Yeah, I thought of that too. This method is very well-suited to an uptrending market like the one we've been in for the last 3 years, it basically can't lose. It will be interesting to see how it performs whenever the next bear market comes along. I guess the safeguards for bear markets are the fact that bear markets always have upward retracements, there's the hedge as protection against a blow-up, it plays indexes which are far safer than individual stocks, and the method doesn't use leverage or margin. Offhand, the only danger I can think of would be a prolonged bear market like the one the Nikkei has been in since it's parabolic bull run in the 1980's. Depending on how the buys were spaced out, there is a danger you could have run out of buying power had you tried this method there. Though, you could still trade around the hedge in that scenario to offset some of the losses, not to mention the dividends as well, and the daytrading version of this, so there would still be ways to try and claw your way back... By the way, on the daytrading thing... on all the trades you could just as easily have gone the other way. For example, here you were shorting at the pink circles and made a profit. Well you could just as easily have been going long at the orange circles I drew in and taken a loss. From what I saw it seemed like you had a lot more wins than losses, so you probably do have some sense of which way it's more likely to go on the intraday charts. Otherwise you'd have had a lot more losses. Of course, this assumes your long term w/l ratio is the same as it was for the brief time you were doing it live. Did you keep records of all your trades using that method? Number of wins vs losses? Avg win size vs avg loss size? Those numbers could prove or disprove my assumption...
Actually I think that this method is best suited to a bear market. This is because the initial position size is tiny and additional size is added only as the market drops. If the market just keeps going higher without a significant correction, there is never a chance to add enough size to develop a significant return. The market might rally 10% and your portfolio gains only 1% because you're mostly in cash. I have been thinking lately that even if a bull market is around the corner, it won't benefit most people because our generation has been so battered and bruised by the bear markets of the last decade that we won't know how to invest in a bull market. The ideal approach in the two types of markets is opposite. In a bear market, you want to avoid investing too heavily now because there will be a chance to invest later at a cheaper price (which is the basic theory behind the OP's approach if I understand correctly). In a bull market, you want to invest as heavily as you can now because if you add later, you'll be adding at a more expensive price.
worldwary makes some good points. Ideally, in a bull market, you want to be fully invested to maximize your return. Unfortunately, I don't ever know when a bull market is coming, so I have no idea when to go all in versus averaging in. A slowly trending upward market without retracement won't really give you many entry opportunities. So the people who are always all in might point out how much opportunity we're missing during a run like that, but the thing to remember is that none of them know how to pick tops so they don't know when to sell their all in position, and they were still probably all in during the big drop that occured in August. There are a few things you can do to deal with rising markets that don't have many pullbacks which I will address in the future.
There is no easy answer to this question, as no one really knows what the future holds. The best you can do perhaps is to increase position size when the market is showing characteristics that you associate with a bull market (low volatility, steady uptrend, etc.). This can be scary though as it usually means going long, or adding to a position, after the market is already up quite a bit off the lows. Again, no easy answer to when to get out, but all traders need to have some plan in place for identifying "toppy" conditions. Some would have caught warning signs before that August drop, some would have missed them. In your own case, what criteria do you use to set targets or otherwise decide when to exit a profitable trade? Anyway, however, this is all assuming that a trader makes some attempt to "predict direction." If you don't want to do that, and instead want to use an approach that gives you a good chance of success whether the market goes up or down from the initial entry, then I think you're correct that adding in pieces rather than going all-in from the beginning is probably the way to go. The question then becomes how to optimize your opening position size. This may involve some kind of probabilistic analysis of how likely you think it is that the market will go up rather than down from any random point. If you believe for instance that the market exhibits an upward bias over time, you might lean toward a larger initial position size.
SPY out @ 129.01 SH out @ 39.32 After commissions it's: SPY: $8,311.00 Hedge: -$3,405 12/16/2011 was the ex-div date for SPY (to be paid on 1/31/2012) which means I have an estimated $616.08 ($0.7701 per share * 800 shares) coming my way, so the total for this trade is: +$8,311.00 (SPY) -$3,405 (SH) +$616.08 (estimated dividend) ----------------------------- $5,522.08
The above is your response to a poster who asked nicely that you post your account statement at the end of the year. Maybe you forgot, so this is a reminder. Thank you.
That was when I was day trading with OEC. If you've been following the thread you know I stopped day trading over a year ago. I withdrew most of the money from my OEC account and just kept a little in there to keep the account open. Do you want a Scottrade account statement now instead?