Since I have been in the process of building my funds back up in my account, I have been doing daily observance of the markets to see if there are any viable trading opportunities, and if there are, doing paper trades on them to see how they would play out. This will get me prepared to trade for real when I am in shape financially to do so. My wife still has some funds to do an option trade here and there, but her cash reserves are down, so I only do one once in awhile on lower-cost trades that really look good.
I've had a few good trades lately, and found that the 2-contract (could be just a multi-contract, but in multiples of 2) trades in one direction are working much better than trying to do two-direction trades. The market just isn't that volatile at this time.
The trade that seems to be working right now is using high-volatility stocks and find the ones that make 3-5 point swings within a few days. After it has gone up or down an unusual amount for several days, look for the sign of a turn-around. I've found that a larger gap up and subsequent reversal work the best. If it reverses to under the previous day's close, it is time to consider a trade.
I've also noticed that if there's an inside day after several up or down days, you can look for a reversal by the following day going below the low of the day the original hi (or low) was made. That's when a trade should be considered.
Now, remember to always have a plan in mind. Determine where the trade is going the wrong way and put stops. Especially when you have exited from the first half of the trade (we'll get to that later.) I realize that you can't really put stops on the trade to begin with in an option trade. You need to put a mental stop on the underlying stock when it goes the opposite way of your trade.
Generally, you aren't going to be wiped out by not putting a stop because we are dealing with small amounts here. You should figure out how much you have to trade and that you can lose the whole amount of the trade and still be ok. There is also an amount of time to consider. On lower priced options, generally, you are going to be kind of close to the expiration, so we can't hold the thing more than 2 or three days. Don't be trying to make a killing on every trade either. Generally, we are going to be taking small profits on a larger percentage of the trades, or breaking even, and then, once in awhile, getting a large profit on the second part of the trade upon letting it run.
We'll get into the specifics on exiting next time.
Later!
Thursday, November 11, 2010
Thursday, October 14, 2010
Another Good Rule To Use
I was just looking at some possibilities for paper trades today, and got a thought I felt I should jot down while it was in my head. I've had this one in my head before, but failed to do anything about it. Strangely, I often go against those ideas if I don't write them down or post them in some way.
One of the rules I feel one should use if one is swing trading these volatile stock options is what day you should initialize the trade. Unless there is an extreme situation (like a stock gaps way beyond a range in the direction it was going and begins to pull back rather quickly), you should tend towards starting a trade in the beginning of the week. Monday or Tuesday is best. The main reason for this is, you want to put as many odds in your favor as possible, and the weekend days count as time as well, when you are talking about days until expiration. Your position will always erode, price wise, over those two days that nothing can happen. Sometimes 3 days, if there's a holiday, which is another thing to consider. I would almost NEVER start a trade before a holiday weekend. It can degenerate on the days something CAN happen, but you stand to make some profit and possibly be out of the position in that time. And this is especially true when you are looking for cheap options, usually within a week or two of expiration. Ideally, I don't want to hold these things for more than 2 or 3 days anyway, and when those 2 or 3 days are days where nothing can happen, it seems pretty dumb to start them before that.
Just a thought...
One of the rules I feel one should use if one is swing trading these volatile stock options is what day you should initialize the trade. Unless there is an extreme situation (like a stock gaps way beyond a range in the direction it was going and begins to pull back rather quickly), you should tend towards starting a trade in the beginning of the week. Monday or Tuesday is best. The main reason for this is, you want to put as many odds in your favor as possible, and the weekend days count as time as well, when you are talking about days until expiration. Your position will always erode, price wise, over those two days that nothing can happen. Sometimes 3 days, if there's a holiday, which is another thing to consider. I would almost NEVER start a trade before a holiday weekend. It can degenerate on the days something CAN happen, but you stand to make some profit and possibly be out of the position in that time. And this is especially true when you are looking for cheap options, usually within a week or two of expiration. Ideally, I don't want to hold these things for more than 2 or 3 days anyway, and when those 2 or 3 days are days where nothing can happen, it seems pretty dumb to start them before that.
Just a thought...
Wednesday, October 13, 2010
Some Paper Trading Results
Okay, so I've done a couple of paper trades, and by gosh I DID find out some things, some additions to the rules I had thought up.
