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.
Wednesday, September 29, 2010
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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