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...
Thursday, October 14, 2010
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!
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