Today’s market action was brought to you by the letters W, T, and F.

Apparently I’m either an extraordinarily amazingly profound trader, or a liar.

Or just plain lucky.

The market plunged in the morning – as I hoped / expected it would (and was positioned to take advantage of it) – and then shot up to close the end of the day only slightly down. Fortunately, my stops preserved about 2/3rds of my profits, so I wasn’t clobbered by the sudden rise.

So it was a good day for my account. But holy cow, how are you supposed to trade that?

Man. I won’t call it all luck, because I did expect this to happen (but I’m wrong plenty of times) – but it’s nice being on the right side of a massive gap down in the market at opening. I’d still rather have less explosive volatility at open, all things considered.

And I hope I can retain my profits here.

But Wow. Sometimes stuff like this just takes your breath away. It’s just nice when it takes my breath away without taking my money away…

I’ve never used ‘em, can’t vouch for them, but their transaction costs are – well, not great, but reasonable. They also have an automatic-investment program and no account minimum.

The offer is for a $50 bonus for a deposit of only $50 or more – there’s a nice profit right there.  And – hey, you have an account all set and ready to invest in something interesting…  There are still some stocks which are pretty badly beaten up and worth picking up and holding for a longer term. I don’t know anything about the automatic investment program, so you’d have to do your own research. But hey – a free $50 within the first few weeks of opening the account is a good start on profitability!

The offer expires 4/16.

Sharebuilder.com

Here’s a book I want to read… with a review at My Money Blog:

Notes and Lessons from Liar’s Poker: Rising Through the Wreckage on Wall Street

Curiously, the author went on to write The Blind Side, which was made into what was possibly my favorite movie of last year (kinda tied with Star Trek…)

We’re looking at buying more shares of the local berry / jam company. Shares are 10x more expensive now then when I bought them a year ago. Which I guess means, on paper anyway, we’ve scored a 10x ROI in only one year.

Awesome, but I’m not sure who I’d sell them to at this point…   That’s one of the problems with privately-traded institutions. But they are continuing to grow and expand, and are maintaining profitability in spite of being born in the worst economy of almost 30 years.

They have no plans on going public, and I’m pretty much in it for dividend yield once they are no longer able to throw every penny of profit into  expansion. It might be a while – they’ve got plenty of room to grow.

It’s a pretty speculative position and not too well-defined. I’d really not want to see the bulk of my investments looking like this. But I’m not too worried about it.

This book will be hitting stores in 10 days. I am a big fan of his previous book, Rule #1. Not that I actually invest that way, currently – it was the book that helped make the stock market make sense to me. Well, as much sense as one CAN make of the market…

I got clobbered this week, dang it. (Of course, right after I wrote about what I was doing and how successful I was, I’d get clobbered. Karma works that way. Or something).

I made a bullish play in mining. It went bad almost immediately, and I was stopped out at a huge loss. I assumed to drop was telegraphing an overall market drop, so I went bearish on two other positions. Almost immediately, the market reversed and went bullish, making nice gains for the week. If I hadn’t been stopped out of my mining play, it would have been a VERY profitable position for the week.

Turns out that 140 tons of gold was getting dumped on the private market – the drop in precious metals & mining was probably based on fear of the impact of this action. It was small and short-lived, relatively speaking, though perhaps it will have more of a long-term impact.

Anyway – my losses were unacceptable this week. But next week is another week. Time to start over fresh.

After receiving a thorough thrashing in November and December, I decided that I’d gotten too casual and lax in my trading discipline… and that I needed a new plan.  Nevermind that my confidence was shaken. Taking stock of my weaknesses as a trader, I’ve formed a new plan. The plan is one that I hope will help me overcome (or at least work around) my weaknesses, continue learning, and turning option trading into a consistent business for me.

As Alexander Elder’s book, “Trading for a Living,” admonishes: focus on developing skill, not money. With skill, the money will come. I’ve made insanely awesome returns in options trading. And I’ve seen those some incredible wins dry up and turn into losses in only a few days or weeks. While I still don’t mind swinging for the fences if I can do it safely, I need those consistent base hits to win this game.

So – here are my goals / plans. I actually made most of these goals at the beginning of the year, and have been following them ever since.  So far, about six weeks into the new year, they’ve been working out okay.

