekend, once during the week and then gauge your results by the end of next weekend

Completed

    Thanks to reading and practice, I have a context that I can operate out of. The market, and its subsequent movements all make sense. In addition to sizing up the market 1-2 times a week, my next goal is to practice executing trades. I want to work on anticipating where the market has the potential to go and being prepared for opportunity.  Looking at individual stock is going to be too big of a leap for me to maintain so I will be focused primarily on the sector/industry ETFs. Lower beta than individual stocks but less DD overall.

Short Term Goals for 7/29 - 8/4
- Continue to read trading affirmations on the train daily
- Set alerts for ETFs and look for entry points
- Read 3 chapters from the book
- Read SeekingAlpha posts (last time I will mention this. It is implied as a weekly goal moving forward)



 

Good insight Rock. Yeah, I don't want to become too biased because of predictions. What I do enjoy about the articles is that it does give me a context in the market. I will have to keep an eye to make sure I pay attentions to the charts first and foremost definitely
 

After getting hired permanently, work is slowly becoming more manageable/consistent. Dating life is hectic but not complaining ;-), and I am moving into a new apartment October 1st. With a bit more structure coming into my life I will have time to trade. Also I'm working out a budget so that I can save money monthly and 'play' with more $$$ in my trading account.

I have 10 stacks burning a hole in my bank account, itching to be used. Just finished Brian Shanon's book. Overpriced? Perhaps for some... but it gave me a great context from which to view the markets. Before I risk life and limb though, I need to start paper trading. Boring I know but fuck it. For the first time in my trading life I don't feel undercapitalized. I'll be damned if I ever feel that way again.

Any Chicago Trader in the house? Going to go here and meet some fellow traders tomorrow:

^^^ Ended up skipping the event. I hadn't put any DD in and so I would just be giving lip service to the discussion and going off of theories and ideas that I haven't proven or tested recently. Ah well maybe next time.

I've done a few hours of DD so far today and the biggest question is one that has been on my mind for the past week or two: how will I trade options.

I find that I can figure things out easier if I write them down so here are the pros and cons that I thought of when it comes to Bull/Bear Spreads vs Outright Purchases. Please correct me if I am wrong or if you can think of any other advantages/disadvantages:

Advantages of Spreads (Bull/Bear Spreads)

• Managed risk:  Nowadays there are a lot of traders who have experience and can accurately predict the market to the point that they should be profitable, but because they don't manage risk properly, they end up with a trading account in the red. Being able to define how much I will lose up front every time is a big plus.
• Bid/Ask Spread is irrelevant: If I were trading outright calls/puts, I would have to ensure that the bid/ask spread is tight to avoid slippage and beginning the game too deep in the hole. With a spread though, this is irrelevant (I think?)
• Volatility is irrelevant: Since spreads involve buying and selling, I won't ever have to worry about overpaying for an inflated option and I can participate regardless
• I can do more with less capital: Since half of the spread is sold options, less capital overall is tied up. This works great for trading options with underlyings that are triple digits and/or move fast.

Disadvantages of Spreads (Bull/Bear Spreads)

• Clashes with my trading timeframe: I want my trades to last between a day and two weeks. However, with bull/bear spreads, it is often about allowing time value to decay to lock in profit. The rate of decay increases as the option nears expiration but the further the option is from expiration, the slower it takes to get profits. If I trade an option that expires in 30 days to take advantage of a move that takes 3-4 days, I will be better of trading outright calls/puts. The work around I have decided to do is to use weeklies or front month options that are set to expire in two weeks or less. This leads to my next disadvantage though....
• Greater commission costs: Having two legs or having more efficient capital usage means that I will be buying more contracts. More contracts = more fees. Fees are a big deal still since I don't have millions in my account.

