iceman's options trading journal

added 3 OIH NH (Oil Feb 140 puts)

@ 4.40

now +8 @4.66


may be early - OIH may trade to 145 - was actually going long OIH calls when I exited OIH puts yesterday - let's see what happpens - also looks like a potential re-test of broken TL.

target on OIH is 135-136

 

DNA


on radar screen for a long scalp @ <85

those who read Multioptions Journal last year recall I said short DNA @ 96-97 - and I was (planning) to get long puts near 100. Of course since I was still in too many positions at the time (and still am until next Friday) -- I missed the trade which did turn out to be a big winner. Great plan! :eek:

 

order buying 10 DNA Feb 80c @ 6.1-6.40

 

OIH


1800 Feb 135p crossed @ 2.80a

 

DNA



well, knew it was ready for a bounce - so soon as I place order stock reverses and trades higher. Still gonna stick with target - not taking the trade for pennies.

 

DNA

unreal...!

almost exact moment I post that DNA is in play- BAM it reverses higher -- & in a down market.

I was going to enter 10 Feb 80c but offer only got to 7.30 - and I wanted to pay 6.40 or so. So held out for my price even though I identified the right entry point -- watched the calls close at 8.60 bid! Sickening. I waited a long time for this trade. A fund buddy of mine once reminded me - since I was good at identifying swing points- not to be so precise in my price level ---- since I'm taking the position for more than a day trade (usually) -- and consider scaling in when the underlying reaches at or near the level I was seeking. So, rather than hold out for another buck or so on DNA- maybe take a one-half position today and look to add on after I re-evaluate today's action. At least then you participate to some extent albeit you may not have the size on that you prefer/intended. Of course - it's my belief that the market usually gives you a 2nd and third opportunity to get on board. It just may be a different train and a different departure time- but that's OK long as it's heading in the right direction.

I sure look forward to these long weekends. In fact, the exchanges should have more - even if it isn't a Holiday. Good time to recharge - and do the preparation - bearing in mind:

"all battles are won BEFORE they are fought"!!



Here are some thoughts for the long weekend,

to-wit:

"The spectator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day and you lose more than you should had you not listened to hope. And when the market goes your way you become fearful that the next day will take away your profit, and you get out too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit."
Jesse Livermore

Life is on the wire… everything else is just waiting!
Karl Wallenda

Do the thing you fear… and the death of fear is certain!
Ralph Waldo Emerson

He who is not content with what he has… would not be contented with what he would like to have.
Socrates

Excellence is an art won by training and habituation. We do not act rightly because we have virtue or excellence, but we rather have those because we have acted rightly. We are what we repeatedly do. Excellence, then, is not an act but a habit.
Aristotle

 

novel20

I am getting some new software this week and I will be able to post pnl for open/closed trades much easier in this Journal - as attachments --- then with all of this typing.

net down on aapl positions so far-- not to mention all the upside gain missed by not being flexible and reversing long.

 

2006 trading really begins next Friday, for me. The focus all year will be position sizing and money management so that I can exploit and maximize gains on the many good trading opportunities I continue to seem to identify.

For me, one way to increase gains and let profits run when I am correct on a move is -- after I ring the register that day at a point that looks to be a decent exit - rather than take a deep breath, smile and be content and complacent over the profit just realized on said position - remain focused, poised and totally ready to re-enter the same position IF it appears it still has legs and a decent r/r for re-entering at that time; i.e. continue to milk the trade - maybe try a different cow of the same breed (i.e. a different strike price/the underlying or maybe futures).

This article addresses an issue for many good traders; although they take small losses and have good discipline- they also take small profits. But as many know (and many more don't) you can indeed go broke taking profits.

Don't necessarily agree with the 10% rule - that is a little to modest a target. Would prefer at least 20% of trades should skew the week/month and year.



Risk and Success


Sometimes you hear people debate whether trading success is attributable more to trading techniques vs. psychology. The answer, of course, is both—but the point where the two intersect is risk management. A huge percentage of trading success or failure can be laid at the doorstep of risk management. A recent book on risk management (that I’I'll be reviewing next week) observed that, across different traders and trading firms, 90% of all profits were attributable to 10% of all trades. While traders would like to think of themselves as making money on a majority of their trades, the reality for frequent traders is that a minority of trades are winners—and it is the few large winners that produce a favorable profit/loss statement (P/L).

The book goes on to observe that, if 10% of trades account for a majority of profits, it follows that a large percentage of trades have to be “scratched”. A cardinal skill in trading is recognizing that a trade is wrong before it hurts the P/L. Time and again, I have seen good traders exit trades when the trades fail to move in their direction; bad traders exit only after the trade has moved against them.

