23 Lessons From Stock Market Wizards

I recently finished reading Stock Market Wizards by Jack Schwager. This book has been my travel companion during my recent trips to Malaysia, with me reading it on the train and also on the ferry.

Most of you have probably heard of this book and some may have read it. For the benefit of those who have not read it or heard of it, Stock Market Wizards is basically a book that consists of interviews with 15 top stock traders in America. These top traders come from a myriad of backgrounds and have varied interests- from mathematician, historian, scientist, to those with an interest in photography and even farming. But they have quite a few things in common when it comes to trading:

DISCIPLINE

LOSS CONTROL

HARD WORK

Most of the traders interviewed were quite forthcoming, but a few were reluctant to talk about their strategies (even past strategies that worked but is now no longer used) for fear that disclosure would render its effectiveness. Of the 15 traders, only Mark Cook and John Bender are options trader. By the way, Mark Cook's story is one of my favourite and he is also the guy that likes to farm.

I am interested to read about these traders, not simply because they are top traders, but also because many of them encountered major failures and lost tons of money before they become successful in trading. The path to success is never easy and this book really keeps me inspired. I think in future if I meet with setbacks in my trading journey, I will re-read this book.

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Here's my 23 lessons from Stock Market Wizards (in no order of importance):

1. Successful trader use trading methods that suit their personality
2. You can't control what the market does, but you can control your reaction to the market
3. To be a winner, you have to be willing to take a loss
4. HOPE should never be in your vocabulary
5. If you are on a losing streak, reduce your position size
6. Don't underestimate the time it takes to succeed as a trader
7. Approach trading as a vocation, not a hobby
8. Have a business / trading plan
9. Be honest about your weakness and DEAL with it
10. Know when to do nothing
11. Being a great trader is a process. It's a race with no finish line.
12. Never ever listen to other opinions. Make your own trading decisions
13. Analyze your past trades. Study what happened to the stocks after you closed the position
14. Don't take on excessive leverage. It only takes one mistake to knock you out of the game
15. Great traders continue to learn and adapt
16. Don't just stand there and let the truck roll over you
17. Being wrong is acceptable, but staying wrong is totally unacceptable
18. Contain your losses
19. Good traders manage the downside; They don't worry about the upside
20. Wall street research reports will tend to be biased
21. Knowing when to get out of a position is as important as when to get in
22. To excel, you have to put in hard work
23. Discipline, Discipline, Discipline!!!

Grade: A-

Tags:simplyoptionstrader, stock market, stock trading, trading rules, trading psychology

Frozen Fingers Syndrome

I think I'm suffering from the frozen fingers syndrome. I was not able to pull the trigger on initiate any trades last night. Even though I have prepared well in advance during the day. I identified a few stocks which I think will have good potential for the move up if they should rebound from the Mon sell-off. Among them on the list are GS, MA, RIMM, CAL, NVDA, etc. These are stocks which had a massive slide on Monday and are located at some support level and if this support level can hold, they have high probability for good rebound. I have also drawn the relevant support and resistance levels on these charts.

But come around 10.00-10.15am ET when the market improved and these stocks on my watchlist started to rebound off their support level, there I was watching these stocks, but yet not able to do anything about it. I think I somehow lack the confidence to execute such fade the gaps or rebound trades. I don't know why. Maybe it's because I don't trade such setup often and hence the lack of confidence resulting in "frozen fingers". It sure sucks when you watch the stocks fly a few points without you.

So instead of letting this episode repeat itself and going through the agony again, I'm taking Trader Mike's advise to get started reading Mastering the Trade by John Carter soon...not soon, but NOW. Actually I've got my hand on this book a few days back. I'm should also spend some time studying how some master traders in the blogosphere execute such setup.

Tags:simplyoptionstrader, stock trading, stocks

Market Correction

The market tanked last night and it was a sea of red in my IB watchlist. It's not surprising to see that whenever the market slips, it always falls alot harder than when it climbs. Last night's decline in the major indices wiped off more than a week's gain by these indices. Recent momo stocks like GOOG, MA, GS, CAL, NYX etc tumbled the hardest. If you were short or traded puts, you are one happy man :)

Here's a look at the 3 major indices:




I also want to bring your attention to VIX. Adam had a great post about how the holiday season understates the real VIX

Tags:simplyoptionstrader, stock trading, options trading, put options

Weak Start for the Week Ahead?

