Archives of “February 2019” month

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Profitability -Market Timing

  
  Education
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How often you are right on a trade is only half of the equation. The other half is how much do you make when you’re right and how much you lose when you’re wrong. You can remember that with this formula: Probability (odds of it going up or down) x Magnitude (how much it goes up or down) = Profitability.

“Market timing is the art of making investment decisions using indicators and strategies to observe and determine the direction of prices. Many believe that market timing involves predicting the future, when in reality, the goal of market timing is to participate in periods of price strength and avoid periods of price weakness.? 

Have a Goal

  
  Education
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There is no reward without risk, and there should be no risk without reward.  Knowing this, there’s absolutely no reason why each trade shouldn’t have some favorable objective associated with it, so set a goal for each trade.  A realistic one that could quite feasibly be reached during the course of the trade.

Perhaps you’ll set a hard target and book profits once that level is reached regardless of how strong the momentum seems at the time.  Or perhaps you’ll plan to book partial profits at intervals along the way.

At the very least, having some idea of a level where your stock could move to is still going to help you formulate a game plan, even if you don’t choose to leave a resting order in that zone to book profits.

If you know your stop and you have some kind of upside expectation, then you’ll have a far better grasp of just what your risk is on a given trade and whether or not it should be taken.

A story of how honesty cost one trader his job.

  
  Education
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With the current climate surrounding the investment banking culture in the wake of the Barclay’s Libor scandal, it is interesting to read about the story of Steve Clark taken from his interview with Jack Schwager in the Hedge Fund Market wizards. 
 
Clark is a highly successful hedge fund manager, running the Omni Global fund which during the period since inception in 2001 has returned almost 20% per annum, with a maximum peak to trough drawdown of just 7% and not a single losing year. However during the 90s he tells a story of how he was forced out of a major investment bank purely for being honest. 
 
The excerpt from the interview goes as follows:
 
‘Nomura ended badly for me because there was a change in management. The new guy in charge wasn’t straight. He had a convertible book, and all he was doing was buying illiquid convertible bonds and every month pushing the price up. He was the market because he owned most of these issues. So all he had to do was buy a few hundred bonds every month to push the price up. (more…)

Try to Learn these things

  
Education, Life
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  1. Ancient Chinese philosophers realized that with great danger often comes great opportunity. This nexus is further reinforced by the fact that the Chinese character representing both danger and opportunity is the same. Remember that only those who possess and use the necessary skills to survive the period of great danger are in position to profit from great opportunity. Risk control is paramount.
  2. The extrinsic (time) component of the option premium goes to zero at options expiration. Always.
  3. Although statisticians would argue, the probability of occurrence of an extremely unlikely event is much greater if you “bet the farm” on the event not occurring. Never forget that black swans do exist.
  4. The human brain is not inherently logical. It evolved for survival and is prone to make erroneous assumptions and draw incorrect associations. To guard against these potentially costly errors, continuously challenge your assumptions.
  5. Absence of proof does not constitute proof of absence.
  6. Thinly traded options are usually characterized by egregious B/A spreads. You may be able to negotiate acceptable spreads to enter the trade. You will not be able to do so if you need to exit. It is usually better to stay away from these snares.
  7. Option orders executed as spreads always receive better fills than individually placed orders.
  8. Failure to consider current IV in an historic framework for the particular underlying will usually cost money.
  9. Failure to follow predicted changes in volatility prior to a known event (e.g. earnings) indicates there is some factor of which you know not. When discovered, it usually impacts your position negatively.
  10. Failure to use and understand option modeling and option modeling software puts you at a significant competitive disadvantage to other participants in the options market. The only thing more expensive than having appropriate tools is not having them.
  11. It is stunningly easy to “roll more than you can smoke”. It is usually disastrous to attempt to smoke all you rolled if you find yourself in these circumstances. This is another reason to model trades and crisply define risk.
  12. If you create multi-legged option beasts by manually entering the orders as opposed to entering from a graphical presentation, you will enter positions incorrectly and end up “upside down” and commit other similar errors more often than you thought possible. You must monitor the magnitude of extrinsic value when short options are ITM. Failure to do that and considering your trade plan in light of these developments, will result in unanticipated early assignment at the most inopportune times. Option positions can be easily adjusted to improve their structure only before they enter the ICU.
  13. Forgetting to honor time stops when holding certain varieties of option beasts can be as costly as forgetting price and/or P/L stops.
  14. Good traders know what they know; great traders also know what they don’t know. (more…)

EXIT in Trading

  
  Education
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exit_strategy1Exit– The exit is critical to being a successful trader. Let your winners run and your losers run out quickly. Two factors determine your exit, the Target and the Stop loss you have set on entering the trade.

1. The Target is determined by the type of market and the trading history of the stock.

2. If the trade proceeds in your direction move the Stop loss keeping it tight.

3. It the trade continues to move, you may want to take your money off the table!

4. Profits should be taken before reaching a S/R. SO WHAT if it continues to run after you left!

5. Take Profits quickly and often! And remember discretion is the better part of valor.

6. The two most important factors in determining the Stop loss are the last S/R and providing enough margin for the trade to be successful. You must balance these against each other.

7. The Stop loss can be predetermined by your maximum loss limit but understand a small loss limit can positively impact your probability of success.

8. I must balance courage and common sense when staying in the trade. The money may be better used in another trade.

9. Remember small losses are the key to success in an environment where you may be wrong greater than 50% of the time.

10. Don’t give back, remember you can always get back in!

11. Don’t change my rules and therefore my settings.

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