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Protecting your positions

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somagish

Posted : Wednesday, November 1, 2006 9:25:01 PM

Registered User
Joined: 11/1/2006
Posts: 6

Hi, I have read hundreds of post and replies and I feel confident that I am asking the correct people this question. I have been trading for about 8 years, but focussed on learning what I am doing for only the last year. I want to stop trading like I belong in Vegas and start trading like an investor. So, currently I have stopped trading with real money and I am doing my best to learn and develope my own strategy.

I was hoping someone could shed some light on how to minimize a loss on bad stock decision. For the past year my trading strategy (on paper) has developed into a style that enters a long stock position after a substantial decline. The Worden scan I developed has been proven to be profitable over the long run. Where I run into problems is that as we all know it is risky and difficult to play the bottoms because often the bottom you buy in at is actual just the beginning of reaaal bottom.

Besides a stop loss, is there another strategy that minimizes a loss via going long on a security and also taking out a put option on the same security?

BigBlock

Posted : Wednesday, November 1, 2006 9:27:51 PM

Registered User
Joined: 10/7/2004
Posts: 2,126

Yes there is. You need to study derivatives and their applications. It is an extesive and complex topic to explain over a bulletin board.
good luck
Bigblock.

rmr1976

Posted : Wednesday, November 1, 2006 10:16:30 PM

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Joined: 12/19/2004
Posts: 457

You should really reflect on this statement, because I think it is mistaken:

"The Worden scan I developed has been proven to be profitable over the long run."

No amount of testing can PROVE anything about future market activity.

We HOPE the past is like the future, and many times, it is. But as the regulators like to say: PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

As for your initial question:
"Where I run into problems is that as we all know it is risky and difficult to play the bottoms because often the bottom you buy in at is actual just the beginning of real bottom."

You can try options, but I will be the first to tell you, by using them, you trade one set of problems for another. It takes significant adjustments to your trading to incorporate options, and there are lots of decisions to make:

1. Do I simply buy options, sell options, or spread?
2. How much time do I need?
3. Do I buy in the money (acts most like a stock), At the money, or out of the money?

I follow the advice of Jesse Livermore. I do not usually put on the whole lot at once. I'll buy a little bit, and keep a close stop, usually between 1 and 2 points. This isn't a strict "money management" stop, but one based on support and resistance. I'll want to get in as close to the balance point as possible, so if the stock trades above or below that point, I know I was too early.

Since I trade the option, I'll use a swing methodology, with candle patterns as a signal, and take profits on certain points, and then increase the size on a retracement within the uptrend, if the initial trade turned out correct.

But more often than not, you will be stopped out very often using this method, even when your idea is correct. What that means is you have to have the courage to know when to re-enter the position, as well as to know when your analysis is clearly wrong.

kokoda

Posted : Wednesday, November 1, 2006 11:08:36 PM

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Joined: 1/12/2006
Posts: 296

Do you day trade (able to watch an open position during the day)or are you basically opening long positions? If basically long positions, you must employ a stop loss immediately after the buy, and you select the stop loss point on technical criteria and also on money management principles (risk acceptance level).

BigBlock

Posted : Wednesday, November 1, 2006 11:30:36 PM

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Joined: 10/7/2004
Posts: 2,126

I have to say that the comments of rmr1976 are far from accurate.
Let me firts say, that for any of you on long term plays the only way to insure or dramatically reduce your risk of losses is OPTIONS.
OPTIONS = INSURANCE. You buy home insurance - don't you. Nothing happens the policy expires and so you money for the policy bye, bye. But that is the only way to cut your risk of owning a home. SAME WITH STOCKS AND OPTIONS.
Your option may expire, and so you go an buy another term to keep up the protection.
Now it is not easy, and yes it takes some planning of what stocks to buy and when to coordinate with Option leverage.
It is a complex subject that I will not take the time to explain here. Besides each situation is different.
Let me say, if you are trying to learn options from a bulletin board I can assure you that your tuition is going to cost you.
I am sometimes amazed about what some folks want to achieve and how. Those who call themselves investors and traders, yet they are trying to save pennies.
It takes money to make money, and it takes money to protect your assets.
By the way kokoda, yes I daytrade. About your stop loss - let me tell you: you go ahead and place your stops right after you buy - you are just wasting your time, money, and making the market maker rich. You are just telling him the first thing he wants to know. Where are this gooneys willing to give it to me. Do yourselve a favor and keep that number in your mind. When the time comes execute. If you cannot watch the tick any minute and second of any day, then don't daytrade. If you swing or position then your stops will give you much more room. Still no reason to enter them until close by, by then anyways you know you need out if you didn't or dont want to level with a option at that point.
Like it has been said before - it is not the numbers, but what they mean to you.
good luck
Bigblock

somagish

Posted : Wednesday, November 1, 2006 11:44:49 PM

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Joined: 11/1/2006
Posts: 6

Hi to all, I appreciate the info from everyone. I think Bigblock is addressing the issue I am trying to uncover. Kokoda, I am a firm believer in the stop loss and having a rough idea of where to set the stop loss prior to actually buying so I agree with you there. I think the Worden Daily reports have demonstrated that for 100 investors you might see 100 different stop loss techniques.