The markets were down last Fri due to nervousness in the market as the holiday shopping season begins and concern that U.S. shares became less attractive to foreigners after a steep drop in the dollar.

We'll see how the market kick off today but for a start, news from Reuters does not seem so postive and we may see a weak start today. Will the bulls be able fight off the weak start like it always did recently?

Reuters reported that:
-Traffic was down but spending was up during the 3 day holiday season and that analysts were not not impressed with overall traffic levels.
-Web sales were down on Black Friday.
-Wal-Mart sees weak sales as holiday season starts

Here's looking at the week ahead. We've got a fair amount of economic data and a couple of earnings from the retailers as well.

Tue: Consumer Confidence, Existing Home Sales
Notable earnings: CHS, DBRN, FRO, **ARO

Wed: New Home Sales, Fed Beige Book
Notable earnings: TIF

Thurs: Personal Income, Personal Spending
Notable earnings: HRB, HNZ, *CAKE, OVTI

*Big mover earnings stock
**If you are trading ARO, pls check its earnings announcement again for confirmation. Yahoo Finance reflects 29/11 AMC while briefing.com shows up 28/11 AMC. ARO website didn't specifically state earnings time and date, though it mentioned that its conference call is on 29/11 morning, so most likely I think is 28/11 AMC.

Tags: simplyoptionstrader, stocks, earnings

Happy Thanksgiving!

I'll be away, so unlikely to post for a couple of days. Have a great Thanksgiving and enjoy the good break.

Btw, in case you haven't noticed, we've created an Options Corner (at the right side bar). Check it out and don't forget to subscribe to the Options Trader Magazine, it's free!

I love this ad :) remember to watch till the end

Tags:simplyoptionstrader, thanks giving, options trading

PSS - Why Spread Is Wide???

I was watching PSS after it gapped up on earnings report and is now trading at all time high. Had wanted to enter on NRB 6th bar high (on 15 min chart)supported by upward 5 EMA and also a 5th bar hammer. Initial stop would be below 6th bar low. Did a check on the option chain for Dec 25 Call and I was turned off. Option priced at 5.5-5.9 => 0.4 spread!!! Clueless why this stock which has an average volume of abt 1 mil and open interest of 1,403 has such wide bid-ask spread. Can anyone throw some light on this?

The 25 Call is deep ITM with delta @ 0.94. This would have been my chosen strike due to the following reasons:

-It is a slightly higher risk setup as the entry is below OR high
-On eve of Thanksgiving, I'm not sure how market will behave later and how far this stock can move
-Dec 30 Call delta @ 0.6 only. And because of the above 2 reasons pointing to higher chance of uncertainty, I would prefer to have a higher delta to capture as much gains as possible

As I'm writing now, PSS is climbing up nicely (slightly over $31) and Dec 25 Call is now worth 6.0-6.2. Bid-ask spread has narrowed down somehow. Of course I could have tried to enter the trade with a in-between price of say 5.7, but my concern is more on the exit part should the trade turn sour. I wouldn't want to assume that the spread would narrow down when I want to exit.

(Edit: chart added. Looking back, PSS behaved really well, moving along the 5 EMA nicely. If I have taken this trade, would probably have taken profit at 18th bar low and 21st bar low)

Tags:simplyoptionstrader, NRB, options trading, open interest, bid-ask spread

Buzz Of The Day

Yes, GOOG flew past the $500 mark....on no news I think. Well, at least I couldn't find any news to support its surge to all time high and cross the psychological mark of $500. Question is can its growth keep pace with its price tag?

AAPL is another tech stock trading at all time high last night, extending its recent momentum ahead of Thanksgiving.

Talking about AAPL, Jamie posted his AAPL trade and I think it is a good lesson for all of us on how where you place your stop loss can make or break a trade, despite his very good entry point.

Richard from move the markets thought process when he scalped NYX, another momentum stock of the month

The VIX has been low for quite some time and since Monday, has stepped into the single digit territory and is at an all time low now. Volatility index is a fear gauge for the market. So does it mean that the market is over-complacent now?

