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Option Trading (2014)
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Option Trading (2014)

  #11 (permalink)
Hyde Park,
Chicago, Illinois
 
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Random thoughts on trendline trading

During the weekend, I do most of my DD for the upcoming week. When I see a stock that I like, what I normally do is set an alert for the price I am willing to pay and then forget about it. If there is a pullback in the stock, but my alert isn't triggered, then I never get in on the stock and c'est la vie. If the pullback is deep enough to the price I am willing to pay, then ideally I enter when buyers/sellers perceive the price level as valuable and enter/exit positions.

With SLW, I received the alert that the trendline was being tested, but that initial trendline has not held. Additionally, I never received a strong confirmation via volume. As a result, price has drifted higher on average/mediocre volume and I watched the 1-min charts for a few days to find an entry point.

However, because I have not had a concrete new level of support/resistance that would illustrate that the trendline theory trade has been invalidated (the Weekly trend-line in retrospect has been is pretty vague/subjective because there was a lot of large wicks that can drastically alter where the context within which I view the overall trend). I definitely want to finesse the trade, but trendline bounces are notoriously hard to capture when compared to regular horizontal support/resistance areas. It feels much more subjective and harder to prove to myself when a trade idea has been invalidated. For example, I could theoretically still enter a position in SLW if I wanted to because it is still in a long term downtrend and the trendline is still in effect.

Normally, once the trendline is tested, I look for volume to confirm the shift in sentiment. However, because the context that the trendline gives me is vaguer than support/resistance, I really don't have the proper context within which to zoom in to the 1-min timeframe to stalk an entry. In instances like this, perhaps the best bet would be to use an intermediate timeframe to find support/resistance levels to pinpoint where value can be perceived. Something like the 2hr timeframe ideally.

Two stops in SLW in a few weeks. Technically the trend is still showing but I think that I have a more liquid way to take advantage of the precious metals downtrend by reverting back to a good ole fashion trade on GLD. Will keep an eye on the ETF, and apply what I have learned about SLW to create a trade that I am more confident in even if it results in a stop out.

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  #12 (permalink)
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SubGoals

On the way to work mornings I occasionally read lessons of The Daily Trading Coach. I have had the book for years but still haven't made it past the first 20 lessons or so. I always get distracted during the book and put it down. For what it's worth though, I am in no rush to read the entire book. I get the most out of the book when I focus on applying the lessons so I have to remind myself of that instead of skimming through as many lessons as possible. I have read the first 15 lessons a good 4-5 times already and I appreciate them more each time.

One of the lessons that is recommended is that every day/week, you have a goal that you are working towards. Doing this will create a context for improvement and give each trading day meaning outside of "make more money than I lose". Also, it allows me to reinforce my skillset as a trader because I am becoming better each day/week by completing my goals. Doing this allows me to shift how I gauge my competency as a trader: originally I established whether I was a good trader by my overall P/L, but if I implement goals that I am working towards, I can judge my competency based on the completion of the goals I set (and in the long run, the goals will make me a more profitable trader anyhow)

Steenbarger says that the issue with most trading goals are that they are either:
a) Often based off of results which we can't control instead of process that we can control. For example, if your goal is simply to double your account value, that doesn't give you any concrete parameters that you can work on on a daily basis. There is nothing wrong with having a goal that is monetary, but there needs to be subgoals within it that work on what is necessary to achieve that goal.

For example, Peyton Manning might have had the overall goal of winning the game against the Patriots today, but he had to break down that goal to give him areas to work on throughout the week/in the game. Peyton focused on WR making double moves down the middle of the field because the NE safeties were known to be slow when it comes to returning to cover the middle of the field, Peyton also focused on exploiting man-coverage on Demarious Thomas once the key cornerback for NE was injured, etc. While the overall goal was 'win the game' the execution of various subgoals was what made the overall goal a possibility. Too often as traders, we focus on the overall goal, but do not give ourselves a road map with which to achieve the overall goal.

The question Steenbarger says to ask yourself when setting goals is, "What is the difference that will make the greatest positive change in your trading" Here are my subgoals
  • Concrete targets: I have a target every time I enter a trade, but as a swing trader, my positions sometime take a while to develop. When this happens, I run the risk of watching price action and hoping the stock goes 'to da moon' instead of managing risk with regards to my initial analysis. Moving forward, I want consistently plot my target price on charts so that I always have that context when I review my position.
  • Focus more on trading well & less on P/L: No one likes losing money, but recently I have noticed that I have been slightly stressing over 1-2 positions that have gone against me. In Q1 2013 I attempted to tackle this, but it resulted in reckless overtrading as opposed to indifference towards Account Value. Since then, I have evolved mentally and I have little/no qualms accepting a stop out if it was a strong theory. I do still have issues being stopped out on trades that in retrospect were not very sound, or trades that were initially profitable but that retraced. Additionally, I have caught myself focusing too much on intraday P/L as opposed to just taking it a day at a time. I am more accepting when my account takes a slight dip on a market-wide pullback, but I become unnecessarily concerned when I notice that my account is above/below the initial funded amount. I can reduce the stress I feel regarding by doing the following:
    1. Taking partial profits when the stock nears the target price level
    2. visualize stop-outs prior to entering positions. Completely accept the fact that stopouts are a fixed cost of the trading lifestyle.
    3. Remember that stop outs tell you important information about the health of the stock/market.
    4. If the trend is still intact, I now have a chance to get into the trade at an even cheaper price point.
    5. Put stopouts in the proper context: As long as you limit it to the expected amount, it has already been accounted for in my strategy. That is why my risk is 1/3 of my reward. That way, I only need to be right approx. 33% of the time to breakeven
    6. By always being aware of my price objective thanks to my other goal, the approach to the trade becomes more calculating, and less arbitrarily optimistic
  • Choose your price: Only enter the market when the stock sets up exactly as I'd like. Since my trades are often contrarian (in regards to the short term timeframe) I really want to get a clear signal that there is a perception of value prior to entering a position. The markets create new opportunity on a daily basis so I can accept that I will not be a part of every rally that occurs, but I will be ready to take advantage of the few that meet my criteria.