So Bigblock and others, message boards are not the place to try and teach others about some of these topics, so where does one turn to learn about these topics?

rmr1976

Posted : Wednesday, November 1, 2006 11:51:38 PM

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Joined: 12/19/2004
Posts: 457

QUOTE (kokoda)

No, I don't daytrade. I've found the most success entering trades using market on open, or market on close orders, particularly with options, so I'd consider myself a position trader.

I'm still looking for that strong trend that is going to take me into retirement.

In employing stops, I'll close out a position if the stock closes beyond a particular high or low. If the stock is on the borderline, I'll use a bit of judgement in whether I want to wait for a clear sell signal (ie. close the trade at the market open AFTER the signal--ie the next trading day), or use a market on close order on a day where it is very likely I'll get stopped out.

Broad market action, volume, and response to news are things I factor into what I want to do. It is a question of whether I want to pull the trigger early, or wait for a clear signal, but I WILL follow the trading plan, one way or another.

If you get stopped out of a trade, you have a tough decision to make. You need to decide whether your analysis is completely wrong, or if you were just a bit too early. Here are a few examples, and how I handled them.

AAPL: I had successfully traded AAPL from the bull and bear side this year. I had closed a successful put purchase just before AAPL announced strong earnings, which sent the stock gapping up in late July.

In August, I thought this was a typical short term bear market rally, in the context of a more significant downtrend. I entered a bearish option trade on 8/10/06. Since the trade was short term, I risked a small amount of capital, and held until expiration. The trade didn't work out, and I let the options expire worthless, which they did. I decided to leave AAPL alone, as I didn't want to buy it, but it didn't look as if it was ready to go down. The broad market was also rallying strongly, which I did not anticipate. I stepped aside and looked for other trades.

TROW: I turned bearish on TROW in late September, as a search of my posts will indicate. TROW traded in a tight range, and I got stopped out a few times, for small losses, as the stock closed above the recent price extremes. Now that TROW is breaking down, I'm strongly considering getting back into it again, on the short side.

NVDA: Another stock where my trade was a bit early. I took a few quick losses, and now it appears as if I'll have to get back into them again.

JCI: I bought puts on JCI last week. You can bet I'll be out if this closes above 85. I might close out earlier if the market begins to act better.

AMD: I bought puts after it released a negative earnings surprise. I expect this to trade down to 16 eventually, but closed out the long puts within 3 days (for a modest profit) as the stock did not continue to trade down, and appeared as if it wanted to rally.

BigBlock

Posted : Wednesday, November 1, 2006 11:53:42 PM

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Joined: 10/7/2004
Posts: 2,126

soma for me it has always been books. There are many other ways, but for me they have proven to be a waste of time, and funding.
some online sites dedicated to educating the investors have very good programs so. It is just that for me it is more attractive the idea of the book without all the screen glare and the other technical problems that come along the online access.
good luck
Bigblock.

rmr1976

Posted : Thursday, November 2, 2006 12:15:37 AM

Registered User
Joined: 12/19/2004
Posts: 457

Bigblock,

What did I say that you disagree with?

You wrote:
Your option may expire, and so you go an buy another term to keep up the protection. Now it is not easy, and yes it takes some planning of what stocks to buy and when to coordinate with Option leverage.
It is a complex subject that I will not take the time to explain here. Besides each situation is different

FWIW, married puts (long stock long put) are inefficient trades, but they do make brokers happy. You pay the ask on both the stock, and the put, as well as commissions. If the stock moves up, your put doesn't protect any profits, which means you will either have to set a trailing stop, or roll you puts up.

Puts are better used to protect profits, when you want to let them run, than to prevent initial trades from losing too much. That should be done by sizing the position correctly in the beginning.

It is simpler to just buy calls equivalent to the number of shares you wish to be long. If you want to be long 300 shares, buy 3-4 short term options with deltas close to +80, or 6 longer term, near the money options with a delta of +50. Keep the rest of the money in cash equivalents.

How is what you said any different from me saying that options solve one set of problems by introducing new ones?