Tags:simplyoptionstrader, stocks, trading, volatility

Sectors Of Interest This Week

Metal Mining
News was out last night that FCX is buying over giant PD. Naohiro Niimura, director at Barclays Capital Japan Ltd said that this kind of big merger could raise the company's ability to take advantage in price negotiations, therefore this should be positive for copper prices.

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Steel
Last Fri news from Briefing.com:

U.S. Steel (X): Severstal mulls Russian merger and U.S. Steel bid - Bloomberg (67.80 +3.23) -Update : Bloomberg reports OAO Severstal, Russia's biggest steelmaker by sales, is in talks to merge with local iron miners to create a $20 bln co that could bid to buy US Steel, Kommersant reported, citing and unidentified person familiar with the matter.

U.S. Steel (X): Color on potential takeover (69.61 +5.04) -Update : Matrix, which upgraded X and added it to their Focus List on Wednesday, is telling us they would price a potential X takeover at $85-90, given the co's excess cash per share of $9.

X opened @ $66.4 and closed @ $70.57 last Fri. Still has some room for upside movement if takeover target price is valued @ $85-$90

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Airlines
Airline stocks e.g. UAUA, AMR, CAL, JBLU, have been on the rise since LCC proposed merger with Delta last Wed. More news today about possible airlines marriage which could heat up the sector stocks again this week. From Briefing.com:

Barron's reports there has been persistent speculation about a merger of Continental (CAL) and UAL (UAUA). "UAL is still the cheapest of the major carriers and its margins have the most room to improve," says Steve Epstein, a portfolio manager with Defiance Asset Management. Epstein says UAL can earn over $6 a share next year, above Baker's estimate of $4.60. If United nets $6-plus in 2007 or agrees to a merger, its stock could trade above 50. UAL is a plum takeover target because of its large Pacific-route network and strong hubs in San Francisco, Denver and Chicago. The major hitch for a United-Continental merger is that Northwest Airlines (NWACQ.PK) essentially holds veto power over any deal involving Continental through ownership of a "golden share" of Continental. A Continental-United deal could hurt Northwest's competitive position on Pacific routes.

Tags:simplyoptionstrader, stocks, merger

Week Ahead 20/11 - 24/11

Very light economics data and even lighter earnings report in the week of Thanksgiving holiday

Mon: Leading Indicators
Notable earnings: BCSI, LOW, MDT

Tue:
Notable earnings: GME, CWTR*, PSS, BGP

Thurs: U.S. Markets are closed in observation of Thanksgiving

May start seeing light trading volume starting on Wed and suspect some traders will take Fri off too. There is usually a bullish bias prior and/or after Thanksgiving, so you may want to start looking out for Call options.

*big mover stock for earnings.

Tags: simplyoptionstrader, stocks, earnings

NO PROFITS = NO FEES

Gary Ang, founder and the head trader of Market Neutral Options wrote to me about their options trading advisory service about 2 weeks ago. I checked out his website and after a few correspondences with him, decide to introduce Market Neutral Options here. Gary uses options strategies such as Iron Condor and Diagonal Spreads on index tracking EFTs, which are excellent in range-bound market condition.

If you recall, combination spreads or synthetic positions are not exactly my cup of tea (but I don't rule out using such strategies in future). If so, why introduce Market Neutral Options? Two main reasons for doing so:

-Expose my readers to a wider range of options strategies. I know some of you are interested in such market neutral options strategies and I leave it to you to explore further with this introduction. This service is fairly new (started in Jul this year) and looking at their past performance, you will understand why I say the such strategies are good in a tight range market.

-I like the idea of performance-based payment for their subscribers. With their performance-based variable rate structure, subscribers only pay a low one-year sign-up fee of US$50 (which works out to be less than US$5 a month) and you won't have to pay them a cent until you make money from their recommendations. See here for more on their fee structure.

We have seen many advisory services out there charging exhorbitant fees regardless of performance, so the ones making money are really these so call advisors and not their subscribers. So I find this performance based service a bold move, fair and appealing.

-I know this is the third reason. They are offering a free trial service for one month, with NO credit details required. I like this arrangement because it means that you don't have to worry about forgetting to write in to cancel the service and be charged for subscription should you not like their service.

Having said that, this advisory service is pretty new and it may time to build their credibility and track record. Also like to add that market neutral strategies have to be used with caution during a trending market.