I can sit down and think of a few other areas that I can improve on, but I want to pay a lot of attention on a small amount of goals rather than a little attention on a large amount of goals. These three goals will hold me over for the next month at least, and potentially until Q2 2014. I am going to stick a post-it note in my apartment so that I am mindful of the goals I am working on.


Last edited by Bermudan Option; January 19th, 2014 at 11:59 PM. Reason: Thought of another way to reduce stress during existing positions
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  #13 (permalink)
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So it looks like you bought the puts for somewhere around $0.47 or so... and you got out at maybe $0.26 or so. Nothing wrong with exiting if you feel it is not a worthwhile trade. But if you read your original premise, you are talking about long term, even months. So 2 days' worth, and about a $1 move in the stock, is enough to shake you out, when you were looking weeks/months down the road, and when it has to move down $2.50 from your entry just to break-even (assuming you are looking close to expiration since you said "months")? Sure you have lost some time premium, but it's not like it really rocketed against you. Maybe it will wind up being a good move to have exited when you did, but your time horizon initially stated does not match the action you took.

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  #14 (permalink)
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josh View Post
So it looks like you bought the puts for somewhere around $0.47 or so... and you got out at maybe $0.26 or so. Nothing wrong with exiting if you feel it is not a worthwhile trade. But if you read your original premise, you are talking about long term, even months. So 2 days' worth, and about a $1 move in the stock, is enough to shake you out, when you were looking weeks/months down the road, and when it has to move down $2.50 from your entry just to break-even (assuming you are looking close to expiration since you said "months")? Sure you have lost some time premium, but it's not like it really rocketed against you. Maybe it will wind up being a good move to have exited when you did, but your time horizon initially stated does not match the action you took.

Good guess. Pretty much spot on w/ the pricing:
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With regards to my position, I agree that time decay was minimal at best. However my $200 risk per trade (including commissions) was hit so the position was yanked as result. I do not think I was overleveraged or anything though, because the trendline and the $21.80 resistance area were both broken convincingly.

Also, I do think that the trade is still potentially worthwhile, but it was no longer adhering to the initial criteria that was the basis of me entering the stock: the long term trendline/resistance level will cause heavy selling in the very near future. (Technically, the criteria that I use for entry was not even used in this trade, so I should have exited immediately. I entered the position and then looked for volume when my strategy involves entering after stop volume occurs)

I expected the stock to move lower, or at the most, move higher a percentage point or two. I entered @ $21.30 and the stock reached $22.60 so technically it is just over a buck, but in the context of the trade, that is a +6% move against me, and a break above key intermediate term resistance on the 2hr timeframe and the trendline I drew (which in retrospect was not that ideal to begin with). This shows that the bullish traders are putting up more of a fight than I can currently withstand.

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Last edited by Bermudan Option; January 20th, 2014 at 02:31 PM.
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  #15 (permalink)
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Stalking Citigroup for an entry. I am watching Citigroup test a lower low and I know I want to wait to see whether volume enters before I enter but there is a small voice in my head telling me to jump in. I realize now that I need to reread my ideas on volume analysis. I haven’t reviewed my reasoning on volume in quite some time, and so the small seed of doubt is starting to slowly grow. On the plus side, I am aware of it, and just typing this post has allowed me more objectivity than I had five minutes ago.
It is unlikely, but I may eventually tweak my criteria for entering a position. I will review what I believe about Volume during after-hours. However, until that happens, I need to stick to what I originally agreed upon: volume confirmation.
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Last edited by Bermudan Option; January 22nd, 2014 at 12:18 PM.
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  #16 (permalink)
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Perhaps, save for extreme cases, stop volume can only be determined in retrospect? I have to think that one through. I don’t want to reduce the analysis to: ‘the stock went higher so I should’ve taken the trade’, but it is interesting to see that the stock did go higher and the area that I perceived to be support held.

I definitely don’t feel bad about not taking the trade though. There will be plenty of other opportunities for me to get involved in trending stocks

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  #17 (permalink)
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Stalking GLD trade on a pop higher
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  #18 (permalink)
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Grabbed some Citigroup after it put in a lower low today:
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  #19 (permalink)
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Bermudan Option View Post
Stalking GLD trade on a pop higher
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Jumped in GLD on a failed test of 122. Stop @ $122.50
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  #20 (permalink)
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I have realized recently that I do have some negative thoughts to weed out still when a position goes against me. I still have not fully accepted the idea of entering a position with 100% acceptance of potentially losing my money.

I am still too affected by the outcome of the trade as opposed to the reasoning behind the trade. The two are not related in the short term so I have to accept when things go against me and focus on the long run. Easier said than done but I can workshop through it. The first step is being aware of the error and the second step is changing my thought process.

Let's git 'er done!

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