I’ve discovered that for my patience and budget level, I really only have two kinds of trading options available to me that seem to be consistently successful:

#1 – Long-term investments … I can’t even be positive of this, as I’ve not really had positions in for longer than 18 months or so now outside of mutual funds. But trying to follow some sound investing strategies – especially when the economy is in such a funk and good deals abound – seems to work pretty well. I really like this strategy. I’ve got money in companies that I feel good about, and I bought them for what seemed to be a very good deal. I have had to bail a couple of times in the case of stocks that just didn’t pan out, but for the most part I don’t worry about the day-to-day fluctuations, and I’ve done as well as doubling my money in mere months.

#2 – The exact opposite of #1 – Very short-term swing trades that only last anywhere from one day to about a week (less than a day – “day-trading” – I can’t do except in an emergency due to SEC restrictions for small traders). I  fortunately work at a place where I can usually check the market once in a while, and I don’t have to go in until an hour after market open. I identify the stocks to watch at night and on the weekend, wait for them to hit the technical criteria I’m looking for*, and then get in. Then I set up my exits / stops** to automatically exit the trade again when my exit criteria are met. I am often not even at my computer (or at least not paying attention) when I sell out of a position. The key seems to be taking small bites.

What hasn’t worked for me in the past has been trying to anticipate the reversals for the Big Bucks, or playing more medium-length (multi-week) trades where the longer term and further target encourages me to be more loose on my acceptance of loss.

So far, this year has been AWESOME for my principle trading account, and not at all shabby for my self-maintained IRA, either (which is mostly in longer-term positions). This is a far cry from last year, when my professionally-maintained Roth IRA and 401K in mutual funds did wonderfully well, and I personally struggled.

I hope that that it’s more of a case of me FINALLY figuring this stuff out, rather than it simply being a case of a lucky streak.

* – Um, usually. I wish I could say I was super-disciplined and calculating enough to make a play only when it hits the exact penny of my target, but my logic is a lot more fuzzy than that.

** – Usually the evening after I open the position, as due to day-trading restrictions I only exit positions the same day I opened them in extreme situations. If things are going really ugly (or so very well that I expect a major counter-reaction at market open the next day), I may exit the same day. Another thing I will do sometimes is buy an offsetting position, turning it into a straddle or strangle. That way I can neutralize losses, and exit the losing leg – or both legs – once things become clear what’s happening and whether or not I was truly wrong.

Maybe it’s a glass-half-full idea, but I like it:

The Ultimate Truth About Preventing Market Abuse – It Can’t Be Done

Bottom line (according to Dave Forest) – no matter how much regulation and enforcement we try and pile on the markets, people are going to game it. And lie. And cheat.

This doesn’t mean we shouldn’t do it. But we need to understand we’re going to hit the law of diminishing returns on this. The Bernie Madoffs of the world will slip through from time to time.

But Forest has another idea:

Here’s a revolutionary idea. Why don’t we instead just invest our money with honest people?

We increasingly leave the matter of honesty up to regulators. Hoping that rules will force all companies to behave in an appropriate way (at least some minimum standard of appropriateness).

A much more effective approach is for investors to take it upon themselves to analyze the honesty of the management teams they’re buying into.

That’s a much more challenging proposition. But I like it.

I managed to end my losing streak this week. Last week I broke most of my rules, and enjoyed amazing gains from Monday through Thursday – truly astonishing. And I lost it all and a small amount besides within fifteen minutes Friday morning, due to a little more in a massive opening gap and the lack of an automated stop.

This week I tried to follow my rules more carefully, and while I didn’t make my weekly goal, I made a profit, breaking a three-week losing streak.

Tonight I had the opportunity to teach the JARS budgeting system to my mom. I was taught it at the Millionaire Mind Intensive a little over a year ago. It’s worked out great for me so far, and my mom had gone with me once to one of the evening seminars.

I don’t think I did a great job of teaching the system, but she seemed to understand it and catch the vision of it. She asked if it was similar to Dave Ramsey’s envelope system, but I was not familiar enough with it to answer. But she was ready to work out her own budget and use the system by the end of my quick lesson.

The thing I appreciate the most about the system is how it gives us permission to spend money without guilt. Each dollar now has a (general) purpose, and some of those dollars are allocated specifically to having fun and enjoying life. I don’t know that we would have bought the expensive tickets to take our daughters to the symphony a few months ago if we’d not been on this budget system.  I was always fretting that money spent on something “frivolous” was money not invested or put towards something “more important.” The more important stuff is already being taken care of!

This was a very annoying week.

I got whipsawed in the beginning of the week – death by a thousand tiny cuts – and so I switched strategies to loosen things up by the end of the week. And then THAT clobbered me.

Part of what killed me after the initial whipsaw at the beginning of the week was that prices more-or-less FROZE after that. Very stable. Very annoying if you are an options trader. So you end up losing a little bit of money two ways: First of all, you are losing time each day, which sucks the value out of an option contract. It may only be a dollar or three per contract, but over the course of a week, it adds up when you are dealing with a small account. Secondly, volatility is priced into options pricing as well. As the price stabilizes, volatility is bled out, which reduces the price of the option as well. When something that was swinging around a couple of dollars a day suddenly goes to moving only a few cents, the contracts get cheaper.