Check out their free trial and judge for yourself whether this type of trading style will suit you.

Tags:simplyoptionstrader, options trading, trading strategy, options, free

Daytrader Stuns Pros At Asian Poker Finals

Wow, Singaporean Pang Leng Ang, has been making the headlines the past few days as a newcomer to the poker scene who stunned the pros to take home prize money of USD233,200 as 1st runners-up in the Betfair Asian Poker Tour.

Mr Ang, a self-taught poker player, is a currency daytrader. Hmm, which brings us to the topic as to whether good traders also make good poker players and chess players? I'm don't know much about poker game or chess, but I think its probably not surprising if this is true because trading, poker and chess essentially use the same skill set:

-It is a probability game. There is no sure-win. What are your odds of winning when you enter a trade or make the next move in poker /chess? In trading, we look at technical analysis and the use proper money management e.g. stop loss to improve our odds of winning. As I said, it's only to IMPROVE your odds, not GUARANTEE a win. Traders have to know there's no such thing as a holy grail. Don't ever believe that!

-Thinking on your feet. The market is dynamic and each day is a different day. You apply different strategies for a trending market vs a range-bound market. Also, different stocks behave differently and even the same stock will behave differently under various conditions. Same for poker and chess, you will face different opponents and even the same opponents you played with before may change their tactics to tackle your weakness

-Thinking ahead of your opponents. In the game of poker and chess, it is very much strategic. In the world of trading, I liken this to more of being prepared and knowing when to taking profits or cut losses ahead of entering a trade. All this steps are mapped out in your head before you take on your opponent. Read Art of War by Sun Tze.

-Manage your emotions.
We all know how getting emotional can ruin your trading. I think this is one area which Mr Ang can probably learn from the winner, Mr Guoga. It was reported that Mr Guoga (who by the way is a professional poker player) "sat calm and stony-faced" all through the competition. In contrast, Mr Ang "began pumping his fists in the air and calling for the cards he wanted to be dealt".

And I will leave you to ponder over Mr Ang's last remark "...poker is not about luck, it's about skill. If I keep trying, I will win in the long run"

Tags:simplyoptionstrader, trading psychology

It's Weekend!

Ok, Sat is already over and we are left with Sunday. Had a full day yesterday helping out at my cousin's wedding, this time held in Singapore. Taking a rest today and hope to do some blogging as well. Here's some interesting read and enjoy the rest of your weekend.

Milton Friedman, one of the world's greatest economist and winner of a 1976 Nobel Prize, passed away on Thurs at the age of 94. Here's an interview with him in Sep 06

In case you missed Dr Brett's series on "How Traders Can Become Their Own Trading Coaches", see here: Part 1, Part 2, Part 3

Using options to speculate on takeovers? (via Kirk)

Trader Gav's compilation of articles on Trading the Tick

Trader Mike's guest contributor, Michelle B shares her insight

Lastly, Trader-X revisits his classic post, Chasing Success again

Tags:simplyoptionstrader, stock trading, options, success

Chart Study - RIMM, SHLD

RIMM gapped up and is now trading at all time high. First bar closed in the lower half the bar. 2nd bar quickly hit 1.38 Fib ext, which subsequently acted as a resistance. Next few bars consolidated and pulled back to close 5 EMA gap. 8th bar is the narrowest range bar. Potential entry above 8th bar high, with initial stop below 8th bar low. Although supported by 5 EMA, this is not the most ideal set-up because it is smack in between the 1.38 Fib ext and OR high. 1.38 Fib ext continued to act as resistance after entry and would be shaken by the 12th bar which closed below 5 EMA. However, if you have followed your initial stop loss, you would have remained in the trade. Upside action came about from bar 13-17. Partial profit take after $1 move and close remaining position after 1.62 Fib ext is reached. As this is not an A grade setup, it is better to bank in some $$$ after a dollar move.

SHLD gapped down after earning report. 1st bar is wide range and bearish. Next few bars traded around the OR low and thereafter hugged the 5 EMA closely. Potential entry below 14th bar low and stop loss above 14th bar high. Exit when daily 50 MA is reached.

