Welcome.
Ok that was weird. You know, I’m not entirely sure why I do these blogs. I don’t think there one particular reason, but I do it to provide family and friends an idea of what I’m doing because people generally have no idea about this world that I’ve begun to deeply delve into. Another reasons is that I’ve noticed that traders that I’ve learned from talk about how teaching others has been very beneficial to their craft. I also believe that accountability is essential to improvement, and I strive for ways to be accountable.
Speaking of accountability, I want to give an update of my progress. In July I will have been trading for two years. I have improved drastically. It’s really, really exciting. I feel like I’m just now transition out of beginner status. It will probably take me just as long if not longer to transition into full fledged professional.
I ended the year strong. I made about 600 dollars in the last 3 months of the year, and with my account size, that’s really not bad for a beginner, especially considering all the many mistakes I made.
This month has been a little disappointing, but I can sense that I’m heading in the direction of professionalism because I have kept the beating myself up and the impatience to a minimum. I have trust in my system and I know I will do better next month. I still made a little bit of money, although I spent it on commissions.
I’ll explain how this month went, to give an inside look into the life of a trader.
I started the year and the month off right off the bat at a loss due to an oil call that had carried over from the previous year. I decided to sell it because I didn’t like what was happening in oil, and I’ve learned that you have to cut losses quickly, not only because it negatively effects your account, but because holding on to losing trades can effect a trader emotionally as well.
I saw some opportunities to put on some credit spreads, which are basically low reward, high probability trades. When people are first learning, this takes a little while to wrap their mind around, but I’m basically selling options and I can either buy them back at a lower price, or wait until they expire worthless. With weekly options, I just have to wait until Friday to see if they expire worthless and I keep all the premium. This first week I think I had 3 credit spreads and I bought them all back on Thursday for a profit. That was enough to recoup my losses plus some.
At that point I was feeling pretty good, I was back on track.
The second week was a little more interesting and one where I made some mistakes. I sold a credit spread that was a lot more aggressive than the ones I previously mentioned. Those credit spreads I don’t need to stock to move anywhere, and it could even move against me slightly and I would still make money. This time, I liked the setup and I wanted to take more advantage, and I needed the stock to move a little bit, but I would be compensated better.
So to make a long story short, the stock was taking a hit and there was a pre-earnings announcement due out that day. Now from my experience, when a stock is taking a hit before an announcement, usually it rebounds because people realize that they overreacted to rumors. I knew this and yet my emotions took over and I got out in order to avoid taking a hit. The announcement came out and the stock erupted higher. John Carter made a million dollars on the trade, I lost 60. That was a moment where I struggled with patience. But I got over it.
Anyway, this could go on even longer, but I’ll fast forward to the point where I was up 300 bucks on the month. At this point I got a little unlucky, and often in trading you have to deal with bad luck. So I like to do a high probability trade that works out most of the time but has the potential of completely blowing up on you, and so you have to make sure you define your risk and you’re ok with it.
When a company reports earnings, there is a lot of uncertainty in the market. The stock has potential of getting destroyed if the company didn’t do well that quarter, or go up 300 percent if the stock did amazing. Usually though, the stock doesn’t move more than 1 and a half standard deviations. Options are a little trickier than just straight up stock. Not only does price movement effect option prices, but demand effects it as well. What I mean by that is when people are buying options like mad, the options pricing inflates. Around earnings, people are either speculating (not a good idea), or hedging their positions. A trader who understands how options work, and the probabilities can position themselves for a 95 percent chance of success by positioning themselves one and a half to two standard deviations away from the current price the day before earnings
There’s always that 5 percent chance the trade will blow up on you, and that’s basically what happened with Netflix and Apple. The stocks both made improbable moves and I lost all my profits for the month. I could have done better to defend my positions, but practice makes perfect. All you can do at that point is get back in the saddle.
The rest of the month consisted of some bone headed trades where I didn’t follow my business plan, as well as some pretty good trades, and I basically broke even. Next month will be better as every month I continue to learn lessons and improve. It takes time to learn this crap, and learn it I will.