And so I found myself stuck in a situation where my positions weren’t moving against me very much at all – not enough to trigger any technical failures – but I was still losing money pretty quickly. It was frustrating, as I couldn’t really see I was doing anything wrong, but I was uncomfortable holding on. So I’ve taken pretty substantial losses, but I still have positions on the table. We’ll see what happens next week.

Oh, and I tried something unusual this week. As Friday was expiration day, and I’ve noticed a tendency in the past for stocks to return to their opening prices on expiration day, I tried to make a day trade at what seemed like the low point of the day – a quick bullish scalp in case the price rose closer to opening. It didn’t happen this time, though I managed to get out with a tiny profit that was almost enough to cover my transaction costs.

I lost a little bit this week. More than I’d hoped, courtesy of getting my stop blown out by early-morning volatility (I pretty much sold at the absolute bottom on a trailing stop…. grrr!)

But I think I’m having a single lesson reinforced that I hope I will eventually learn:

QUIT POSITIONING IN ANTICIPATION OF REVERSALS!

While the gains are fantastic when they work, most of the time… they don’t. And I’ve lost much, much more trying to call a top or bottom than I’ve ever made.

The trend is my friend.

And if it’s looking unfriendly, like it might reverse – just stay away. I don’t have to play it.

I never warmed up to the options symbology. Fortunately, with my broker, I never really had to – I had to dig into the charts to see the actual symbol that represented the ticker symbol, expiration month, call or put designation (A-L was for January-December calls, M-X was for January-December puts), and strike price.

Another brokerage I use still used them extensively, but the lookup was handled automatically.

Fortunately, mastering this old system is nothing I never need to worry about, as it’s being phased out. It was designed for old-school technology, back when computers had tiny memory and storage capacities, bandwidth was oftem over modems of baud rates of three or four digits, and most orders were handled via telephone.

Between that, and penny pricing (which has been more-or-less standard as long as I have been trading), I think the trading world is more user-friendly than ever.

Which I guess is important to the sharks swimming those waters that are always in need of fresh meat…

A squeaked out a win, exceeding my dollar-value goal this week. I’d say it was hard-fought, but it was actually a couple of bad decisions on my part balanced by one not-so-bad decision.

Mistake #1 – Taking Profits too early. I saw a breakout on DIG, and played it to the upside. It did very well at first, and then retreated. Hard. I panicked, and got out with a slender profit. I was too afraid of the volatility.  This wasn’t a horrible mistake, especially considering the general choppiness of the market – and considering that a couple of days later the price would have gone into negative territory for me before shooting up on Friday.  So while my entry was fine, my management after the entry was poor.

Mistake #2 – During my panic-induced frenzy, I decided the pullback from the above was a bull trap (a hasty decision made near the close of the day). I very quickly made a bearish SPY play without having fully planned out the trade. After close, I evaluated my position and realized that I had merely been looking at an expected pullback from a breakout. It hadn’t pulled back far enough to be considered a bull trap. I quickly got out of the position the following day at a mild loss.

After these two trades, I thought my chances of hitting my profit goal this week was slim.

Success - Shortly after exiting the bear position – on confirming (I felt) that my analysis was correct, I entered a SPY position with calls. I doubled up on my position on further confirmation I exited these at EOD on Friday at a very nice profit – half when I hit a very conservative target (which made up for the loss on the puts, plus a tiny bit more after transaction costs), and then half at the EOD Friday (since I really don’t like to hold over the weekend when the market is this choppy and news-driven).  Since I doubled-up on this position, this may be considered two plays, not one. But ah, well.

So this puts me at seven winning weeks to two losses this year (and one week I just didn’t participate). I really like that ratio. My individual trades are running at around a 60% win/loss ratio – not nearly as high, but this tells me that I’m doing a better job of managing my losers.

While I’m still not convinced that my success thus far is skill-based rather than luck-based, I think that having an actual goal – a target income – each week has really helped my trading. Before, I was goal-less, with no plan other than to “make as much money as possible” on every trade. Oh, and to not lose “too much” on any losers.

Based on my overall negative performance the last two years (with some amazing volatility), I’d call that plan (or lack thereof) a failure. While I’m not enjoying the kinds of amazingly profitable weeks now that I experienced back then, my trading account is nevertheless swelling at a pretty impressive rate. It’ll take a while at this rate to recover the amount that I’ve put into “tuition” over the last couple of years, but I’m regaining confidence that I can do this.

I saw this article, which has little to do with personal wealth (unless you are a banker, or a home-owner in Canada) but couldn’t resist weighing in on with my own personal philosophy. ‘Cuz I have, like, opinions ‘n stuff.