Tags:simplyoptionstrader, stocks, chart, fibonacci

Strangle on BKS earnings

-What did I buy?
Nov 40 Put and Nov 45 Call. The strangle cost a total of $0.35

-Why did you buy Nov options?
Simply because it is cheap. I am aware that Nov options expiration is just 2 days away. So this is a VERY high risk trade and I'm prepared to lose 100%. Why? Because 100% loss is only $0.35!

-Isn't this a gamble then?
No. Trading is a probability game and some study has been made on BKS before I decided to buy a strangle. I've looked at the recent past few earnings of BKS and see that they tend to make a minimum move of about $3 (within 2 days after earnings announcement). Average move is about $4. At the point of entry, the stock was trading at about $42.87, smack in the middle of 2 strikes. And with a minimum move of $3, it will be able to move into the money. And I am only assuming minimum move here only, so it is a conservative scenario.

-How did you exit?
BKS moved down pretty fast in the 1st 15 min, but rebounded. At this point, my position is in the red. But because cost outlay is very low, I say it was a stress-free trade. The stock hit 20 EMA resistance, unable to break and came crashing back down. I set an alarm in IB (my broker) to ring if position breakeven. Around lunch hour eastern time, it rang. I was watching it closely as it nears $40 mark because this is a strong support area. I closed the Nov 40 Put for $0.4 when stock price was about $40.05. I didn't want to hold longer because of several reasons:

->$40 mark is strong support. Not to mention possible pinning effect on expiration day

->From the intraday high of $43 to the low of $39.94, it has already made the $3 minimum move. There is no guarantee it will continue its downward move tomorrow and if otherwise, my position will be reduced to zero due to rapid time decay

->I've learnt from my past experience that when trading with current month options which is so close to expiration, grab whatever profit you have and don't be greedy.

So there you go, a strangle on earnings play. I must stress that strangles are always more risky than straddles because you need to have a bigger move to breakeven, even though capital outlay is lower. And it is even higher risk when you buy a current month strangle so close to expiration. All I have to say is do your due diligence and be aware of the risk you are taking when you want to do this type of trade.

Tags:simplyoptionstrader, earnings, options trading, put options, call options

Follow Up On ESRX

In my earlier post, I highlighted ESRX as a potential candidate for double bottom. The stock has since completed this formation (faster than I've expected) with 2 days of gapping up. Note the accompanying high volume on its way up. I'm not sure if chart do tell a story before news are out or is it purely conincidence, but ESRX gapped up yesterday due to upside guidance. Hmm...

Tags: simplyoptionstrader, stocks, chart

Random Thoughts

Take a look at the unusual low volatility at this time of the year.

How to find low risk, intraday setups for momentum stocks. For your info, this stock in illustration IPO end Oct 06, traded at abt $7 and in less than 1 month, this stock closed @ $43.6 yesterday. WOW WEE! Too bad it is not optionable.

Check out Tom C. interview with stocktickr. Always interesting to hear a trader's trading journey

Edit: I have corrected an earlier post. FOMC minutes is supposed to be out today (15 Nov), not 14 Nov. Apologies for that.

Where To Ask Options Questions For FREE!

If you are quite new to options trading and have questions to get off your chest, here's an aggregate of places where you can ask questions on options for free:

-CBOE's Learning Center
A new question and answer is published each week. But questions submitted will not be personally answered and may not be chosen for publication on the web site. You can also view past questions and answers in the archive.

-The Options Industry Council
You can either call or email them. Past FAQ also available.

-Options University
Ron Ianieri, co-founder & chief options strategist of The Options University answers your questions.

-OneOption
Submit your questions to OneOption and if it gets highlighted in his website, you'll get a detailed response and a free one-month subscription to the OneOption service of your choice. If he doesn't highlight yours, there's a still a chance he'll shoot you a quick response.

-Investopedia
You can ask a variety of subjects, not limited to just options, from mutual funds, general investing, to bonds, stocks etc

Tags:simplyoptionstrader, options trading, options, investing, stocks

Chart Study - ESRX, ILMN, WYNN

ESRX was on my watchlist. But it gapped up on opening to my preliminary target of $64. The 4th bar printed a bullish lower shadow, with next two bars having narrow range. Potential entry above 6th bar high (also cleared the OR high), with support from 5 EMA. The stock was then consolidating in a series of narrow range bars before seeing some real moves after lunch hour. Exit when 1.38 Fib ext is hit. Tom C. also had a go at ESRX.