And yet it is equally true that, if 10% of trades are going to account for the lion’s share of profits, traders must be willing to milk very good trades. This not only means finding the sweet spot where you can “cut your losses and let your profits run”; it also means being willing to trade sufficient size to maximize returns from a good trade. The worst traders I know put on their maximum size when they’re trading at their worst. Typically, they have just lost on one or more trades and now are trying to get the money back. The best traders are able to identify superior trading opportunities—and are patient in waiting for those—and will put size on to take advantage of these. This is how 10 good trades more than make up for 90 scratches and losers.

A favorite trading story that I tell concerns a very successful trader. He promised to tell me the secret of trading success. Of course, my curiosity was piqued and I asked, “What is that?” He responded with a question: “What is the ratio of your largest position size to your normal size?” “Three-to-one”, I told him. He smiled. “Consider 20-to-1,” was his advice and his success formula.

I completely believed him. The reason he was successful had nothing to do with finding a better oscillator, regression analysis, or chart formation. He was successful because he had the ability to identify—and wait for—particularly profitable opportunities and then take maximum advantage of those. While 20:1 position sizing is—and will always be—rich for my blood, I think the principle is valid: success is partly a function of putting size on for the logical, not psychological, reasons.

This is one reason trading is so difficult. It is an unusual blending of traits that allows someone to be prudent with risk, scratching trades that don’t move promptly as expected, while at the same time milking opportunity. It is easy to find traders who are risk-averse and stick with their one and five lot positions; it is also easy to find traders who will swing size freely, including times when they are frustrated with the trade. What is rare is to find the mix: the ability to accept and limit the 90% of occasions that don’t work, and yet act aggressively on those 10% of times when there is a move to be exploited.

What is true for size is also true for time. Much can be learned simply by identifying how long a trader has held onto winning vs. losing trades. If a trader is quickly exiting trades that aren't’t going in the desired direction, the average holding times for such trades should be quite low. Conversely, with the good traders, it’s not unusual to see a trading log that registers 10% of trades that are held for a lengthy period of time. Invariably, these are the winners that contribute significantly to the overall P/L. The truly unsuccessful traders will also display a minority of trades with long holding times—and these will be the losers. I recently asked a trader why he hung onto a long position for an unusually long period of time. He looked at me somewhat quizzically and replied, “Because I had the bottom!” He was willing to sit through a choppy trade as long as it went in his direction and as long as nothing happened to convince him that he didn't’t identify the bottom. That one trade made his entire day.

Perhaps this is a truism in all of life. The people who I have seen who have been very successful in dating and relationships have been willing to go on very many first dates, but not so many second and third ones. They “scratch” the unpromising dates and then focus their energies on the 10% that look worthwhile. The same is often true with respect to career and company success. A successful individual may take on ten projects over the course of a year, but focus efforts on a single initiative when it yields promise. A company may roll out ten products and quickly pull nine, making significant money on the one that finds ready acceptance in the marketplace. Even successful artists and inventors, researcher Dean Keith Simonton found, tend to churn out creative efforts, deriving their fame from the small minority of works that attract the attention of an appreciative world.

Successful traders risk manage their market exposure. Successful individuals risk manage their life exposures. It is not just how much we undertake, but how much we scratch in life that determines our ability to benefit from the episodes of promise that come our way.



Brett N. Steenbarger, Ph.D. is Director of Trader Development for Kingstree Trading, LLC in Chicago and Clinical Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY. He is also an active trader and writes occasional feature articles on market psychology for a variety of publications. The author of The Psychology of Trading (Wiley; January, 2003), Dr. Steenbarger has published over 50 peer-reviewed articles and book chapters on short-term approaches to behavioral change. His new, co-edited book The Art and Science of Brief Therapy is a core curricular text in psychiatry training programs. Many of Dr. Steenbarger’s articles and trading strategies are archived on his website, www.brettsteenbarger.com

 

found this very interesting.

Can definitely relate looking back over the years to the early years in trading. The more flexible and less rigid I became in viewing potential trade opportunities, the more I looked at wider and varying scenarios and thereby broadened my views on what might happen, and where a market could or might go- rather than pre-conceving ideas perhaps based upon some bias or merely s/r levels on charts, and the like--------- the better I have done.

And the converse has also been true.

My recent trading in AAPl has been an example of the latter. Only my increased experience level has prevented me from getting creamed in said aapl positions, and will likely ultimately allow me to still realize a profit or a scratch from trading AAPL stock and options. But it illustrates what this article is saying. How we look for 'facts' in the market to defend our bias, and may even become more entrenched therein as a move goes contrary to our paradigm.


Ice





A large body of research examines skilled performance in various fields by comparing experts with novices. These fields range from athletics (both team and individual sports) to chess to various performing arts. Having now read scores of books and research studies on the topic, I see where much of this research could be of value to traders seeking to achieve their own levels of expertise. A book that I am planning for 2006 will chronicle these investigations--and their implications for trading--in considerable detail. This article will focus on one particular finding of interest from studies on expertise in medical diagnosis: the differences in reasoning styles between accomplished professionals and neophytes.