Due North: Canada’s Marvelous Mortgage and Banking System

There’s a lot that we folks south o’ the border could probably learn from this. If we truly dislike nasty boom-bust cycles. But there are a few examples I’d wish we wouldn’t learn from. Here are my opinions (given absolutely free and worth every penny):

#1 – Full Recourse Mortgages: I guess we have this in some states, but not in others. I’m not a fan. Everyone takes a risk when mortgages are written. For the consumer, their skin in the game is called a DOWN PAYMENT. The bank assumes the risk of lost value on the collateral.That’s the way it ought to be.

#2 – Shorter-term fixed rate mortgages: What the freak? While not nearly as bad as our balloon mortgages or variable-rate mortgages, this seems like it could be a contributing cause to the problem, not a cure. It exposes the home owner to open-ended risk.

#3 – Mortgage Insurance: Yeah. Many mortgages in the us (including FHA loans, I think) require mortgage insurance at least until 20% of the house is paid off (or something like that). This is probably not a bad idea.

#4 – No Tax Deductibility for Mortgage Interest: Sigh. I love being able to take my interest on my house off of my taxes. But I gotta agree. I lean in the direction of having flat taxes, anyway.

#5 – Higher Prepayment Penalties: I agree, but this should only be for a limited time. Say, five years, tops. And only for fixed-rate mortgages. Kinda like a cell-phone contract. The original lender gets that as a reward / guaranteed payoff for taking the initial risk.

#6 – Public Policy Differences for Low Income Housing: Amen. IMO, a big chunk of the mortgage crisis can be traced directly to government intervention to try and get people who couldn’t afford it to be home owners. It raised demand on the low-end, which raised demand (and cost) across the board, and created a bubble on a risky foundation. Home ownership is its own reward. We shouldn’t center government policy around it. Let the landlords make money!

#7 – Canada’s Bank Concentration: While it’s great that power is concentrated in the hands of a relatively small consortium, I don’t really see that being an improved survival factor. I prefer to see the risk spread out.

#8 – Loan origination: Can’t say I really know enough to say. Banks service their own loans: AMEN! Another factor in this bubble was that banks were making crappy loans not only because of government mandate, but because they were simply traders of these loans, selling them off immediately to Fannie and Freddie when possible. Electronic Payment: Meh. Yeah, I can see this as a positive factor for the banks. As long as it is encouraged but not mandated ($5 off if you pay electronically!), I’m cool with that.

The other factor I liked hearing was that Canada’s banks are “non-politicized.” You hear that, Washington?

I was redeemed this week. Well, okay, my account was redeemed – I don’t know if my trading methodology was in any way redeemed.

I was reminded this week of one of those little bits of trading advice that I’d forgotten — take profits quickly in choppy markets, but let them run in trending ones. The market continued to be pretty choppy this week.

I got lucky, I think, which made it easy. I let dollar-based trailing stops handle my exits, and all three trades this week were winners. All three WOULD have been losers if I hadn’t been fortunate in my entries and iron-clad about my exits.

I entered Microsoft puts Monday morning, followed by PCP puts later in the afternoon. The MSFT puts I bracketed with a trailing loss and a target sale price – those did GREAT Tuesday morning. The PCP puts lost a lot of value later in the day, and eventually exited with a small profit on a trailing stop with Wednesday morning’s SERIOUS choppiness. By that point I’d exceeded my goal, but I got gutsy and got back in on Wednesday with puts on DIA (Diamonds – a DOW Index ETF). The market took a major swan-dive Thursday morning, but recovered almost fully by close. My trailing stops saved the day, as I was off getting a sandwich for lunch when my order fired on a massive upwards surge.

I couldn’t read the market very well at that point, and so I decided to take my profits and call it a week. Friday was choppy and ended much where it started.

All-in-all, this was my most profitable week this year under my current weekly goals.  I exceeded my goal by about 4x, and was correct 3 out of 3 trades (well, technically I guess it was four, as I entered my DIA puts at two different times on Wednesday).

I broke Livermore’s rule about not increasing my stake in a position until it posts a profit – my second DIA entry was cheaper than my first, as my first position had lost value.  However, by the end of the day it had stayed well within my window, rising closer to my resistance line but incapable of pushing higher, showing greater weakness in the last hour. It was probably not the best entry criteria in the world, but it does suggest that there may be an exception in there somewhere to Livermore’s rule. I entered when I did because I was afraid of missing the move and thinking I couldn’t GET the entry I had wanted. By the end of the day, I had the entry I wanted, and it had done nothing to violate my reasons for wanting to get into the position.

The combined positions did not violate my dollar-value limits on position size (well, I take it back – they violated it by $3, shame on me), it was a highly liquid option, and as my second entry was near EOD I wasn’t worried about getting a double-ding against me on the day-trading rules for having to exit the same day.

So it worked out, but I played a little loosely with my rules on the DIA positions.  It did pay off this time, but I should either officially modify my rules a bit or adhere to my old ones a little more tightly.

But I made up for all of my losses last week and then some. So that, at least, makes me feel good.