#1 – Read at least six books on trading this year

I’d noticed my attitude towards educating myself had slipped in the latter half of 2009. I still followed some trading websites, but I have to acknowledge that while I’m veteran enough to have almost two years of experience under my belt, I’m still just coming out of the “rank beginner” stage into the early “intermediate” stage. I need to constantly learn more about how the professionals do it.

Of course, I’m going to continue following the various online resources as I always have.

#2 – Record EACH and EVERY TRADE

I read somewhere that a study showed that the traders with the most success weren’t just the ones who’d been at it the most, but those who had made the most trades, and those who had recorded and reviewed those trades. So – if keeping a good journal of trades (and reviewing them) acts as a multiplier on the value of each trade in helping me become a better trader, I’m all for it. I would love to get better twice as quickly!

So my goal is to record EVERY SINGLE TRADE. And I’m not talking about a mechanical record of entry dates, positions, and entry / exit prices. I’m also recording my reasons for entering, my initial plan (to help make sure I have a plan with each trade), my reasons for exiting, and additional notes (where I note what I learned, special considerations, or just whatever). I really should continue tracking how my position ‘would have performed’ after I exit, as well, at least for a few days.

It would probably be valuable to expand the “additional notes” section to make it a more formal review. Or I could save that for my weekly report (more on that in a moment).

The trick has been making this a habit. I don’t think I’m quite there yet (I still end up waiting a day or two to record a trade, sometimes), but it’s become a lot easier for me to do. I’ve also started using Google Docs spreadsheet as my platform for recording trades… this means I can record my trade from any computer. This was extra handy when I found myself using my old laptop for a few weeks after my desktop died and I was waiting for a replacement.

The other advantage of using a spreadsheet over, say, pen-and-paper is that I can have it automatically calculate my performance.  I can see my win-loss ratio, how much total commissions I have paid, what my typical risk-reward ratio is, the average duration of my trades, etc.

#3 – Focus on Consistent, Lower-Risk Base Hits- Initially $50 / week

Making 20% in one day is certainly an incredible adrenaline rush. But consistently making the kinds of trades that will make those kinds of gains may also lead one’s account to ruin. At least it does for me. It means I’ve not been managing my money and risk appropriately.

So instead, I’ve made a current goal of making $50 / week consistently. Once I have several weeks of consistent success, I’ll up my goal to $75. Or $100. My principle trading account is small, so this represents a pretty big chunk of my account – over 2% / week. Hey, if I could consistently make 2% per week forever, I’d be thrilled! And I’d also be a billionaire in just over ten years. But right now, the goal isn’t a percentage – it’s $50.

Why this goal?  Frankly, it’s to teach me to be less greedy and to reduce my risk.

I’ve been so worried in the past about “taking profits too early” that I’ve left profitable positions on until they became losses. I need to focus on preserving those wins, and being willing to take a “mere” 15% or 20% profit in a three-day trade rather than holding out for a big 200% gain or something.

Focusing on the dollar value should also help me be willing to take longer-term options. These tend to move more slowly as a percentage of the risk, which means a lower likelihood of making those stellar double-your-money-in-a-day trades, but they are a lot easier to manage and make reasonable moves in a day that can get me to my goal. Since a 10% loss is more damaging than than a 10% gain is valuable, I think it’s a good plan.

$50 is easily obtainable in a single week with only one or two contracts in options trading. This should help me limit my tendency to over-trade. I don’t need to manage a dozen or even half-dozen positions at once. Nowadays, I haven’t needed to have more than three trades on at one time in my main trading account.

A side effect of this strategy is that I tend to close out my trades before the weekend, holding trades for usually no more than three days. I’m not sure if this is a good thing or a bad thing. Considering the volatility of the market over the last couple of years, it may not be too bad. And hey – if it works for me and helps me hit my goal of being a consistently profitable trader, I’ll call it good.

Finally – there have been times in the past that I have held out on a bad trade because “it’s just not worth it for me to exit.” When an $0.80 option drops to being only $0.30 overnight (a problem with shorter-duration options in a volatile market), I’ve frequently said something like, “Bah, it’s only $30 – plus a transaction cost. I may as well hold onto it and see what happens.”  With such a small weekly goal, $30 (minus a couple of bucks for transaction costs) is a significant chunk! Unless I have a strong reason for believing the trade will come back, I should exit, take what I can, and put it towards something else with a higher probability of return.

