I'm Back! The rumors of my death have been highly exaggerated. I can't believe it's been nearly 5 months since I last wrote an entry, damn! I am sure by now I have essentially no readers(so that would be exactly 2 less than before I took a break).
Anyways, after about 3 straight months of not doing anything just waiting out the market, I am now back in the game. I was at a level in my account I really did not want to go below, in fact even after re-capitalizing with some money I got from selling some things(I sure will miss my left testicle) I am still at a dizmal level, but I am much more comfortable.
So, with that out of the way, it appears we are headed higher, I was waiting for a break of 12,750 to signal the next leg up, and we got that friday and it held today. The only semi concerning thing is the S&P has not broken significant resistance of 1390 yet. I feel this is coming shortly though.
So my first two trades back are not examples to go by, but bring up the age old question. Plan or Conviction? In my early days(and a great bull market mind you) I made quite a bit of money going with conviction based on what I thought would logically happen. Such as, if Apple had say 2 big announcements coming up and they would be positive, I could expect a 10 point move in a month, so I'd buy options accordingly, without any regard to the chart. Sometimes I could be at a large loss and still end up making out very well by sticking it out and keeping my timeline. Of course I then lost even more money following this same line of thinking.
The first two trades started out strategic, they were trades on AAPL(Apple) and GS(Goldman Sachs). AAPL was in a short term uptrend for the past month and the pull back it had was a perfect entry at 155. I entered this in the beginning of the day. Same with GS, the stock has seen significant resistance at the 180 level, which at that point it was above, I entered early.
This is an example of why it is always good to wait till the end of the day to see a confirming break out or support hold. Both AAPL and GS, failed, with former finishing at 153 and the latter falling back down to 178 by close. Had I waited till the end of the day I would not have entered these trades.
The "correct" thing to do in terms of consistency and rules would have been to get back out of the trades right before close for a small loss. In both cases, it would have been a good move because AAPL fell down to 145 and GS down to 168. At those levels both of my call positions were much greater than the 2% riskI want to be taking per trade, in fact one was nearly 50% of the original investment.
In this instance I had bought July dated calls, 165 for Apple and 185's for GS, simply because I knew earnings were approaching for Apple and they would likely announce the 3G iphone in June if nothing else, so 165 in 3 months seems very reasonable and decently conservative. GS seemed to be forming an ascending triangle about 20 points in size, so again 185's seemed good and it had no subprime exposure and market opinions seemed less bearish on the financials(and GS in general) lately so I thought it would be a break out.
So, all these trades were taken before the break out of the Dow and Nasdaq indices. As of tonight I am luckily sitting at a 56%(of investment) gain on my AAPL calls and only a small loss(a little over 1% of my total account) on GS. This was the WRONG way to do it, the market could have kept going against me however I lucked out this time. The problem with these relapses is it can be a big issue in the future because it will draw me down again. I had my reasons to stay in obviously and wait out the loss but, no reason should trump rules because in the long run the rules will keep you profitable, not conviction. I will give you an example of how a recent GOOG day trade proved this point. I took a position, should have immediately closed it when it broke the other way. I held assuming at some point I would be in the money and lost my entire investment, so instead of losing 1-2% I lost over 6%. That all adds up in the long run.
I entered into a new trade today as well on the Q's(Nasdaq tracking ETF), some June 47 calls. With the break out of the Nasdaq. My thinking for these was that this was going to be a fairly heavy tech earnings week and in general most of the names are not leveraged to the US for their business, so they should do fairly well. I would like to see a 4 or 5% move up in the next couple weeks. My price target is 49. I am risking 2% of my account to hopefully make 10%. A 1:5 risk reward ratio is always something to take. I am currently up a little over 12% on the trade. I will exit if I get past my maximum risk of 2% total account.
As for AAPL and GS. My price target on AAPL is 175. on GS it is 195. GS is still an unconfirmed breakout, it finished over 180 today finally but on below average volume. If I hit my 2% loss I will exit and wait for full confirmation. Cutting your losses and letting the winners run sounds so simple, and it is when there is no human involved. ;-) Apple releases earnings on Weds after the bell so depending on if I have hit my target or not I will hold over earnings. If I have hit my target I will leave 1 contract on the table over earnings.
As an aside, oddly enough the one place that actually confirmed how important rules are was Las Vegas. Blackjack is a game of streaks, you get on winning streaks and you get on losing streaks. You want to minimize your loss on your losing streaks and you want to make as much as possible on your winning streaks. This is done through progressive betting. When you win, you stack your bet by your minimum, when you lose you only bet your mininum. So 3 consecutive wins will greatly outweigh 3 consecutive losses.
The point of rules in trading is the same, you minimize your losses knowing that the longer you last the more winners you will have to outweigh your losses. If I have a streak of 5 losses, I have lost 10% of my total capital. I could then have a good trade that makes me 20%. Even though I am smart enough to realize this and trade this way most of the time, I would love to be able to set all my targets and just leave it once I enter a trade so I am taken out of the equation entirely. :-)
Whew, that was a long one, sorry it's been a while I had a lot to get out, haha. We'll see what tomorrow brings.
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