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Archive for May, 2010

Now that I’m single again, I’m finding myself with a lot more time on my hands.  While my blogging has picked up recently, it also picked up in February and March before I was single so I haven’t been filling my time with additional writing.  Instead, especially over the past couple of weeks, I’ve started to get more actively involved in trading again.

This has been a double-edged sword.

I just started fooling around with options again.  While some of my trades have been profitable, I’m currently sitting on a position that is several hundred dollars underwater (and was the opposite the week before) that I still think will be profitable in a week.  Next Friday is the deadline because that is when they expire.  I probably should have sold them last Friday but I am certain that they are going to go up in value.  I am fighting my impulse to cut my losses because I have a belief in my own analysis.

The good thing about options trading is that I am learning to trust my instincts and pattern recognition from years of having a feeling that I can’t describe.  I’ve felt the market do stuff like this before and I feel like I know what is going to happen.  Yet I can’t be sure because I don’t have a good strategy.  It turns out I am profitable more often than not, and that’s because I know that my trades are often profitable for a short period of time and then turn around.  Because I am currently forcing myself to get out of positions quickly, this is working.

The problem is that I feel that I am only as good as my last trade.  And my last trade isn’t the one I closed, it’s the one I closed but shouldn’t have.  I made 7% in one day yesterday.  But had I held on, I could have made 30% in two days.  That makes me feel terrible on the inside.  But yet I can’t stop trading, it is a feeling that I don’t understand.

Jim Cramer, of Mad Money fame, has a book called Confessions of a Street Addict.  It’s one of my favorite books because he tells the story of his day-to-day nature of hedge fund trading and the emotional swings that he went through.  He wrote a column last year describing how he “hates” himself.  I thought he was being melodramatic, but I completely understand what he means.  The term “hate” is not the best way to describe it.  I don’t know how to use words to describe the emotion that goes along with it, but I get it.

I used to think that in the markets, emotions can be a detriment.  I know longer think that.  People who have had brain damage where their intellect is intact but their emotional processing centers have been damaged have serious problems doing basic tasks.  They can organize things but they cannot prioritize and take action.  They can figure out that certain things are risky and dangerous to their well being but keep doing them in spite of knowing this.  This suggests that emotions are still a center of our well being and we need them in order to function normally.

These emotional swings, highs and lows, are things that I experience.  I feel so much regret when I see a trade go up further still when I sold it earlier.  And I have a lump in the pit of my stomach with these other option positions that are so much in the hole.  And I feel elation when I make 100% in one day.  And I have to fight every ounce of my desire that wants to close my current position in natural gas even though it’s up 10% in two days.

I cannot tell you why I just don’t stop trading.  Well, maybe I can – I don’t stop trading because I don’t want to.  I  have stop losses.  I restrict options trading to less than 10% of my portfolio.  I trade reversals and short term momentum so I think I know what I am doing.  But I still experience that emotional anxiety that I thought I had cured myself of when I went to a lazy portfolio.  That little bit of active trading part is a powerful elixir.

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I’ve started trading in options a bit and I find myself panicking and doing the wrong thing for lack of knowledge in this crazy market.

I opened up two positions yesterday – call options in IBB (Nasdaq biotech) and UYM (building materials).  I made a bit of money in the former and lost a bit on the latter.  I really should have let them ride but decided to close them today even though I think they have more to go.  But not having a good options trading strategy, I’ve decided to go in and out relatively quickly until such time as I feel comfortable letting them ride.

I made a net gain of 7% ($122) in one day.  Not bad, I would say.  Not great, I think that I can get triple digit returns trading options but I saw that the SP-500 reached its 50 day and encountered resistance.  To me, that suggested that the rally was not looking as good as it once did and that the risk/reward ratio was not in my favor anymore.  I fully expect maybe a slight advancement and then a collapse in some other positions that I am not in and then pick up some put options.

I fully expected my position in IBB to keep rallying even more, but now I am not so sure.  The market isn’t oversold anymore (only slightly) and so because my preferred holding period in options is so short, I decided to abandon my positions and keep my tight profits.  I realize that this is not a great idea, but not having a strategy means get in and get out quickly.

Mind you, 7% return in one day is better than the 1.5% it would have earned in a savings account in a year.  So I guess I should be proud of that.  In order to get $122 return in a savings account, I would have needed to tie up $8133 for a year.  This way, I only tied up $1742 for one day (includes commissions).  That’s a better way to get a return on investment, I think.

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Tonight, I had the opportunity to perform my effect that I call “Number, Please.”  Basically, it’s a numerical trick that works on the premise that a spectator calls out a number and I turn around a piece of paper to reveal a sequence of numbers, all of which add up to their chosen number.  It actually gets pretty good reactions from people.  As a magician, I would have initially dismissed it as not having that much of an impact, but people seem to like it.

I performed that effect tonight for a girl who was at the dance studio.  She’s seen me perform before and whenever she sees me, she actively asks to perform something new.  Tonight was no different, so I performed this one.  I grabbed a pencil and a note pad, did the effect and then gave her the Post-It note.