#4 – Enter Multiple Positions Slowly

This is a new goal made this month. When I get excited and confident, I tend to go “all in” with multiple positions all at once.  And then, when I’m wrong (which may be less than 50% of the time, but not significantly less!), I get to watch in horror as my account hemorrhages money across multiple positions all at once.

And, since I have day-trading limits due to the size of the account, my hands are tied. I may be able to exit a position or two (or maybe even three) at the cost of limiting my flexibility over the next five days, or I just suck it up and take it.

Since my trading goal is small and keeps my number of positions down anyway, it’s really in my best interest to take a “wait and see” attitude. Put ‘em down one at a time where possible. That way it’s easier to take the cards off the table when I need to, not only when I’m allowed to.

After all, isn’t that one of the advantage of being a small, retail trader? Being able to be quick and flexible?

#5 – Review and Track Each Week’s and Month’s Overall Performance

This is another new goal for this month – though it’s also an old goal. I find it’s much easier to make sure I track each week’s performance when I’m winning… but when I’m losing, it is probably 10x more important to do this.

My goal is to keep track of my weekly overall performance in several of my accounts, including my professionally managed IRA (for a baseline).  It’s easy to lose the forest for the trees, and this will help me make sure I’m following the Bottom Line. And then – hopefully – relate it to what I’ve been doing so I can see if there’s something I’ve been doing right or wrong.

I’ve also written posts here analyzing my performance for the week – mainly as a way to force myself to perform the review of my trades this week and see what I can learn from ‘em.

How Have These Goals Worked Out For Me So Far?

Well, my confidence is up, at least… as is my account for the year.  So far I have had five winning weeks, one week where I did not trade, and one week where I took a moderate loss (-$38).

One of the issues I’ve run into is when to exit trades after I’ve made my trade. When I’m up over $50, should I just exit everything and be done trading for the week? So far, my answer has been, “No.” The point of the exercise isn’t just to declare a win each week (though it feels good) – it’s for training.  It’s to help teach me to make smaller, smarter trades and gain consistent weekly profits, and to learn to be more intolerant of losses.

So far,  I have had one losing week (loss of $58), and one week where I did not trade at all.  The rest were all profitably by at least $57 – with my most profitable week clocking in at $171.

So far, I’d call it a success – but it’s still early yet. In theory, if the strategies I’m evolving to succeed  on this limited plan work to achieve $50 a week, they should also be applicable for $100 a week. Or $200 a week. Or $2000 or even $20,000 a week, once my account gets large enough to handle it.

But more importantly, I believe it’s focusing my efforts to simply learning to be consistently profitable — managing my risk and money, cutting my losses early, and … well, maybe not letting my winners run as long as I should (a risk of this strategy), but at least managing them so that I don’t take too long to take profits from them.

It was an extremely challenging week, all told, costing many traders a lot of money. Complaints abounded in trading forums and comments on trading websites. It was pretty much constant whipsaw action – down one day, up the next. It culminated with a Friday move that opened strongly down and yet ended the day pretty close to flat.

However, this week I managed to squeak out my goal + 50%. I am not sure if I can count this as luck, or skill. I had three successful trades and one that failed pretty badly – partly because it went violently against me at the end-of-day trading, and I was reluctant to make a day trade out of it with only fifteen minutes left on the clock. The following morning, it looked like it was going to reverse and go back my way, but it stalled out early and turned against me – hard.

I exited a trade on Friday by simply chickening out. While I don’t know if I’d call it the “right thing to do,” it turned out to be the more profitable thing to do.  I saw the downtrend was pausing, and while I hadn’t hit my technical target yet, it had hit my profit target. So I exited. But I left my final trade on, with a “proper” exit of a fairly tight trailing stop. My order fired at an extremely modest profit – just a little more than the transaction costs. But hey, a profit is a profit!

The overall market broke the down-trend this week, but whether we’ll see it go into an uptrend, resume a new downtrend, or go into a horizontal trading range remains to be seen.  At this point, if forced to choose, I’d go with a modest, short-term bullish trend.

With the new year, especially after getting my account brutalized in November after making too many bad mistakes, I have taken a step back and tried to evaluate some of my strengths and weaknesses as a trader in the stock & options market, and see what I can do about it to improve my performance. Particularly as my two-year anniversary as a trader is coming up in less than two months.