There are many ways to figure out how to get into a trade, but you only need one or two to always have plenty of trades to go around. I've found that I like reversals, partially because stocks always seemed to reverse on me when I was trading a momentum method. All it takes is a little observation of what a particular stock does, and then adjust the entry rule to coincide with how the stock usually moves. Always keep in mind, however, that anything can change at any time. Way too many times have I become locked into a way of trading something, only to be killed because I couldn't let go of it. Anyone else do that? I think that is a great lesson to learn. Use the tendencies, but don't become attached to them. There are way too many stocks out there that are always forming new tendencies that you can use to become attached to a particular one. We just get lazy sometimes and don't want to let go of a good thing so we have to go looking for another good thing, and we always think, "I'll never find anything that worked that good again!" Right?
Always listen to yourself, and the minute you hear yourself think something like that, you should whack yourself in the side of the head (not too hard!) and say out loud, "Stop it - there is always the possibility of something better or at least as good."
I have been going back and forth with the ways to enter some of these volatile stocks, and trying to figure out if it is better to wait until they go outside the previous day's range (in the opposite direction), or if it is better to just go for it when you know the stock is at an extreme of a range and it is showing signs of fatigue. There are, of course, problems with both. If you wait until the former, you most likely have less room for the trade to work, and usually are risking more, since your stop would be on the other side of the set-up day's range. On the other hand, the latter would be much more difficult to set up concrete rules for. What to do?
Generally, I would figure you should look at how the stock has behaved in the recent past, and figure out if your trade would have worked then. If the stock switches up on you, it's easy enough to eject from the trade right then. If the thing is making some real wide swings and the set-up day isn't too huge, then you can most likely afford to wait until it is outside the day's range, and your rules/stops will be easy to set up. If the range of multi-day trading is not so huge, but your set up day is pretty wide (wider than you want to risk), then you either pass on the trade, or make a determination the stock is pulling back, and use the range of the day to verify it. I used this method on RIMM a few days ago, and it worked very well. On the other hand, I tried the other one on CREE a few days before that, and it didn't. I wouldn't have lost too much on CREE, however, (again, it was a paper trade) and I would have made close to $100 on RIMM. We're talking small risk amounts here, the value of the initial trade is usually under $150. I'm doing that because if you can actually make money on small-risk trades, then making money on larger-risk trades, if you use the same rules, should be easier.
I think having the set-up day being a particularly big mover, after several days of movement in the same direction, is often a good indicator it is at the end of it's run. That can be your clue to watch for a pull-back, even while the day is still in session. Or, if the stock has a pretty big gap, and looks like it is going to fill it back in, can often be a successful set-up. As long as you keep in mind what I said earlier, and be on the lookout for any change-up.
I'll continue doing some of these paper trades, and, of course, let you know how they turned out and my thoughts. Later!
There are many ways to figure out how to get into a trade, but you only need one or two to always have plenty of trades to go around. I've found that I like reversals, partially because stocks always seemed to reverse on me when I was trading a momentum method. All it takes is a little observation of what a particular stock does, and then adjust the entry rule to coincide with how the stock usually moves. Always keep in mind, however, that anything can change at any time. Way too many times have I become locked into a way of trading something, only to be killed because I couldn't let go of it. Anyone else do that? I think that is a great lesson to learn. Use the tendencies, but don't become attached to them. There are way too many stocks out there that are always forming new tendencies that you can use to become attached to a particular one. We just get lazy sometimes and don't want to let go of a good thing so we have to go looking for another good thing, and we always think, "I'll never find anything that worked that good again!" Right?
Always listen to yourself, and the minute you hear yourself think something like that, you should whack yourself in the side of the head (not too hard!) and say out loud, "Stop it - there is always the possibility of something better or at least as good."
I have been going back and forth with the ways to enter some of these volatile stocks, and trying to figure out if it is better to wait until they go outside the previous day's range (in the opposite direction), or if it is better to just go for it when you know the stock is at an extreme of a range and it is showing signs of fatigue. There are, of course, problems with both. If you wait until the former, you most likely have less room for the trade to work, and usually are risking more, since your stop would be on the other side of the set-up day's range. On the other hand, the latter would be much more difficult to set up concrete rules for. What to do?