ILMN gapped down on news of it acquiring SLXA. First bar was bullish, but 2nd bar had a bearish upper tail shadow. 3rd-7th bar was basically consolidation. If you are aggressive, you could have entered on break of 7th bar low. Bear in mind that entry above OR low (for Puts) is risker than having entry after it has cleared the OR low. Alternatively, entry at 9th bar when it breaks OR low. Exit at 1.38 Fib ext or at 50 MA on daily chart. Tom C. also traded ILMN, but on 30 min chart.


Just before market opened, WYNN announced $6 special cash distribution. You can see how the stock gapped up and surged to abt $89 from previous day close of abt $82 in the first 15 min candle. That's abt a $7 move, and for the remaining day, it hovers arounds $88. See how market factors in the $6 distribution (82+6=88). If you trade on the news like this one, you've got to have fast fingers.

Tags: simplyoptionstrader, stocks, chart

ESRX - Formation Of Double Bottom?

Quick one here. ESRX has the potential to form a double bottom. The strong bullish candle last Friday was formed on higher than average volume. Prelimary target @ $64. Keep it on your watchlist

Tags: simplyoptionstrader, stocks, chart

Week Ahead 13/11 - 17/11

I'm back from my short trip and really looking forward to this trading week after some intermittent break during the last two weeks. It will be a week filled with economic data, earnings report from the retailers and it is also the week of expiration.

Tue: PPI, Retail Sales
Notable Earnings: HD, SKS, WMT

Wed: FOMC Minutes
Notable Earnings: AMAT, BEAS, CRM

Thurs: CPI
Notable Earnings: ADSK, BKS*, DELL, GPS, HPQ, SBUX, MRVL, SHLD*

Fri: Options Expiration
Notable Earnings: ANN

*These are big mover stocks for earnings as well

Tags: simplyoptionstrader, stocks, earnings

Updates

Its official - the Democrats have a sweeping win and are in control of the Senate.

I was out of action last night due to unexpected appointment. Was out the whole day, came home around midnite and was deadbeat. Didn't even want to turn on the PC to look at anything. I'll be travelling very early on Fri to Malaysia to help out my cousin's wedding over the weekend. So I doubt I'll be trading tonite. I may post some chart studies later and those should be my last for this week. I hope to resume trading in full force next Monday.

Before I go, here's a futures trading blog by gerimegaly, a fellow blogger in Singapore. Its fairly new, but who knows, it may get you interested in futures trading!

Adam's View On My Losing Trades

In reponse to my earlier post, Adam explains why he only trades options listed on ISE and he also has another way of calculating risk for option trades.

Chart Study - MA

Mastercard (MA) rise has been unstoppable since they announced earnings a few days ago and gapped up more than $10. Volume has also been higher the past few days. Today, it gapped up and OR bar was bullish. 2nd and 3rd bar consolidated the move and brought it close to 5EMA. Entry above 3rd bar high (which is also OR high). Nice climb supported by 5EMA along the way. Profit take at 1.38, 1.62 and 2.0 Fib ext. Lovely!

Tags: simplyoptionstrader, stocks, chart, earnings, fibonacci

Free Prizes Worth Over $400 To Be Won!

I'm not the one giving away the prizes, but My Money Blog is having a Thanksgiving Giveaway. Check out this interesting site. I do like the way the winner(s) is being determined. Have fun!

Big Mover Stocks For Earnings: 6/11 - 10/11

As earnings are slowly winding down, I thought I'll post the list of big mover stocks for the week at one shot.

Mon: CRL, FLR
Tue: FCL
Wed: BRL, FWLT, FOXH, HOLX, HSP, RMD, INT
Thurs: ENER
Fri: PBR

Tags: simplyoptionstrader, stocks, earnings

Week Ahead 6/11 - 10/11

It is a week with very light economic data. However, Wall Street will be looking to the results of the US Senate Election on Tue to determine which area of business interest will be affected.

Comparatively fewer companies are announcing earnings this week. Notable earnings:

Mon: LEND, MFLX, NTES, ASEI
Tue: BZH, CECO, WYNN
Wed: CSCO, FOXH, CELL, FWLT, JUPM, PCLN
Thurs: ENER, EXPE, HANS, KSS, DIS
Fri: SNDA

Tags: simplyoptionstrader, stocks, earnings

Looking Myself In The Mirror

As some of you know, I have taken time off since late last week to do some intensive trade review. Took me a few days to complete it because the backlog was...huge! During those few days when I reflected on my trades, I examined where I went wrong and what I did right. It was a good exercise which I should have done on a more regular basis. Really.

