Once upon an early J.D.’s Trading Career…

March 8, 2010 in Ideas & Strategies

Mom and Dad pulled me into Dad’s cubicle to share with me some of what they had learned, been doing, and encouraged me to give it a go with their guidance. We focused mainly on premium collecting theta based trades and began developing a growing understanding of technical analysis. And we invested little interest in day or directional trading.

My very first premium collection… got put to me. Took about 3 months but in short the position was ultimately able to be closed out in entirety with profit. Wasn’t the biggest win or the most promising start but at the end of all trades if you can say that it was closed out in profit you need to not complain about it.

Premium collection trading continued to be the main focus of my/our investing all the way through now. And I don’t expect that to ever end. But early on I decided I was going to try something if for nothing other than a learning curve. I told the market I had $1000 that I was going to daytrade with and it was welcome to have it all. The only thing I asked in return was for it to tell me how it took it from me. We shook hands, I daytraded, gave my money to the market, I studied and studied and reviewed and reviewed and it told me how it took it from me. After that I ran through a month of virtual trading/testing of what I had learned. My observation was that I was very good at picking spots to enter for very short term gains, truthfully 1-3 cents plus commission (which is another 3 cents). So I virtual tested this. And with $3000 (give or take) I made “virtually” $1000 in one month “nibbling” profits out of the market. I cannot tell you how many trades off the top of my head. I have the print out in a file somewhere. It’s not really important. I remember there more wins than losses. The losses were usually very small as were my wins. It was EXHAUSTING. And truly I never want to do it again. But all that yielded great learning curves on many fronts.

Today is some years later. And again with my parents support I am trying my hand at daytrading. There was a part of me that wanted to attempt to pull off with real money what I had accomplished with virtual trading, “nibbling” out small profits consistently, focusing on when to get in. But I never made any commitment to that. In fact, part of the problem/what I think I/we have been working hardest on is figuring out what should my trading strategy be. We are on week 3 of this evolving endeavor. And things are scary at the moment and could easily discourage me from doing this anymore. But I have done some experimenting and thinking this past weekend and want to share and “commit” to some of the conclusions I have made that also oddly enough end up correlating to many of the observations I made way back at the beginning of my trading career. And some of it may not sound particularly inspiring. There are even cliches for some of the simpler concepts. But the “cliches” never tell you how. And no matter how cliche, obvious, or just commonsensical it all may be, it ends up being remarkable hard to get your head around and put into an articulate practice.

“Cut your losses short and let your winnings run,” a stupidly simple concept. You hear it and instinctively go “duh, if I could or knew how to do that I wouldn’t be reading this” because it is surprisingly hard to do just that. If you do research, you can find a number of traders or scam sellers who claim to have formulas to balance your losses profitably against your gains and I offer no estimates of their usefulness or accuracy. Some of them may be VERY useful with the right practice and execution. But as yet I haven’t found any that meld well to what I read, see, or do on the trading screens. In fact I think it is this preemptive arbitration of profit or loss that has cost me the most money in this endeavor both virtual and real so far. I believe I have been focused on “when to get in” a great deal. After that I arbitrate some number of desired profit and acceptable loss and admittedly in addition to that being potentially wasteful of potential profit as well as capital that is already on the table that can be lost I think I allow the “acceptable loss” to be greater than my “desired profit”. This system cannot work.

Based on my observations of myself, I am a chart reader. I cannot follow news important though it may be. I listen to the a few moments of news and my eyes glaze over. I have yet to find a formula to balance my losses profitably against my gains. But I find that based on technical analysis I am right about picking a direction more often then I am wrong. I’d say at least 3 out of 5. I think more than that but AT LEAST 3 out of 5 times I am right. Way back when I made $1000 on $3000 in a month by “nibbling”, I did something right. Obviously.. I walked away with 30% profit. But specifically, what was that? Well, obviously, again for starters I was often right about picking entry points and a direction even on the smallest oscillations. And that much is great but another unbelievably important thing I managed to do was exit negative positions at near to no loss. I was making 1-3 cents. I was losing 1-3 cents. Out of an ungodly amount of trades I was right about my entries and direction more often than I was wrong and when I was wrong I saw it VERY quickly and got out VERY quickly. Put all that together and it translates to profit. Good stuff. But HERE IS WHAT I DID WRONG: VERY OFTEN when I was right I was much more right than 1-3 cents and yet that was all I took.

Today, so far in this endeavor I have been trying to find the “right point” of entry and direction, arbitrating a profit and a loss, and exiting based on that arbitration. I am a chart reader. I don’t listen to news. I can’t find a formula to balance my investing. I can see when to get in. And if I allow myself I can see when to get out. Way back when I experimented with “nibbling” I didn’t exit losses with 1-3 by an arbitration. I entered at what seemed like a point of entry then I exited either at 1-3 cents of profit (arbitrarily) or if my technicals turned around on me, which usually happens very quickly, I exited at a loss. That loss was conveniently small but it was based on a turn around in my technical analysis not an arbitrary number. What I have been experimenting with this weekend is using that sense of things to guide my loss protection AND as my guide to get out of positions after they move in my favor. I am waiting for the trade to do it’s movement then give me a turn around signal. This is a trading simulator. Things are always different in real life than in simulations. But so far I am managing to continue the pattern of finding good entry points more often than not, exiting at very small losses when I am wrong, and exiting with much more profit when I am right. I have no magic bullet. But right now I am prepared to say this IS a system that can work.

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