Generally, I would figure you should look at how the stock has behaved in the recent past, and figure out if your trade would have worked then. If the stock switches up on you, it's easy enough to eject from the trade right then. If the thing is making some real wide swings and the set-up day isn't too huge, then you can most likely afford to wait until it is outside the day's range, and your rules/stops will be easy to set up. If the range of multi-day trading is not so huge, but your set up day is pretty wide (wider than you want to risk), then you either pass on the trade, or make a determination the stock is pulling back, and use the range of the day to verify it. I used this method on RIMM a few days ago, and it worked very well. On the other hand, I tried the other one on CREE a few days before that, and it didn't. I wouldn't have lost too much on CREE, however, (again, it was a paper trade) and I would have made close to $100 on RIMM. We're talking small risk amounts here, the value of the initial trade is usually under $150. I'm doing that because if you can actually make money on small-risk trades, then making money on larger-risk trades, if you use the same rules, should be easier.
I think having the set-up day being a particularly big mover, after several days of movement in the same direction, is often a good indicator it is at the end of it's run. That can be your clue to watch for a pull-back, even while the day is still in session. Or, if the stock has a pretty big gap, and looks like it is going to fill it back in, can often be a successful set-up. As long as you keep in mind what I said earlier, and be on the lookout for any change-up.
I'll continue doing some of these paper trades, and, of course, let you know how they turned out and my thoughts. Later!
Wednesday, September 29, 2010
An Additional Note for Rules
I just got a thought concerning rules for trading. This is to let you know whether the rules you have set up will work in the long term, or not.
If you are doing a trade, and you feel your heart racing with the excitement as to whether the trade will win or not, chances are you do not have the kind of rules in place that will make you money in the long term. If the actions of putting on a trade, and everything else that you do to complete it seem a little boring or just a day-in, day-out type of feeling, chances are that is a system that will make you money in the long term.
I know this because I go against it all the time. I am constantly wondering if I am doing the right thing. That is because I do not have the proper rules in place that tell me what to do, and I have not paper traded enough to set up those rules. I am impatient, and it is getting me killed.
Next week, I am going to start paper trading this method, because I know somewhere in here is a good method for trading, and if the proper rules are followed, money would be made on the long term. I will keep you posted on the results of my paper trades, the criteria I used, and how it is coming out.
If you are doing a trade, and you feel your heart racing with the excitement as to whether the trade will win or not, chances are you do not have the kind of rules in place that will make you money in the long term. If the actions of putting on a trade, and everything else that you do to complete it seem a little boring or just a day-in, day-out type of feeling, chances are that is a system that will make you money in the long term.
I know this because I go against it all the time. I am constantly wondering if I am doing the right thing. That is because I do not have the proper rules in place that tell me what to do, and I have not paper traded enough to set up those rules. I am impatient, and it is getting me killed.
Next week, I am going to start paper trading this method, because I know somewhere in here is a good method for trading, and if the proper rules are followed, money would be made on the long term. I will keep you posted on the results of my paper trades, the criteria I used, and how it is coming out.
Monday, September 27, 2010
My Main Lesson Here
I beginning to think this method was a mistake to try without some heavy-duty paper-trading. It seem every stock, except NFLX, has flattened out every time I enter a trade on it.
The main lesson here, though, is, DON'T TRY A TRADING SYSTEM WITH REAL MONEY UNLESS YOU HAVE HARD, STEADY RULES TO FOLLOW. This means for every circumstance. This also means you MUST paper trade in order to arrive at those rules...otherwise, you won't know what all the circumstances could be. Yes, you will always come across new ones, but at least the ones that happen often but you don't think about will get out in the open.
There has to also be rules for money management. In other words, you need to figure out how much and how often you can trade for the amount of money you have available. For instance, I had no business trading with only a $500 account (acutally, not even quite that.) $1500 is even stretching it, especially if you don't do your homework and paper trade enough. Come to think of it, there probably isn't a big enough account if you don't do that. Even after paper trading, though, you should be able to withstand 20 losses in a row and still have at least half your account left. Sounds ridiculous, huh? I guarantee, that anyone who figured out how to be successful doing this thinks that way.
I'm going to see what I can get out of my remaining trades and, unless there are some extraordinary circumstances, hold off trading for awhile. Probably do some paper trading, just to solid up my rules.
The main lesson here, though, is, DON'T TRY A TRADING SYSTEM WITH REAL MONEY UNLESS YOU HAVE HARD, STEADY RULES TO FOLLOW. This means for every circumstance. This also means you MUST paper trade in order to arrive at those rules...otherwise, you won't know what all the circumstances could be. Yes, you will always come across new ones, but at least the ones that happen often but you don't think about will get out in the open.