Here are some of my findings and observations:

General
-Avoid option open interest < 100
-Avoid bid-ask option spread >=0.3

I noticed that quite a number of losing trades have the above characteristics. Well actually I've noticed that quite waaay back, but I've not officially documented it down as part of my trading rules. It is not hard to see why when the spreads are considerably large, your odds of making a profitable trade is greatly reduced.

Day Trades
-Try to trade with market sentiment of the day.

If market is bullish, look for Call Options to trade. If the market is bearish, go with put. And if the market is choppy, stand aside

-Stop loss on the option should NOT exceed 15% of option price.

I realised that some of my losses could have been avoided or minimised. If the stop loss worked out to be greater than 15% on the onset, such trades should be seriously re-considered to either pass it or cap stop loss at 15% and not take larger risk than necessary. Essentially, it only makes sense that my stop loss for day trades should be smaller than those for swing trades.

-Use 5EMA / 10 EMA to help in determining better entry & exit

-Always take some profits off the table when target is hit to lock in profits & adjust stop loss accordingly to protect remaining position if trade is still going well in my favour.

I think it is one of my weakest area. And turning a profitable trade to a losing one is definitely my MOST painful one. When this type of situation happens, I'm completely devastated. I need to manage this area much better.

Swing Trades

-Avoid stocks in basic industries & capital goods sectors.

These stocks tend to move with the market direction & they can move quite strongly. If you are on the wrong side of the trade, its not going to be a pleasant sight. These sectors are probably more suited for day trading.

Feel free to chip in your comments on what you think of my findings/observation. Hearing from more of you will certainly help me to improve my trades better. Thanks!

Tags: simplyoptionstrader, stocks, trading

Weekend Readings

Check out Dr Brett's new book "Enhancing Trader Performance"

Want to know what is your trader IQ? Take a free test here to see if you are suitable for trading

How the election can move the market? via Kirk

For those of you interested in technical analysis, check out the 2 additions in my blogroll: Alpha Trends, Technical Analysis & Stock Charts with Tim Knight

We are still in the earnings season now. If you are scratching your head about volatility of options and their move during their earnings announcement, the daily options report is a good place to know more. Some examples here, here & here and many more...

Tags: simplyoptionstrader, stocks, technical analysis, volatility, charts

Housing Sector - Formation Of Ascending Triangle?

The housing sector is showing higher lows & looks to form an ascending triangle. It tested the 50MA yesterday and closed above it. If it can hold above 50MA, high probability of breakout for the housing sector


Both RYL & LEN appears to be exhibiting the same formation.

Tags:simplyoptionstrader, stocks, chart

Correction Of A Correction

As ChartTrader in Briefing.com aptly puts it, the market was in a correction of a correction yesterday, trading in tight ranges. As we can see from the charts below, all 3 major indices are still supported by 20 EMA as they managed to close above it. Whether the indices can continue to hold at 20 EMA is alot dependent on the unemployment and payroll data tomorrow. As for myself, I didn't trade last night as I was out. And I think I will most probably resume trading after next Tue, when the dust has settled for the US Senate Election. Meanwhile for this few days, I'll have some personal matters to attend to and also do some readings to recharge.

Tags:simplyoptionstrader, stocks, chart

Chart Study - SIRF, ADM, CRDN

It was a seller's market after the disappointing Chicago PMI and Consumer Confidence figures were released. The 3 major indices are now supported by 20 EMA. We'll have to see tomorrow if this support can hold.

Here are 3 chart studies using dummy style:


SIRF was dragged down together with GRMN which reported less than stellar results. SIRF gapped down and pulled back in 4th-6th bar to close the 5EMA gap. 7th bar was the narrowest range, which closed below the OR low. Entry on break of 7th bar low. The exit can be pretty tricky. Either partial exit at 1.38 Fib ext or full exit. If partial exit, your guts will be tested as SIRF broke the 5EMA on its way up & you may have closed the remaining position at this point. However, if you have held on to your initial stop (above 7th bar high), it will ride out to eventually close at a much better price at 1.62 Fib ext.