Having taught in a medical school for 19 years (and having traded stocks and equity indexes longer than that), I can vouch for the similarities between arriving at medical diagnoses and coming up with trade ideas. Both involve an initial absorption of detail, followed by a comparison of the details with known patterns, and then a sharpening of one's ideas prior to taking action.

Traders and physicians alike bring with them mental maps of familiar patterns based upon didactic learning, research, and personal experience. In that sense, a trader's assessment that we are moving higher is not so different from a psychologist's diagnosis of an anxiety disorder. The trader knows what trending markets look like--including certain configurations of price, volume, and volatility--and the therapist has an internal representation of anxiety disorders. Pattern search following careful observation is crucial to their expertise.

It turns out in the medical expertise literature that novices (such as beginning medical students or laypeople) lack the internal representations of experienced professionals and thus have a harder time making sense of the data they collect. Such novices will collect blood test results, physical findings, and data from the medical history in a far more haphazard fashion than experts, creating both inaccuracies and inefficiencies. Most crucially, the novices employ what researchers call "backward reasoning": they jump from initially presented information to diagnostic impressions and then move backward from their impressions to identify data that support their views. For example, an inexperienced psychology student might observe low energy in a patient and leap to the impression of depression. From this impression, the neophyte therapist would ask questions that would be relevant to mood disorders generally and depression specifically.

Expert doctors, however, do not function this way. They employ "forward reasoning". They collect a wide range of data that are relevant to making differential diagnoses. Instead of jumping to a single conclusion, they have in mind several possible conclusions and collect the data needed to distinguish among them. Thus, for instance, the expert therapist would seek a blood workup and a full history and physical to accompany the usual psychosocial questions regarding mood. This is because the expert knows that low energy in a patient can be the result of hormonal imbalances, nutritional deficiencies, and disease processes--not just depression. Where the novice works backward from an initial impression, the expert assembles large amounts of data into clusters and narrows hypotheses until the best one remains.

It is not unusual for traders to become married to market opinions: They get an idea in their head where they think the market is going and then they ignore information that tells them otherwise. I have watched traders selectively pick information from markets that confirms their biases while ignoring huge trends that are contradicting their ideas. Only after their markets close do these traders look back and wonder how they could have missed what was so obvious.

I contend that the trader who is married to an opinion is behaving like novices in the medical expertise studies. They form an impressionistic view of their market and then search for evidence to support their bias. Expert traders, however, "let the market come to them": they gather enough information to sort out random movement from significant tendencies, eventually arriving at trade ideas that represent their diagnosis of the market. New traders, I've found, are like medical students in that they haven't received enough training and seen enough variations of patterns to know how to assemble data into differential diagnoses. Only with repeated experience do they learn to identify meaningful clusters of information and use these to sort plausible ideas from implausible ones.

If this is true, trader education might need to more closely approximate medical education. Traditional medical education consists of a pre-clinical phase that teaches basic science fundamentals, so that students understand principles of anatomy, biochemistry, cell and molecular biology, pathology, and the like. After this comes a very different clinical phase where learning is at the bedside, with students encountering a variety of clinical cases and "reading up" on these. Traders, too, need a basic education in the fundamentals of auction markets and statistics, so that they understand the significance of bids, offers, volume, and price levels and patterns that appear over time. After the basics, however, traders learn at their equivalent of the bedside: by viewing markets under varying conditions and looking deeply into these.

Ultimately, what physicians and traders learn is not just a fund of knowledge, but a method of reasoning. What makes a good trader may come less from the trade ideas themselves than from the forward reasoning process used to generate these ideas. Traders who keep journals and work on their performance may want to think about monitoring more than their moods, trades, and profits/losses.

They also need to think about their thinking.


Note: A version of this article was posted to Trading Markets on 11/7/05

Bio:
Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com.

 

I have been reading your journal with interest. Thank you for the above posts. I believe you have a good handle on many of the psychological aspects of trading.

Two questions.
1) Can you give us any insight on how you select the underlying stocks for your option trades, and,
2) will your new efforts standardize the way you post your entry/exit/position reporting.

We appreciate your sharing of potential future stock selections. I did make a small trade on HUM puts that came from one of your posts. It did not get to your high point but I did Enjoy a small profit.

At times I have found your entries difficult to understand. Am looking forward to your 'more concise' postings as promised. Last year an ET member, SammySOESa did something similar - his posts were very easy to follow. http://www.freewebs.com/mytradingjournal/ no need to do elaborate blog - just an easy to follow log.

Thank you for your time on this project