Trading Rules – Bobby's Trade Journal

New Year, New Trading Resolutions

So the new year has officially started with the market running on the 2nd. This late rally can be called many things. Bear market rally, Santa Clause Rally, January Effect, and other names involving existing or non existing characters. That means it unclear which way the markets will trend. If they’ll trend, that is. The market may just stay in a range for a little while before defining a direction.

This means to a daytrader that they will have to start monitoring closely to see if the market is range bound or starting a trend. Depending on that, a daytrader will have to use the correct strategy.

Additionally, many securities are running on their own a little and not mirroring the DOW. Which is good and bad. It’s good for those that may find a good trend and benefit. It’s bad, because it may not help identify a trend early enough.

Leaving all the market stuff aside, it’s a good time at the beginning of the year to sit down and make some trading decisions. The last year has been educational. I will be refining my trading rules and will be defining a clear risk management strategy for my trading in the coming year.

Trading Rules And Their Importance

It is a good idea to stop and make a rule review. There has been so many good plays the last few days. Yesterday alone was a guaranteed to be a money maker on down stocks. OK, there’s no guarantees in the market so the previous statement is not accurate. It maybe just hindsight. However, in general there have been many opportunities the last few days that I couldn’t take advantage of because I made one stupid mistake: I went all in on my previous trade. That trade has lost me most of the account (95.43% at the time of this entry), and has kept me away from the market in the last couple of weeks. The market has been volatile and that is a great thing for option traders because it causes premiums to really rise.

With high volatility comes high risk or capital loss. So to ensure capital safety, one must exercise great caution in:

Determining the correct side of the trade
Not forcing a trade
Adhering to the money management plan very carefully.

I hope that in the next trade, I will use better judgement and not use most of my emotions but rather most of my money management plan.

Market Analysis – Nov. 6th

Well, lot of money was made by someone! Big moves always mean someone is making money. When there is someone selling, there’s always someone buying. Not necessarily an individual investor. It might be a fund that buy at a lower since they’ll hold for longer term and might be buying dividend paying stocks. Might also be that the market makers or specialists on exchange floor are buying. But when the market makers and the specialists buy, they will make sure they get a good price. They provide liquidity. Also probably volatility.

Anyway, the MSFT calls are at this point 100% guaranteed to not be profitable. However, what is the minimal loss that I can get out with. I have almost wiped my original investment. That was one of the rules to not lose the original capital. Now, I will have to attempt to guage and estimate a correct price that is possible and attempt exit around that. I will most probably also have to fund the account again.

Never, go all in!

And then there’s the MSFT.

Aside, from the overall market direction, the selling pressure on MSFT seems to be cooling off. So hopefully, it will make a move up in the near future. I also have some MSFT share in a different account. Those are just for holding.

P.S. This post is made on Nov. 7th morning but backdated for continuity.

Lessons From First Big Trade

Currently, my portfolio is down 87% or something crazy. This goes to those rules I hadn’t made yet and that I didn’t stick to. Well, not having made the rules is an excuse, since I really knew money management is the only thing that separates the tranders from the dice rollers.

All I can say it that having my money tied in microsoft has taught me the following:

Just because the stock is a good stock, doesn’t mean the options are worth trading. If the stock is not trending those options mean nothing. Actually, in that case those options are losing time values everyday. Especially, with front month options.
Too far out-of-the-money options lose value very fast once there’s only 3 weeks or less left.
When you’re down more than 50%, get out. Some people might be more inclined to cut their losses earlier, however, with options you have to give it some room. I have been down 40% and then gotten out at a good 10% profit and watched the options to up to almost where it would be 100% profit. When it’s down 40% and you’ve been holding for 2 weeks, it is already time to cut the losses and leave. Realize that at that point anything short of a huge spike in the stock is not going to get to even breakeven.
Refine the trading rules and make them a concise list of rules that can be easily be followed.

Looking at the MSFT chart, is shows it might go up a little tomorrow. However, in general this is such a slow moving stock and anything less than one of those 900pt rallies in the DOW will not make the options move.

I was also playing options way far out of the money to get cheaper options and hoping that buying more would benefit more. That is simply not true. Closer to in-the-money or at-the-money options will move that much more if the farther out options move a lot. So still bigger gains will be at the closer to at-the-money options.

Might have to try to get out around 0.10 or .11 or possibly higher. Although, I won’t hold my breath for .11 or higher. Just wanting to free up the money to play other trades.