FWIW, I prefer to trade the options. But it is clear to me that there are some adjustments you need to make before you use options to trade your analysis.

Example: You buy a call, the stock drops, but not enough for you to consider the analysis wrong. You decide to hold the call. Eventually, the stock rallies to your initial buy point, but you still have a loss, as theta (time decay) has reduced the value of your option.
What would have been breakeven on a long stock is now a loss.

As for using candlesticks, I use them in the context of Elliott Waves and momentum divergences. It works for me, and a study of my posts would indicate I might be onto something.

If you have failed using these methods, that doesn't make them "inaccurate."

BigBlock

Posted : Thursday, November 2, 2006 4:48:41 PM

Registered User
Joined: 10/7/2004
Posts: 2,126

rmr1976 I guess the confusion was at your statement "by using them, you trade one set of problems for another". I was browsing quickly and very possible I got a different idea of what you were saying.
By the way, yes I have used different options methods in the past and sometimes now. I was sucessfull in some and not in others. The thing is was never impressed by either. The methods and dinamics of those markets never captivated me. Daytrading on the other hand captivated my soul, and yes that is what I mostly do now. I like to see the money on the table now, and resolve my issues now, not tomorrow, or next week, or next month or next year. NOW is what captivated me. And that is what I became a trader of now. A daytrader.
Just recently I am being taught to level my daytrade moves, with daytrade options. Do I think it will take? Not sure. I will let you know when I know more.
good luck
Bigblock.

diceman

Posted : Thursday, November 2, 2006 6:02:11 PM

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Joined: 1/28/2005
Posts: 6,049

somagish

Realize that when traders speak they speak for themselves.

Realize when a trader says "that doesn't work or is a waste of
time". What they really mean is "that didn't work or was a waste
of time for me as I applied it."
---------------------------------------------------------------------------------------------

That being said. I will give you my views based on experience
over the years.

1) Think for yourself.
(listen, learn, test, experiment, study. At the end of the day your trading
will be in your own style)

2)Your stop method is tied to your profit method they are not separate.
( It may be ok for a long-term investor to use a 12% stop-loss. That does
not mean a daytrader should use a 12% stop-loss)

3) Keep it simple.
(adding things like options to the mix just adds another level of complexity.
If you cannot simply buy and sell and be profitable it is doubtful adding options
to the mix will be helpful)

4) Log and analyze your past trades.
(your actual results will point to what is working and what is not
and where stops should be)

5) Learn to diversify what you do.
(No one system will be successful all the time. Learn to buy weakness also
learn to buy strength. Learn trend trading. Learn counter trend trading)

6) Trading is about real emotions.
( I think rather than stopping trades. Its better to take smaller positions.
This will allow you to continue real trading and growth in your experience.
Paper trading and back-testing are fine but, part of the battle is putting
real money on the line. We always make perfect decisions when there
is no risk)

7) Everything you do impacts your profits or losses
(It is not just about stops. When you trade. How often you
trade. What you trade. When you take profits.
Sector. Fundamental quality. All of this
falls into the mix of success or failure)
---------------------------------------------------------------------------------------------------

In my opinion trying to find bottoms is a dangerous game. I would rather
buy strength than weakness.

Stocks like GLW, AAPL, ATI, WMB are up about 1000% since the bear
bottom. These would be off your radar screen. Not to mention last years
energy, and commodities rally.

If all else fails I would recommend an 8% stop loss. If you cant make money
with an 8% stop. Then something else is probably wrong.

Thanks
diceman

memorableproducts

Posted : Thursday, November 2, 2006 8:18:08 PM

Registered User
Joined: 3/25/2005
Posts: 864

Somagish, I have to say that I can really relate to two post here.
And, were I you, I would really take the first post (a Diceman comment0 to heart

QUOTE (diceman)

In my opinion trying to find bottoms is a dangerous game. I would rather buy strength than weakness.

QUOTE (BigBlock)

Daytrading on the other hand captivated my soul, and yes that is what I mostly do now. I like to see the money on the table now, and resolve my issues now, not tomorrow, or next week, or next month or next year. NOW is what captivated me. And that is what I became a trader of now. A daytrader.

laphill

Posted : Thursday, November 2, 2006 10:39:09 PM

Registered User
Joined: 12/7/2004
Posts: 393

Fellas, you've all heard "different strokes for different folks". We all know you have to develop strategies that suits your own knowledge and temperence, and that takes trial and error,time and patience.

somagish

Posted : Friday, November 3, 2006 12:35:06 AM

Registered User
Joined: 11/1/2006
Posts: 6

Thanks again to everyone for taking the time to give your imput.

I wish everyone on here success

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