What I wrote on 9/1/10
Just a real quick update on the puts I bought Monday.
I’m still in them. I had some problems with my trading platform and should have dumped them before now but I’m currently near break-even and my indicators are not saying that the Q’s are going to break above this level so I’m going to stay in them for a little while and see what develops.
Patrick
Here it is just one week after writing the above post. It’s a good time to review
this trade with you. I never did go into more of my puts. Shortly after I wrote this my indicators turned up and I closed out the trade. Here’s how the trade is entered in the TTAM trade book.
587 08/30/10 10:14 AM BTO 100918P45 QQQQ SEPT PUT 45 200 $1.42 ($28,400.00) ($250.00) ($28,650.00) $294,477.50 14723.88%
588 09/02/10 10:42 AM STC 100918P45 QQQQ SEPT PUT 45 200 $0.80 $16,000.00 ($250.00) $15,750.00 ($12,900.00) -45.37% $310,227.50 15511.38%
The downside was the $12,900 loss I accomplished. It amounted to a net loss of over 45% as the last entry shows. My review of the trade showed me right where I lost that money. It also shows me the things I did right as well.
Things I Did Wrong
Not having a hard stop.
Even though my trading platform currently allow me to place a trailing stop on options it does allow me to place a hard stop at any level on any security. I should have had a stop placed well below my trading level in case of things like my trading platform crashing. If you’ve been following then you’d know it was this type of event that started me second-guessing my trading plan and in particular, this trade. This one thing I should have done cost me principal. My solution is to tighten up my trading process so I don’t do this again.
Not treating the continued trade as a new trade.
My technical indicators switched back and forth for three days. Even when the they said “sell” I didn’t but they never said buy when I could. During the trade I rationalized that I was doing it right by considering the position as a bad entry and not a broken trade. That was wrong. I would have cleared the table and started over if it was a broken trade but a bad entry is handled slightly differently. During a bad entry I set my maximum loss and let that decide when to get out. This cost me more principal. My solution here is to clear the table (go to cash) faster and to note this problem so I can recognize the setup before I get myself into trouble.
Not setting maximum acceptable loss using the highest price I could have sold for.
When in the middle of a trade it is always wise to move your stops so that they trail your selling price. The longer in a trade, the shorter the stop. I didn’t do that. The decision was to set it, not from the beginning of the trade but, at each days highest point or perceived entry point. This allowed for more movement to the downside than I should have accepted. It cost me all of any profit I could have gained and some principal to boot. My solution to this is to more proactively set my stops. They need to be recorded (in my trade journal) before I get to this point.
Things I Did Right
Clearing the trade when I did.
I admit that I shouldn’t have taken such a big loss. I could have avoided loss at any level two or three times during the course of this trade. What I did when I sold the puts was to accept the loss as it stood at that time and locked it in. Why was this right? It stopped me from having any more losses from that trade.
I reviewed the trade before moving on.
Sometimes in the heat of the trade we tend to want to put the bad out of our minds and as time goes by a losing trade is never reviewed. That is a big mistake. I reviewed the trade before deciding to make another trade. Up to this moment I still haven’t made another trade. It’s not because I’m scared I’ll make a mistake but because I’m sure I will.
It’s like a juggler who drops a ball. He’ll probably drop a ball again. In fact, the odds are for it. When his juggling gets out of sync and he drops a ball he doesn’t just throw that ball back into the mix. He re-centers and starts over. In that way he reduces that odds that he’ll drop another ball before he gets his rhythm fine-tuned again. It’s just what we want to do in our trading.
Moved on
The more something goes right the easier it is to do it again. Inversely, the more something goes wrong the less likely we’ll want to do it again. If the blame on a blown trade is placed on the trade, trading becomes that which we don’t want to do. Never blame the trade for anything. Accept responsibility and move on.
How do we do this? The first step is to review the trade (take it to the balcony). The review process will point out the good and the bad. The next step is to remember that each trade is an entirely separate trade. There really isn’t any luck in trading. The less you depend on luck and the more you depend on your own competence the more money you are going to make. So throw away the bad from the last trade and shoulder all that was good and once you have, Move on.
There you have it. I’m sitting here with my table cleared, my mind calmed, and new knowledge (more tools for my toolbox) ready to make another trade. I hope this insight to a trade review allows you to do the same. Without the loss, though.
Have a GREAT Day!
Patrick
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