Sunday, August 29, 2010

New Chart Settings

The Performance Chart has been modified to make it easier to know at a glance whether we are meeting our 4% - 6% profits per week target.  You will now see two red lines moving away from each other.  The bottom red line tracks where we should be if we were making 4% profits per week.  The upper red line tracks where we should be if we were making 6% profits per week.  We want to be above the lower red line always.  Right now we are between the two lines so we are exceeding our 4% profits per week target but not yet reaching 6% profits per week.

August 2010: Failed to Meet Target

We started the month with $1,914.08.  At 4% per week, we expected to end this period with a balance of $2,275.03.  However, three margin calls later... maybe four...  its a blurry hazy recollection right now...  anyway, the end balance was $1,774.64.  Our account is still up 47.87% from inception July 2010 while the DJIA is up 4.30%.  More important, however, is what lessons were learned this month.  I don't mind losing some money as long as I don't lose the lesson.

One of the first things learned is to try and not leave trades open over the weekend.  You never know what newsworthy event will occur between Friday afternoon and Sunday afternoon that will cause your open trade to shift drastically for the worse.  This ties with the second thing learned: don't trade Sundays.  All this makes perfect sense now.  All my margin calls came either Monday or Tuesday and were caused by trades left open over the weekend that shifted on me after weekend events.  One or two of those calls also had to do with trades opened on Sunday before a reliable trend was established.  So, for the next trading period: (i) try to close all trades by Friday, and (ii) don't trade Sundays.

Unfortunately, I could not close my EurUsd trade Friday so it carried over the weekend.  Fortunately, no major news means no erratic movements to push the trade against me.  The same cannot be said for a UsdChf short trade also left open during the weekend.  It has gone from a 90 pip profit to a 35 pip profit as I write this.  Hopefully, they'll close profitably before Friday.

Another planned change is to further tailor down my use of margin.  I will go pretty close to baby steps and then try to build on that.  This means I may not achieve my 4% profit per week target for now but hopefully we'll come up with a way to consistently make those profits.

So, as far as targets for September is concerned, we want to finish the month with $2,158.43.  This would be five straight weeks of 4% profits per week.

Wednesday, August 18, 2010

Noet Z'Hin Lil'Avinsin

"Boldly stride the doomed."  -  Drizzt Do'Urden

Ok, time to confess to some hypocrisy.  I know I am shooting for 4% to 6% weekly, but I got so excited with last month's 58% performance that I really wanted to do it again.  However, increased volatility and two margin calls in two weeks are making it real easy for me to come back to my senses and to the realm of reasonable expectations.  Is striding boldly, instead of cautiously, into August dooming my account?

Early in this month's first week, a margin call put me down 15%.  By the end of the second week, I had recovered the 15% loss and was actually up another 14%.  I figured if I could repeat this in the upcoming and last two weeks of August, I would post another incredible 50%+ performance in one month.  However, this past Tuesday I got a second margin call that erased last week's profits and put me up just a mere 0.28% for the month of August.

I modified my strategy.  Up until last Tuesday I was dipping into probably four times the margin I should be using for the size of my account.  Also, I think I may have failed to properly calculate the trading range of the EurUsd for this week.  Hence, ran out of margin before turning a profit.  As of Tuesday, I am only dipping into three times the amount of margin I should be using.  Are these bold or foolish strides?  Is there a difference when they both lead to the same destination?

Guess we'll find out Friday at 4:00 p.m.

Friday, August 6, 2010

On Greed: Part I

"...  greed, for lack of a better word, is good."
  -  Gordon Gekko

I decided to learn about investing when I was in my second year of law school.  I read everything I could get my hands on that could teach me anything about market fundamentals, company evaluation, etc.  As of today I've been trading stocks for about eighteen years, options on equities for about thirteen and currencies for roughly two.  My brief experience has taught me that greed can be very good, but it can also break you in half, make you despondent and even make you doubt whether you have what it takes to be a successful investor.  Greed by itself, for lack of a better qualifier, is not good.  Managed or rational greed, however, is good.  I'll try to explain myself.

This true story dates back the to the year when the tech bubble finally burst.  I was a novice investor - still am - filled with awe and jealousy of Warren Buffet's 22% average profit per year.  Imagine my surprise when I started making an average of 16% profit per month trading option spreads on tech stocks.  Greed drove me onwards and I started buying calls on everyone's favorite stock at the time: Yahoo.  Calls were tripling almost monthly and before long I had turned $5,000 into a little bit over $300,000 thanks to the magic of margin and compounding.

To reach this performance in a span of roughly six months I started doing everything I learned you should never do.  I traded spreads based mostly on the Black-Scholes mathematical model - this is good.  However, as I got greedier I kept lowering my probability of success and increasing my risk in the expectation of a higher profit, and it was working.  Whenever a trade went against me and I got the assignment on the put contracts I had sold, instead of selling the stock and limiting my loss, I would hold the stock for the three days I had to settle the transaction.  Because we were in a bubble market about to burst, the stock would go back up, and I would make a double profit.  I would profit the premium on the put contracts sold plus the profit on the stock assigned.  Life was sweet and I knew more than anyone.  I was God's gift to the investment world.  I must be!  Imagine, less than five years trading experience and making these incredible profits...  Had I any clue to what I was doing, I would have realized that this erratic market behavior was the clearest signal that the economy was due for a correction, at the least, and quite possibly a meltdown.

The economy melted down...

I lost $300,000 in two days...

I am not kidding when I say that I spent almost two weeks in shock.

I was not yet thirty years old and had over $300,000 sitting in an account.  Less than a week before the meltdown I was considering withdrawing all that money and placing it in bonds.  Yet, unfettered greed drove me onwards... and downwards.  Every so often I wonder where I'd be now if I had acted on my instincts and withdrawn that money.  How much easier, more filled with conveniences, would my life be right now... or the life of the people I care for, if not mine.  I will never be able to stop my pondering, and I will never be able to know the answer.

Greed, for lack of a better word, will tear you to pieces.

To be continued.