I recently finished listening to the Dave Landry webcast (Oct11, on trading psycology) for a second time . What he had to say resonates with a couple of the problems that I've been having with my trading. There is some good advice there which could almost be considered trading rules.
1. Obsess before you enter the trade, NOT after!
Whether you're a day trader or a swing trader, this rule rings so true - after you've entered a position, there's really only two things that you can actually do: sell, or watch. If you sell early (ie. actively close your position before your stop hits), then that means you're either NOT proven right (debatable, but I will elaborate in another post), or you're not honouring your stop loss. He encourages entering alerts - alerts for when the stock is close to your profit target, or even close to your stop. Once you have your alerts and your stops in place, and the market hasn't yet given you a reason to sell, then all you can do is watch, and at that point, then you need to ask yourself whether that is the best use of your time.
However, before you enter a trade, there are many things to check, including:
- confirm market trend,
- confirm sector trend,
- confirm stock trend,
- confirm acceleration and/or persistency of trend,
- confirm stock trades cleanly,
- double/triple check that your initial stop is correct.
2. Trade management: Active vs. Micro.
micro-management (bad) - making too many decisions, exiting too early, not letting the market decide when to take out your stops. The rationale here being that micro-management increases the probability of missing out on the big trending up runs.
Active management (good) - putting in limit orders when the price is close to profit target.
3. The method for digging out of a hole is simple (at least according to Landry):
Trade smaller position sizes.
Honour your stops.
4. 80/20 rule: 80% of your profit comes from 20% of your trades.
Tuesday, October 31, 2006
Better Ingredients == Better Pizza.
The Power of Greed
There is famous and gripping scene in The Exorcist where Father Karras is attempting to drive out the demon that has taken control of Megan. He is in the bedroom with her, takes the cross and begins chanting "The power of Christ compels you!" repeatedly.
Well, I have a personal demon as well, and his name is called Greed. Today, I had an intense battle with Greed and lost. Here is how it unfolded:
I mentioned yesterday that I would be looking to get out of my BIDU calls near today's HoD. Well, I did manage to get out near today's High - which occured when BIDU opened with a nice gap up. This morning's action was so fast paced that BIDU managed to fill the opening gap within a few minutes. Then, it looked like it was going to reverse back up and challenge the HoD. At least, that was what I wanted it to look like. It would be another couple of bucks to move back up to the highs, and that would mean a nice and juicy pop in the calls. So I got greedy and bought back into some of those same Dec 90 calls, but without waiting for any confirmation of the trend reversal. By trend reversal confirmation, I mean another green candlestick, and some volume to accompany the reversal. The volume did actually show up - but only for the selloff!
I've actually been getting better at following my rules lately:
1. honour my stops
2. keep my losses small.
3. Select well behaved stocks with clean looking charts and decent setups
4. Keep my position sizes smaller for stocks where I needed to take wider stops.
But in jumping back into the call options that I had sold just minutes earlier, I made two serious mistakes:
1. Entered a trade because I succumbed to the demon of Greed. The thought of making more money on these same calls clouded my judgement.
2. Did not wait for the the chart to tell me it was reversing the initial downtrend, instead I anticipated, and in the end, hoped for a trend reversal.
As it turns out, the selling became vicious after 10AM, so I was actually lucky to lose just the majority of the additional profits made from this morning's gap up.
Hindsight is 20/20, but it looks like the better move was to buy puts instead of calls, as indicated by this chart of BIDU Dec 90 Puts:
Never underestimate the power of Greed - all it took was a couple of minutes for Greed to work its power to cloud my judgement. I'm not sure if I can ever exorcise this demon of Greed out of me completely, so it is in my best interest to actively seek to further understand this destructive side of me, and study how it manifests itself in various subtle ways. I don't forsee any proactive, feel-good, quick fix, "looks good on paper" plan for dealing with the problem of greed. It's going to be more like a grind it out, slow and steady path to a higher degree of self-awareness in order to overcome greed.
Monday, October 30, 2006
grow
Made one other trade today:
GROW is another example of where taking a smaller position size enables me to take wider stops, and thereby keeps me in the game.
What market pullback?
As implied by my previous post, I was looking for a market pullback this week.
Okay, ok, I know I'm not supposed to anticipate, nor predict where the market is headed, but if this is the extent of the market pullback, then I think we could see a serious rally to the end of the year.
Just some thoughts on my watchlist from the weekend:
TGT - market proved me wrong, looks like a long candidate instead of a short now.
AVCT - peeked its head above 37 this morning, but that was just to take out the buystops. Now we wait for the volume to come and a second attempt at breaking above 37.
NVEC - never had a chance to buy below 41, broke above 44 in a big way. Not sure I would play this right now, but will be waiting for the next pullback.
STEM - Hmmm..... if STEM went up because of Rush Limbaugh then it might not be so bad (for me) to see him shoot off his mouth again.
Gold stocks - quietly inching its way up - did anyone else notice the bullish action in the charts today ?
I also made a trade on BIDU options (BDQLS == Dec 95 calls). It was a very small position, because of my wide stop, plus I'm familiar with BIDU's wild swings in the past, plus I am already heavy into STEM. Anyways, here's how it unfolded this morning.