There has to also be rules for money management. In other words, you need to figure out how much and how often you can trade for the amount of money you have available. For instance, I had no business trading with only a $500 account (acutally, not even quite that.) $1500 is even stretching it, especially if you don't do your homework and paper trade enough. Come to think of it, there probably isn't a big enough account if you don't do that. Even after paper trading, though, you should be able to withstand 20 losses in a row and still have at least half your account left. Sounds ridiculous, huh? I guarantee, that anyone who figured out how to be successful doing this thinks that way.
I'm going to see what I can get out of my remaining trades and, unless there are some extraordinary circumstances, hold off trading for awhile. Probably do some paper trading, just to solid up my rules.
Saturday, September 18, 2010
Trading Rules
I keep observing myself when I do this trading method. I find it very difficult to establish good solid trading rules that I can stick to. Maybe I should jot a few possible ones down right now in this post.
The first one should have to do with frequency of trading.
When I first started doing this, I was thinking in terms of the Animal Crossing model. You can't do more than one trade a week there, unless you fart with the clock. You also have a VERY strict amount of time to be in the trade. This I am starting to stick with, even more than trying to achieve the profit goal.
The deal is, there are so many variables in option trading. When you come up with a rule, there are always logical reasons to break that rule, depending on the circumstances of the particular option. What I need to do is force the issue by only trading a certain kind of option, with regards to amount out of the money, and how many days before expiration, and always observe the way the stock is trading at the time of the trade. In other words, I need to ask the questions, did the stock just have a big move in a hurry? Is it in the middle of a trading range, or on the extreme end of one? I also need to look at my account and only trade if there is a proper amount of spare money to do one of these trades. If there's not, I must have the discipline to not trade. That means I am done in my IRA account. I have not done well with the cash in that account. Fortunately, it seems to be going towards selling more stock in there, so there should be more cash in there. I need to understand that the market could turn around at any time, and I don't want to leave myself with no cash when the time come that I am to buy more stock. Excuse me - I am writing about the wrong subject for this blog. That is for the AIM for Dogs blog.
I haven't really had a good trade since the NFLX trade. I have been using lower priced stocks that come from the Volatile Stocks site. NFLX's price is getting too high, and subsequently, the option prices are getting out of hand. I need to realize that these lower priced stocks aren't going to generally act like a high priced stock like NFLX. They generally trade in ranges, albeit large ranges, which I need to use to have consistently successful trades. My fault is that I get too anxious and want to trade too much. I need to cut that out. I don't have thousands of dollars to put into these trades, and I'm finding as my budget gets lower, the possibility of success goes down.
I made another observation that if I used multiple-contracts, I would save significantly in commissions, which when all is said and done, generally you just end up paying the commission out, because the net trade ends up about even, wins vs. losses. That's probably a thought to use for when I have a higher amount of cash to use for trading. That also would introduce more options for rule-breaking, like pairing out of trades by selling only part of the trade.
Options expired today - two of the RIG options expired worthless. I was able to salvage the call on WFMI yesterday - the stock was able to rally and go above the strike of the option enough that I could actually get a little money on top of the commission. The NFLX put expired - if I trade options on that stock again, I guarantee I will not sell it before it at least gets to the goal. I have left a lot of money on the table, not believing that the stock would run. Oh well, I was minding my rules, which what this post is supposed to be about, right?
By the way, the VXX trade I was able to get out of with only paying commission on it. The trade originally cost $110 and I to $90 out of the put and $20 out of the call on Thursday. I then bought a call option on the same stock for October, because I'm fairly sure that this stock can't stay at this level much longer. Kind of going against my whole plan here, but once again, my lesson is your gain.
The first one should have to do with frequency of trading.
When I first started doing this, I was thinking in terms of the Animal Crossing model. You can't do more than one trade a week there, unless you fart with the clock. You also have a VERY strict amount of time to be in the trade. This I am starting to stick with, even more than trying to achieve the profit goal.
The deal is, there are so many variables in option trading. When you come up with a rule, there are always logical reasons to break that rule, depending on the circumstances of the particular option. What I need to do is force the issue by only trading a certain kind of option, with regards to amount out of the money, and how many days before expiration, and always observe the way the stock is trading at the time of the trade. In other words, I need to ask the questions, did the stock just have a big move in a hurry? Is it in the middle of a trading range, or on the extreme end of one? I also need to look at my account and only trade if there is a proper amount of spare money to do one of these trades. If there's not, I must have the discipline to not trade. That means I am done in my IRA account. I have not done well with the cash in that account. Fortunately, it seems to be going towards selling more stock in there, so there should be more cash in there. I need to understand that the market could turn around at any time, and I don't want to leave myself with no cash when the time come that I am to buy more stock. Excuse me - I am writing about the wrong subject for this blog. That is for the AIM for Dogs blog.
