SYSTEM: REVERSAL EXAMPLE: Here's how the NOK one might have played out if the market was showing weakness today. The close below the 20-period low (Donchian channel) indicated significant weakness, but I always require price to move in the indicated direction. The low of the bar that closed was 12.77, so I would have entered short (with a PUT option) below 12.77. This would have put me short near 12.76, which is roughly halfway between my original long (the blue line) and the initial stop (the red line)...roughly 1ATR away. Assuming my short had been triggered (it has not), the 2nd reverse would occur on a close above the original entry line (blue line). If that ended up getting stopped, then my system is not working on this particular stock at this point in time and I move on and take my 3 small losers. One decent winner makes up for those as you can see from the left side of the chart, starting with green candle. A short would have occurred below the low of the doji just to the right of that and the initial stop of 2ATR was never touched. I trail a 2ATR stop, but also set up to reverse if the opposing signal show up. This happened when the two green bars just about in the middle and the exit would have been about 14.4 due to the gap up. This would have been a move of about 15.6 to 14.4 = 1.2 points. With an initial ATR of about 0.45 (lower left corner), I would have added 3 or 4 more positions by the time my exit showed up.
UPDATE-EOD-10/29/2009 Two short positions stopped today (KFT, WMB) as the bulls pile back in to the market. RESULTS: KFT = -0.22R WMB = -1.22R NOK reversal never materialized and I am still long.
TRADE ANALYSIS: LOSER(WMB, -1.22R) Short position overrun by the bulls on highly misleading and overly optimistic GDP data. WMB had been performing well and had been added to several times. The stock had declined enough to the point that the 2ATR stop had moved down to basically breakeven. PROS: Followed my rules completely. Initially performed well. Was a 3.5R winner at one point. Setup was perfect. CONS: Didn't pay attention to major news items coming out Adding trades works well, but adding the same contract averages the cost up too quickly (first contracts were purchases at $1.55 and last was purchased at $2.40) and as a result, a winner can turn in to a loser. I was a bit worried that this would be the case, but thought I'd try it to reduce my bookkeeping a bit COMMENTS: A good trade, just had some unfortunate timing. To minimize risk, I will go back to my original method of adding the nearest OTM contract, rather than the initial contract. This will reduce the profit run-up slightly, but also prevent additions from skewing my average cost up too quickly.
SYSTEM: PYRAMIDING #2 As was demonstrated in the losing trade (WMB), one must pay particular attention to how a position is increased. In this case, I was trying out a new method to make things a bit easier by only using the original entry contract every time I added to a position. This makes it nice because you only ever need to update one order for each position each day. The drawback comes from the option delta and gamma. As the position moves in your favor, gamma causes your delta to quickly rise and the further you get from your initial entry, the close delta gets to 1 (which means your option price tracks the changes in your stock price). Since the initial entry option (NTM or slightly ITM) has a delta of around 0.50, this results in your average entry price rising rapidly as well. A better (but more tedious) method is to use the nearest OTM option each time you add to a position. This means you are adding in the same amount each time and reduces the run-up of your average cost. An added benefit is that after a run up, the position will be less susceptible to a gap down because gamma/delta will actually work in your favor. The drawback is that it takes more effort to keep track of everything.
UPDATE: EOD-10/30/2009 Market reversed hard today. NOK hit reversal point and I am now SHORT NOK. MCO hit short. LVS hit long, but this was a terrible entry, basically a "gap and crap"
UPDATE: EOD 11-2-2009 Stopped out of LVS (-72R), and I'm glad, since that'll teach me to chase on a gap. Added to MCO Short.
WATCHLIST: 11-03-2009 SP500 getting close to giving a buy signal, so it's a little bit more risky on the short side.
Took a nice bunch of time off for the holiday and also revised my trading methods a bit. I've decided to downgrade my "Gooniverse" to a mere solar system and restrict my stocks of focus to a few dozen rather than try to pick from everything. Occasionally a big runner that goes against the grain pops up, but for the most part, things track the big indicies (probably a no brainer, but it took me a while to hammer that in to my head). I'll mostly stick with the major ETFs and individual stocks that suit my fancy (all in all probably less than 50) which are a nice broad cross section of market industries.