I hesitate to say, “School’s out.” I keep learning. As our trainer in the Millionaire Mind intensive liked to say – if you aren’t learning & growing, you’re dying.

So a short analysis of some of my weaknesses revealed the following:

#1 – I have a small account

As a beginner trader, I never wanted to risk too much. My principle trading account has been kept pretty small – on purpose. (And after November, it grew smaller still). But this makes it hard to manage risks. Commission costs are a definite issue (although fortunately, my brokerage – ThinkOrSwim – offers *very* cheap commissions with some excellent service). I simply cannot afford some opportunities.

#2 – I cannot day-trade

This is an NYSE/FINRA rule in effect for all accounts below $25,000. An additional complication from weakness #1. I am only allowed a three “day trades” (defined as entering and exiting a position on the same day) per 5 business days. It’s one more way of making sure the little guys stay little, I guess.

What this means, in effect, is that when I enter a position and find it’s going south very quickly, I have to think long and hard about whether or not to get out and burn off one of my day trades.  Which means that sometimes I end the day with a position with an unacceptable loss because I succumbed to pressure from the day-trading rules.

(The flip side is that this ought to teach me something about being very careful with my entry points).

#3 – I have a full-time job.

I work full-time. This means my opportunities to check on the market and my positions are sharply limited.  Because of my time-zone, I am usually able to log in before work in the morning. And so far they haven’t minded if I take the occasional peek during the day – *IF* it doesn’t interfere with work, and I’m not in a meeting, or knee-deep in a project, or whatever. But that’s obviously never guaranteed.

But this means that I can’t react to changing market conditions intra-day. I need to let automated orders handle that.

#4 – I tend to over-trade

When I get excited and start feeling confident, I tend to pile on the trades – which means that a string of winnings (which increases my confidence) tends to get wiped out in one fell swoop when I am wrong.

#5 – I get greedy and demand too much profit of a trade

Because it’s so easy to find a position down 20%, 30%, or more very quickly, I find myself trying to hit more “home runs” – and demanding more home runs – of my winning positions. In options trading, it’s not at all uncommon to make 50%, 100%, or even higher returns in a matter of weeks, days, or even hours. But holding out for these kinds of returns often refuse to accept “base hits” and instead often see my profits dwindle back down to nothing – or become losses. I’m always worried about taking profits too early… but I also need to control my tendency to take them far too late.

#6 – I don’t always have a plan before I jump into a trade

Yes, sad but true – sometimes I jump into a trade based on “gut feel.” It looks good. But I have no exit strategy. Consequently, a day or three later, I’m not sure if I’ve won or lost – only which direction I’m going.

#7 – I have problems taking losses.

Who doesn’t? Still – it’s hard to accept a loss sometimes. Especially with the gnawing fear (too often realized) that immediately after I exit a position at a loss it will turn around and do exactly what I expected it to do in the first place, and would have been worth a huge profit.

But that occasional event too often results in me hanging on to a losing proposition until after it’s lost far too much value.

#8 – I tend to jump the gun on anticipatory trades

I lost a lot of money last year jumping on what I was sure would be a reversal of the skyrocketing overall market. In a year when anybody could have thrown money at any five randomly-selected stocks in March and sold in December for as much as 50% profit, I lost money. Mostly by trying to anticipate a change that never happened.

#9 – Lack of Consistency

I make big trades, small trades (well, okay, small trades and smaller trades), and win some, lose some, all different ticker symbols, and I’m all across the board with my positioning and risk management. I guess after this year, if you were to draw a trendline on my account size, it would be down with a high level of volatility.  I really, really want to correct that.

#10 – Poor record-keeping

I have – in the past – not been very diligent about recording all of my trades. After all, it’s all done for me by my brokerage, right? But I subscribe to the school of thought that if you want to improve something, it has to be recorded and measured.  Otherwise, how do you know if you are improving or not? So I need to be able to track what I have done beyond simply the position and profit / loss numbers.

So with these weaknesses in mind – and my strengths too (what few of them I possess), I needed to employ a strategy that will help me overcome these weaknesses – or at least circumvent their limitations. More on what I’m doing to achieve that in a later post.