I haven't really had a good trade since the NFLX trade. I have been using lower priced stocks that come from the Volatile Stocks site. NFLX's price is getting too high, and subsequently, the option prices are getting out of hand. I need to realize that these lower priced stocks aren't going to generally act like a high priced stock like NFLX. They generally trade in ranges, albeit large ranges, which I need to use to have consistently successful trades. My fault is that I get too anxious and want to trade too much. I need to cut that out. I don't have thousands of dollars to put into these trades, and I'm finding as my budget gets lower, the possibility of success goes down.
I made another observation that if I used multiple-contracts, I would save significantly in commissions, which when all is said and done, generally you just end up paying the commission out, because the net trade ends up about even, wins vs. losses. That's probably a thought to use for when I have a higher amount of cash to use for trading. That also would introduce more options for rule-breaking, like pairing out of trades by selling only part of the trade.
Options expired today - two of the RIG options expired worthless. I was able to salvage the call on WFMI yesterday - the stock was able to rally and go above the strike of the option enough that I could actually get a little money on top of the commission. The NFLX put expired - if I trade options on that stock again, I guarantee I will not sell it before it at least gets to the goal. I have left a lot of money on the table, not believing that the stock would run. Oh well, I was minding my rules, which what this post is supposed to be about, right?
By the way, the VXX trade I was able to get out of with only paying commission on it. The trade originally cost $110 and I to $90 out of the put and $20 out of the call on Thursday. I then bought a call option on the same stock for October, because I'm fairly sure that this stock can't stay at this level much longer. Kind of going against my whole plan here, but once again, my lesson is your gain.
Monday, September 13, 2010
Low Volatility Days
Well, of course, shortly after I start trading a strategy that needs volatility to work, the volatility of the market goes to crap. RIG finally made a move to a ceiling of 60, and as soon as I was able to get $1.00 for the call, I took it. Of course, the stock kept rallying and the call almost got to $2.00, but I was happy salvaging a majority of the trade, considering I had held it much longer than planned, and was going to expire in a week.
NFLX also went kind of flat for awhile, and, again, when it finally made a move, I quickly snatched profit on the option that the direction made the money on (the call). I didn't quite recover everything for that, but it was close. You need to become flexible when it comes to not losing money. I think that may be my problem. Lately, the stocks have laid there for the first week, and after that, I go into the mode of 'not losing money' instead of 'making money.' The Making Money mode, I have decided, is in the first week of the trade. If it doesn't work, then the mode changes. The timing has been off for the last couple weeks.
I tried something that is a bit bold this week, and it may turn out to be a not-so-smart move. I bought a put and a call for VXX, which is basically a stock that moves off the volatility of the market. The stock itself is very volatile, though, and right now very cheap. It is trading at all-time lows right now, although its charts don't go back more than 2 years, so, evidently it is a fairly young equity. The boldness of this comes in considering the options expire this Friday. I decided to do it, though, because it was a chance to buy the options at the money for very little, which is really all I have. Probably not a good reason to enter a trade, but, again, my experiences, good or bad, can be your lessons. Pretty cheap lessons (for you!)
NFLX also went kind of flat for awhile, and, again, when it finally made a move, I quickly snatched profit on the option that the direction made the money on (the call). I didn't quite recover everything for that, but it was close. You need to become flexible when it comes to not losing money. I think that may be my problem. Lately, the stocks have laid there for the first week, and after that, I go into the mode of 'not losing money' instead of 'making money.' The Making Money mode, I have decided, is in the first week of the trade. If it doesn't work, then the mode changes. The timing has been off for the last couple weeks.
I tried something that is a bit bold this week, and it may turn out to be a not-so-smart move. I bought a put and a call for VXX, which is basically a stock that moves off the volatility of the market. The stock itself is very volatile, though, and right now very cheap. It is trading at all-time lows right now, although its charts don't go back more than 2 years, so, evidently it is a fairly young equity. The boldness of this comes in considering the options expire this Friday. I decided to do it, though, because it was a chance to buy the options at the money for very little, which is really all I have. Probably not a good reason to enter a trade, but, again, my experiences, good or bad, can be your lessons. Pretty cheap lessons (for you!)
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