Weekly trade summary 30 oct 2009

Flexing my fingers

There are 4 months in a year where I become a hermit and simply stops all social activity. If anybody asks about the strange behavior my usual truth reply is: “It’s earnings season” with an It’s-so-obvious-that-I-am-surprised-you-asked look. I guess, for non financier types, they don’t understand why. I’ll let the picture speak for itself.

Performance analysis

Starting balance: $3000

Closing balance: $5149.48

Trade carrying over to next week: $2160.5  (41.96%)

Derivative risk: $12000 (233.03%)

Increase from opening balance: $2149.48  (71.65%)

Cost of capital: $272.52  (12.68%)

Earnings excluding one time lucky shot:  -($1429)

Successful bets: 5/13 (38.46%)

Failed bets:  3/13 (23.08%)

Carryover bets: 4/13 (30.77%)

Why I am doing this

I have tried day trading before on numerous occasions and one thing that I noticed is that it has as much to do with emotional management as well as statistical analysis. To be able to trade and profit, a person need to be completely emotionless. The first roadblock to entry lies in getting past the sinking feeling of taking a loss. No matter how much you read, meditate or reason, you can only improve on this by taking actual losses in your portfolio. I have done just that throughout the past 4 years of my investment. I was able to take losses, change my position and ride the flow to profitability. It is by gaining that confidence that I am able to take losses with sound reasoning and proceed to repositioning.

I am doing this in order to be truthful to myself in order to evaluate if such a life style is possible. I post it for everyone to see to force the truth and prevent myself from pulling a Madoff. On top of that, because I am using only $3000 as a basis each month, I am not disclosing the full extend of my net worth. Which was the biggest argument against showing anything financial previously. In anticipation to the eventuality of doing full time trading, I have started learning Technical Analysis (Trading based on psychology) and options strategies. It took me around 10 months to fully explore the core of the ideas as well as utilising the platform that I will be trading on. It is not something meant for the faint of heart and learning the trade from what I remembered, is an exercise in losing money. Only once you understand and experience the complete wipe out of your capital will you be able to truly trade daily.

Strategy

A wipe out will happen eventually, therefore I have concluded that the only way to mitigate the risk is from the way I allocate capital in a way to limit the risk while maximizing the gain. The chance of meeting a consecutive series of bad bets increases as time goes by without meeting any setbacks. That is the basis of chaos theory. Therefore, it is important to reset the capitals at a predetermined time so you only lose what you’ve put in for that period, while leaving a long enough time frame to profit from the full effect of a swing trade. So here are the conditions that I’ve set for myself for training.

-Reset to $3000 capital each month
-$2000 allocated to weekly trading
-$500 allocated to LEAPS with 1 year time frame
-$500 allocated to write options with 1 month time frame
-Sell all positions allocated for weekly trading.

This way, if I make catastrophic mistakes in a month, the most I stand to lose is $3000 but stand to gain from the profits of $3000. The amount of allocation will remain until I am consistently in the positive for 3 month while getting a 70% or above in terms of correct bids. At which point I will move on to increase the trading capital to 10% of my total net worth. All these numbers are taken based on experience and calculations. I still have to perform some frequency analysis on the stock market in order to fine tune the risk profile.

Reflections

Because I am still working full time, I do not have a chance to trade during day time. All my orders are inputted in the morning before I go to work and adjusted at noon during my lunch hours. This kind of arrangement presented several inconveniences and losses because I cannot nurse my trades and react in real time. Sometimes, only have of a trade in a complete strategy gets executed, resulting in the loss of the partially traded order. Other times, people take advantage of my market order, resulting in a buy or sell out of whack to the actual value. If I have to estimate the loss due to this type of limitations, I have to place it at 30% of my net earnings.