ADM reported earnings on Tue AMC. First 2 bars were bearish. Consolidation from 3rd-6th bar, moving closer to 5EMA. Entry on break of 6th bar low. Partial exit 3 bars later when 1.38 Fib ext is hit & close the remaining at the hammer-like bar near the 1.62 Fib ext.


CRDN reported earnings as well BMO. Gapped up and consolidation in the next few bars. Entry on 8th bar on break of OR high. As the price was moving very fast up (due to on-going upbeat conference call, you may decide to exit entirely once 1.38 Fib ext is hit (all within the same bar!) for abt $1.6 gain or hold out to 1.62 Fib ext for closure.

For those of you trading stocks which have just announced earnings, its good to know when the co. is having the conference call. Sometimes co. talks about guidance during these calls. The tone of the conference call can either serve as a reaffirmation of their results or some sort of a surprise may pop up which can derail its original path, and such move can be fast & furious! So do look out & watch the stock closely during the conference call if you have a position in there.

Tags:simplyoptionstrader, trading strategy, trading, fibonacci, dummy

Big Mover Stocks For Earnings 1/11 - 2/11

Today AMC: GTRC, ITRI, KYPH, LVS, PLXS, SUN

Tomorrow BMO: ICE, THE, RIG

I've mentioned that I'll be taking time off to do intensive trade review. Well, I pretty much done and will be sharing with you my learnings from my trade review soon.

Tags: simplyoptionstrader, stocks, earnings

Chart Study - CMI

I've been reading & studying the NRB (narrow range bar) trading aka "dummy" style day trading from several master trader bloggers like Trader-X, Trader Mike, Wall St Warrior, Mercado de Estocástica.

This is an interesting day trading strategy. I'm still learning & hope to be confident enough soon to apply to real trading.

Below is a 30min chart of CMI, which announced earnings BMO yesterday & gapped down. Noticed how the 3rd-5th bar got narrower in range (consolidation) and moved closer to the 5EMA before the explosive move downwards. No visible support down till 125 on daily chart. Entry on 6th bar. 2 approaches: If you are more agressive, you could have entered below the low of 5th bar; or you could have waited for clearance of OR (opening range) low. Exit at 1.38 Fib ext. See how the stock rebound from 1.38 Fib ext? Fibonacci is simply magical!

Tags:simplyoptionstrader, trading strategy, trading, fibonacci, dummy

Applying 90/10 Principle To Trading

I recently received an email from a family member on 90/10 principle by Stephen Covey, author of bestseller "The 7 Habits of Highly Effective People". I found it very inspirational and that this rule can apply to any aspect of our lives, including trading. Here's an abstract:

"10% of life is made up of what happens to you. 90% of life is decided by how you react.

What does this mean?

We really have no control over 10% of what happens to us. We cannot stop the car from breaking down. The plane may be late arriving, which throws our whole schedule off. A driver may cut us off in traffic. We have no control over this 10%. The other 90% is different. You determine the other 90%!

How?

By your reaction - You cannot control a red light, but you can control your reaction. Don't let people fool you; YOU can control how you react!"

And I can see how this applies to trading. Here's an example:

You made a losing tade. How do you react?

A) Curse & swear. Do revenge trading. Go back to the same stock to trade immediately because you can't believe you lost money on this great set-up. You want to make the money back from this sucker stock.

B) Go into a crazy mood & start trading any setups that comes along, ignoring your trading rules.

C) Lose hope & despair. Lose confidence in your trading rules or system. Start trading with negative mindset. Loses again. Sink into depression. Don't know what's wrong

D) Take the losing trade in your stride. You know that having losses is part & parcel of trading. You do a thorough trade review to identify what went wrong and learnt a lesson from there. The mistake helped you to improve one step in your trading journey

Can you see how your reaction (which you have ultimate control) affects your next trade? The results for (A), (B) & (C) will most likely be negative and it becomes a spiral. If we react in a positive manner like in (D), take a step back (stop trading for awhile if need be) to identify the issues, our trading psychology will be greatly improved, not to mention the actual trading itself.

I take a lesson away from reading this: Manage your reaction and you can manage your trade!

Tags: simplyoptionstrader, trading