I walked away and came back to me later with all sorts of questions and theories.  Now, when it comes to magic, I am dishonest.  But I am honest about being dishonest.  In other words, I openly claim that my performances are a blended fusion of magic, suggestion, psychology, showmanship and misdirection.  It’s not real.  But at no time will I give away my effects.  And to misdirect away from how the effect is done, I continue performing even after the trick is done.

She asked me a question that was sort of leading in the direction as to how it is achieved.  It wasn’t quite correct but it wasn’t wrong.  It was probably more right than wrong.  She said “Did you do <this>?”  What could I do in this situation?  I could admit it and weaken the effect.  Or, I could do my new policy – I lied.  I said no.  “Really?” she asked.  Again I said no.  She then rephrased it again, and once again I said no, that’s not what I did.  In each instance I did not tell the truth.

It used to be that I would neither confirm nor deny anything.  I still do that, but sometimes I lie.  Sometimes I tell the truth, but often to misdirect away from something else.  I figure that my secrets are my own to divulge and even when the trick is done I am still in my persona.  Being an expert in body language, I made body language motions that signal confidence and not ones that signal mental duress.  I made eye contact and put my palm down on the counter, shaking my head as I said “no” (as opposed to shrugging my shoulders).  You can see that I was laying it on thick.

When it comes to magic, if you’re a muggle, you won’t get much out of me.

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Today, the market pounded everybody really, really hard.  It started off as a slow decline and at around 2:40 pm Eastern, it fell off the table and started selling off massively.  Everyone who’s portfolio was exposed to the long side of the market took a hit today, including my own.  It was a complete beating.

Except it wasn’t a complete beating.

As I have explained before, I have a lazy portfolio which is composed of ETFs that track various markets.  However, I also have an active trading component.  One of those is RSW which is an inverse ETF.  Whenever the market goes down, that one goes up.  So, I made a little bit of money in RSW, selling too early but still locking in a gain.

That’s not the good part, though.  I don’t normally boast about all of my trades, but this one is special.  Last night, I went home and made a list of all of the stocks in my watchlists that were trading near their 52-week highs.  For you see, I had a theory – all of my good stocks were getting stopped out after large down moves but all of these other ones were bucking the trend.  I’ve had stocks buck trends before and they hold up for a while but eventually collapse and get dragged down under the weight of the rest of the market.  I ended up with a list of five stocks.  Among them was Baidu, my all time best trade.

I decided that I was going to buy a put option on Baidu.  A put option gives you the right to sell a stock at a particular price.  So, if the price goes down, the value of the option goes up.  I woke up early and put on a trade 7:13 am this morning.  I closed my position at 11:53 am, 4 and a half hours later.  I made a gain of 108%.  That is not a typo, I shall type it again – I made a gain of 108% in one day.

This represents my all-time best trade ever.  I have never come anywhere close to that, and it is unlikely I will ever come anywhere close ever again.  It was a lot of luck.  I had no idea that the market would sell off that hard.  I watched it go up, come down and go up.  And then it went up more.  And some more.  And then some more!  At that point, things started to get ridiculous and I decided to close my position because I had doubled my money in one day.  And I was lucky I did because the market had a huge sell off and then made a V-shaped recovery.  Had I waited to sell at the end of the day I would have surrendered 1/4 of my gain.

This is one of those times when things worked out well.  I bought the option at the perfect time because the stock moved up in the first hour of trading, which is when the option would be cheapest.  I then sold it about 10 minutes after the market swooned; had I sold 10 minutes earlier I could have tripled my money… but I’m not complaining.  I’ll take a 100% in one day, any day.  Yes, there was a lot of luck involved, but it was also pattern recognition.  I recognized the pattern of seeing stocks hold up and I bet that they were probably going to fall.

So yes, today was a terrible day on the market.  But it wasn’t that terrible.

Incidentally, I had another smaller position that was also up 100% but I held onto it and it surrendered 90% of those gains (from a technical perspective the underlying stock should fall another 3-4 points).  Like the rest of the market, this stock also formed a sharp V-shaped recovery.  Even though I made a huge gain in Baidu, I still feel like I missed out on this one.  I was thinking at the time I should have sold, although my web broker account was frozen so I guess everyone was trying to get out.  Maybe tomorrow it will continue the collapse.  Here’s hoping.

Finally, every single stock on my watchlist moved down huge today.  I could have bought put options on any of them and made money.  I didn’t go all out because I don’t have a good options trading strategy (yet).  But perhaps 2010 is the year I change that.

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Remember that stock I was talking about last week that was up 10% for me in a few days?  Well, it swung around and fell 20% from that.  It gapped down and I decided to close the position because it releases earnings tomorrow.  It’s either going to gap up or gap down but from a technical perspective, the trend has changed.  I kind of wanted to hold out in hopes of getting a good earnings report and a reversal, but on the markets, “hope” is a 4-letter word.

My trading this year in individual stocks has been awful.  I am right temporarily… and then the market turns around.  My stocks tend to correct much harder than the rest of the market which is irritating.  My timing is always either right and then wrong, or early.  The only good news in all of this is that I bought an inverse ETF (RSW again) and I am catching back some of my losses for the first time in forever.

