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Sunday, November 05, 2006

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!


6 Comments:

Blogger Dominic said...

Thanks for sharing your lessons learned from the world of options trading! Anyway, it seems like one of the most important factors when trading options is volatility (both implied and historical), but I didn't see any mention of that.

9:11 PM  
Blogger Simply Options Trader said...

Hi Dominic,
Welcome to the blog! You have rightly pointed out that volatility is an important factor in trading options. It was not mentioned in this post because I'm generally quite mindful of volatility when I trade, so it wasn't much of an issue in this review of my latest batch of trades

You maybe interested to take a look at these 2 posts I have relating to volatility:
Introduction To Volatility

Trade Review - VTS Straddle

11:08 AM  
Blogger Quesnay said...

Hi, I operate in stock-market of Buenos Aires(Arg) and follow guidelines similar of analisis to yours.

You have made charts of options or simply you operate with chart of the stock? If you allow me blog will copy your post in my because he is very interesting. Thanks

12:09 AM  
Blogger Simply Options Trader said...

Hi Quesnay,
I trade base on stock charts because movement of the stock is the primary driver of option value.

12:39 PM  
Anonymous Albert said...

I'm a Mexican citizen.Can I trade options in the US ? Thanks in advance for your answer.

9:09 AM  
Blogger Simply Options Trader said...

Hi Albert,
Most definitely! Anyone can trade options in U.S market.

9:41 AM  

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