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Strategies & Market Trends : The Options Box -- Ignore unavailable to you. Want to Upgrade?

To: chic_hearne who wrote (7484)	11/19/2000 3:43:24 PM
From: dli	Read Replies (2) \| Respond to of 10876

Excellent points. Let me add some of my own observations. I've only started trading this past January and for the first few months I basically operated by the seat of my pants. It's not that I gambled, I did employ TA for trade selection but I failed to follow a strict risk and money management regime. That way, between January and the end of May I managed to double my capital and subsequently cut it back in half twice in a row. And I consider myself lucky that I never lost any of my initial capital. It was not until I had gone through that rollercoaster ride that I developed a healthy appreciation for the risks that the market presents us with every day and that I realized the importance of discipline. While a trading strategy with a positive expectancy is of course essential I believe that consistent success in trading is determined by at least two thirds by proper risk and money management. I now won't risk more than 2% of capital on any trade or take trades that do not offer at least a 2:1, preferably 3:1, reward/risk ratio. Ever since instituting those rules for my trading in early June I've been consistently profitable and haven't had a losing week yet. Any sizable losses I've incurred since have been due to taking trades outside my risk parameters or because I went into hope mode and blew a stop. Of course there haven't been any spectacular gains either like there were earlier this year, but small gains can add up rather quickly especially if your losses are even smaller. It's really true that profits will take care of themselves once you've got your losses under control. What I've seen a lot lately is that many people seem to have problems adapting their trading strategy to changing market conditions. And instead of taking responsibility for their own trading decisions and changing their strategy they prefer to blame their losses on a variety of external factors ranging from "MMs manipulating prices" to claims that TA has stopped working (see e.g. siliconinvestor.com. What they don't seem to realize is that bull market methods can't possibly be profitable in a bear market. While buying pullback and breakouts in an uptrend is a viable strategy applying the same principles in a downtrend by buying every reaction low and every bounce to resistance will eventually land you in the poor house. I have a hard time understanding this widespread urge to bottom pick because that's where the most money is lost but then again I'm always glad to find people that are willing to take the other side of my trades. Due to the massive increase in overnight risk in the Nasdaq over the last month I've almost completely resorted to daytrading as far as technology stocks are concerned. I've also stopped trading options in the technology sector because I believe that when daytrading there's mainly disadvantages compared to common stock or futures: - The large spreads create high execution risk and often cause you to lose a considerable part of your profits. - Low deltas prevent you from fully taking advantage of moves and if you try to avoid that problem by going deep ITM you will likely face liquidity problems. - There's little potential to take advantage of an option's time decay and volatility characteristics intraday. The limited risk characteristics are of no advantage either intraday. - In the case of index options it's usually more efficient to trade the corresponding futures contract or ETF unless none is available. - If you choose options to daytrade just because of the leverage they offer then you're probably taking on too much risk in the first place. Dave

To: chic_hearne who wrote (7484)	11/19/2000 6:01:06 PM
From: Poet	Read Replies (1) \| Respond to of 10876

Welcome to the Options Box, Chic, and thank you for your thoughtful first post. First, I'm glad you've taken the time to read a bit of our posting history here. This is not a thread where there are many different posters, but I'm proud of the level of discourse (whether it be TA, FA or political), as well as the variation in trading style we have among us. Contrary to what you might believe, most of the contributers are no longer simply buying calls. Your point is well-taken (and well within the majority opinion here, I believe) that we are in a bear market, or transferring from a bull to a bear and the strategies that once worked no longer do. The fact that you have learned this in such a short time speaks to your everlasting credit. Perhaps the fact that you weren't "spoiled" like many of us who learned to trade during the Bull accounts for some of it, but keeping an independent mind in the face of the still-rampant "buy in here, folks" mentality is admirable. I hope to hear more from you. And thanks for the compliment on my gold trade. <g>