• Short term spreads limit what I can trade: Every stock doesn't have an option chain. Every optionable stock doesn't have weeklies. For the stocks that don't have weeklies, I would only be able to trade them two weeks out of every month. In addition to this, short term options will have little extrinsic value so I will have to trade volatile plays that can move 1-2 strikes in 1-2 weeks or else I will receive very little for the sold portion of the spread. Low price for sold portion of spread = no real reduction of risk. No reduction of risk means I might as well just trade an outright option
• I can't hit home runs; only triples: "The worst mistake a trader can make is to miss a major profit opportunity. 95% of the profits come from only 5% of the trades” – Richard Dennis. Although aggressive bull/bear spreads can minimize what I leave on the table, it is impossible to knock a spread out of the park on a parabolic move because spreads don't participate in parabolic moves

Advantages of Outright Purchases

• Profit potential is unlimited:
• More options to trade at my disposal
• Less commission costs

Disadvantages of Outright Purchases

• Risk is not as easily defined: I trade based on the underlying's pricing. The option that I trade however is derived by many things, one of which is the price of the underlying. There have been many occasions where the option has dropped in price even though the actual stock market price hasn't broken support/resistance.
• I have to pay attention to the volatility and whether or not an option is inflated
• I have to steer clear of illiquid options that have wide spreads

I have been going back and forth over what I want to trade in my head but now that I have it on paper, outright purchases seem slightly advantageous. The main disadvantage of outright trading is that I have to be more vigilant when it comes to risk management. This will be a focal point on my paper trading. The rest of the 'disadvantages' are not really setbacks, they are more like features that require further DD.

With bear/bull spreads, they severely limit what I can participate in because I wouldn't be able to use the tactic for a lot of underlyings that aren't volatile and won't have time premium with 1-2 weeks until expiration.

Solutions

• Spreads might be ideal for the following:

1. When volatility inflates options pricing so that it is more expensive than it should be historically
2. When historical volatility is large because the underlying has been known to run ie: GOOG or AAPL
3. When there looks like little chance of a home run: heavy support/resistance is nearby, market is choppy, etc. (or maybe I should just sit these out completely)
4. Longer term trades (no plans to make this a part of my trading strategy in the near future either)

• I could use outright options for everything else, making sure to control risk by:

1. Set a sell-to-close contingent stop based on the underlying's price falling below anticipated support/resistance
2. In addition to the sell-to-close stop listed above, I want to also always program a sell-to-close stop based on the option's price eroding 2% of my total portfolio value

One week under my belt and my simulated account is in the hole 7. 5%. Sounds like crap but I am actually quite pleased with the results. I have learned a lot in the week.

(Note: I want to risk a max of $200 on each trade)

ABX]: Put a spread on but fucked it up and ended up being long when I wanted to be short (or short when I wanted to be long, can't remember) I made money on the play which sucks because I expect the market to got the opposite direction in the first place. Anyways, didn't manually close out the spread and I was long shares and didn't realize it. Gold was selling off and I got out but not without wiping out my initial profits and then some

FLS: This spread was put on properly but it was wrong directionally. I lost $150 and then paid $50 round trip in commission. Lost money but very very pleased with risk management. This trade is what made me finally decide to trade outright options.

YHOO: I saw weakness on the daily timeframe after the big run up from Marissa Mayer hype. The trend was higher on the longer term and I tried to fade the trend out of greed. Got stopped out and rightfully so.



MSFT: Went short MSFT on break to a lower low on the shorter timeframe. The failed move lower led to a fast move higher and I was stopped out. I am not sure if there were any hints that the move lower would be short-lived, but if so, I certainly didn't look for it. Looking at the chart again, volume didn't give any clues intraday, but one thing I could have looked at was for the underlying to put in a lower high below resistance and/or stay below resistance for at least 30m - 1hr.

SLW: I see what I did wrong and will work on noticing this in the future. After commission, I lost more than 2% my portfolio on this one after commission. Not a whole lot, but I want to be very tight with the stops.

Current Positions
APC: I liked how the chart was setting up, but it was Friday and I wanted to give the trade more than one trading session to go in my favor so I bought Weekly calls that expire Dec 14th.

I got into this trade early and almost paid dearly for it. I risked $10 per contract on this one and had lost $9/ct before the underlying went in the direction I expected.

This was my first runner and it made me realize that I had no gameplan in place for runners yet. During one point, I had $30 profit/ct. Since I risked $10/ct, that is 3x what I risked which is the target. Reaching this plateau, I should have taken some winnings off the table, but I did not and the market retraced.

Currently sitting a $15 profit/ct. I will have to mull over what I want to do with this because there is a potential for some sideways potential before the market takes out the resistance overheard.