The redeeming feature in all of this is that while the market is correcting, it will be a good time to add to some shares.  The other redeeming feature is that I played my hand properly, restricting my active trading to only a narrow portion of my portfolio.  I am wondering whether or not I should close my other position and lock in my gain while I am still showing a profit.  Or maybe I should buy some put options and hedge against future losses.

Hmm, options… Might be time to fork out a strategy.

Oh yes, one more thing – I need to adjust Terry Zink’s Lazy Portfolio to include Emerging Markets.  This means a reduction in exposure to EFA and buying more EEM or VWO.  I don’t really need a big position in underachieving Japan, do I?  No, I think not.

Update

Ok, so I have been thinking.  I really need to get an automated system in place to execute my trade exits.  I seem to lose that discipline in trading when it comes to taking profits/cutting losses until those losses are either much larger than I planned or the gains have vanished.  This happens to me over and over.

I have been thinking that I have a few technical systems I could implement.  I could easily write a software program that connects to the web, downloads market data and does some technical analysis.  If it meets a sell point, it should sell the stock.  I think it’d be difficult for me (personally) to do this coding, but I could have it send me an email alert instead.  Once I get it, I could execute the trade.

The one problem is that my second thoughts might get in a way.  What I really need is a trained monkey who can understand a cell phone and log into my account and do the trades for me.  That cuts out my own emotions of second guessing.  The reason I don’t sell these stocks is because I want to hold them for the long term (this greatly improved my trading 3 years ago).  But I don’t have to do that anymore since I now have a lazy portfolio.  So maybe swing trading is the way to be for me that uses a variety of exit signals.  I still have to enter them manually, but getting out should be done using a strict set of criteria.

Update 2

Ok.  So, I’ve been reviewing strategies for making money in a down market.  I went and looked for stocks that have been holding up well and have moved in a single direction (up) without collapsing yet.  I’ve been toying around with the idea of either going short on them or picking up some put options.

Options are difficult to trade because they are so volatile.  If I did buy some, I’d have to be right and be right fast.  The gains are smaller but the amount of capital you expend is also smaller.  For example, it’s possible to make $100 on a $500 investment, a gain of 20% in only a few days.  That’s if you’re right. 

I am going to wake up early tomorrow and pick up some short term options on the stocks I have identified and see if I can pull out some gains.  My capital in my account is starting to deplete (down 7% in 3 weeks) so maybe I can make myself feel better by making some of it back.

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I have never really watched the television series The Amazing Race until this past season.  I caught parts of episodes before and watched a couple last year but it never really caught my attention until this year.  I’m not sure what changed but now I’ve been watching it fairly consistently.

This past episode, they were in the city of Shanghai, a place that I have been to before.  They went to a little shopping complex and I thought it looked familiar.  It then cut to a scene and there was a Starbucks in the background.  Suddenly, I jumped up and pointed at the screen.  "Hey! I was there! I was there!" I shouted.  And I totally was, I recognized the Starbucks totally due to the angle and the shopping complex architecture.  I then did my Happy Dance.

It was just like being on the show.

Actually, I’ve been to a few places they’ve been to this year – France, Singapore, Shanghai and San Francisco (next week).  It makes me feel important.

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I have a number of types of spontaneous dances.  If you hang around me long enough, you’ll be sure to see me break out in one of them in response to a various event.  Let me go over the three types:

  1. The Happy Dance – The Happy Dance is the most common, and the least structured.  This dance is when something really good happens to me, or something just really good in general, or I’m trying to get someone else in a good mood.  It’s more or less the same dance as my trip to Australia.  Basically, you kind of hop back and forth from foot to foot very quickly, and you swing your arms out-and-in with your elbows bent.  Speed of movement is not crucial but it cannot be slow.
  2. The Victory Dance – The Victory Dance is the dance of champions.  The beginning of it is structured.  You start off by verbally humming (loud enough so that people can hear you) the Final Fantasy victory music and raise your arms in the air.  You then start moving your arms up and down like the characters from the original NES Final Fantasy.  You continue humming the music and at this point you can either stop moving your arms or continue, or you can add steps to it.  The key part is the opening.  The Victory Dance is reserved for when I make a good trade or I achieve a financial victory, or a competitive victory such as beating somebody in a game of mini-golf.
  3. The I-Was-Right Dance – This is the dance of smugness.  If ever I have tried to make a point and someone tried to disagree with me, and then we later on find out that I was right (as usual), I do the “I-Was-Right” dance.  This dance has the least movement and is done somewhat slowly.  It involves raising arms straight out at shoulder length and then then swaying from side-to-side.  Your arms kind of dip up and down a little as you sway, and your head sways as well as your shoulders.  Your eyes should also be closed.  This dance has an air of smugness reserved for it and it is designed to rub it in a little.

Now, these types of dances cannot be done on the spot.  They must be associated with a specific event (like a genuine smile).  But rest assured, eventually you will see me do one of them.

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