BIDU reports on Nov1/06 BMO. I think they will beat estimates, but old lessons from holding thru earnings are still etched into my psyche. Maybe I will look for tomorrow's HoD to close my options play.
Saturday, October 28, 2006
All that Glitters
Here is something worth watching in the next week or so. The gold sector is starting to show signs of life once again. Many of the gold stocks have been building base patterns in the past month or two. Here is my analysis of the chart on gold:
Though there were exceptions last year, in general, Gold move inversely to the movements of USD$, so any weakness in the USD$ will add fuel to a possible gold rally.
Interesting Charts for Next Week
As promised, here is a chart on STEM which explains my purchase decision in more detail:
STEM also has increasing OBV. Many technical indicators are in agreement with this stock, not to mention the nice volume spike today. Plus the 15-minute chart has given me a low risk stoploss at around 2.87.
I ran my custom, cooked up MSN moneycentral scan of stocks near their 52-wk highs. Most of them looked like they were in the process of rolling over. However, a couple of them looked interesting. First one is TGT, which looks like a short candidate, esp. if there is a market wide pullback next week:
The next one is AVCT (long candidate):
Last one is NVEC (very short term candidate):
Friday, October 27, 2006
Not All Pain is Gain
Well this morning, I started scalping my old favourite RIM. I made 5 scalps, and wound up down in the hole $50. My thought at that time was, all that hard work went down the drain, what a waste.
Then to try and take my mind off of things, I went surfing for some finance websites (like the new Flock browser, new FF extensions, etc). While I was surfing, it occurred to me that I haven't checked my papertrading account for quite some time now. In fact, I haven't made a trade there since Sep12/06. So I go over to login to my VSE account and was curious to see what shape my portfolio was in. Crikey, it performed better than I have in the past 6 weeks !!?! This was an portfolio that was "margined" (ie. portfolio size was greater than cash available), and was left unattended for 6 whole weeks, no trades, nothing, and it still outperformed me (if you're interested, check out the "DayTraders" game in VSE, I am under phileo, ranked about 264 as of today). Boy, I hope that was a fluke, random, coincidence, because if it was NOT, then I would feel a bit discouraged. In any case, I am going to continue that experiment (pick something trendy, leave it for about 4-6 weeks, and come back to VSE and see how it does).
Then to top it all off, I had distractions at work again today, and when I came back to my desk, I found that GOOG had just tanked by about 8pts!
So why didn't I just place a Goog put buy stop order, you say? Because:
a. shorting is not my strength
b. I'm still new to daytrading options.
c. I feel even less comfortable make a short trade and not being around to watch it.
Anyways, that's how my (trading) day went today - some days you are the boxer, and some days you are the punching bag.
(UPDATE) Bought STEM @2.9about 5-10 min. before close, will post a chart later on tonite....
Thursday, October 26, 2006
All that Money on the Table
Various distractions at home and at work left me with time for only 1 trade today.
Obviously I left a big point on the table, but the key question here is if I had to re-do this trade all over again, would I do it any differently, not knowing that it was going to slide all the way to the FOMC meeting ?
Probably yes, because if I were to re-do the trade all over again, I would notice the declining volume, meaning there were not enough buyers to continue the push it beyond 480, ie, there were more signs showing up to indicate an increased risk in this trade. That meant going for the quick scalp once it failed to hold 480, instead of holding out longer for more gains.
Also, I'm not too sure how many more of these $10 days that Goog has left in its bag of tricks. Without these big $10 moves, I'm not sure I would want to risk another options trade. We'll see how things unfold in the next few days.
Wednesday, October 25, 2006
Thoughts on options swing/day trading
You know, yesterday I was searching half-heartedly on the 'Net to see if there is anyone else doing what I have been trying lately - daytrading and swing trading options. Sure, there's Adam's options trading blog, but he focuses more on educating newbies like me on options trading in general (which I am starting to read, by the way). I think that the folks at DayTrade Team (DTT) do get involved in options swing trades, but they only report it after the fact. I suppose that is not that much different from what I have been blogging about here, but I want to provide a different focus and perspective on it.
I haven't been able to find too many websites that talks about doing options swing trading, and certainly none on options daytrading. And also, I haven't found, anyone blogging about their own options swing/day trading experiences. So, I will be the one of the first guys to do it - although at this point in time, I don't really see myself getting heavily involved in too many options daytrades (esp. once the euphoria over my Goog call options win dies down). But I will talk about my options trades whenever I do make them, and hopefully I can get to the point where I will talk about the ones that I will focus on ahead of time. Sort of like how I talked about my Goog call options trade ahead of time (instead of after the fact).
In regards to the suggestion to buy AAPL calls last week, IMO, the options swing trade that they (DTT guys) and Brian Shannon suggested was a higher risk options trade than my GOOG options daytrade. I'm glad that it worked out for the DTT guys and Brian, but holding AAPL calls thru earnings is not something that would fit my risk tolerance.
By the way, here is how my RIMM call option trade turned out:
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