Trading Three Figures - Take Two
Fitbit is now benchmarking cardio fitness for users -- I discovered my fitness level is "Good" versus "Very Good" or "Excellent." Naturally, I am running more and eating better to improve my score. A side effect of the activity is more thinking (and podcast listening) time.
Last week, while running, a simple trading strategy sprung from my subconscious cycles, and I deposited a fresh $500 into my optionshouse trading account on 4/24.
I waited to resume trading for several reasons. I need to earn money to spend now, and the goals set forth in Trading Three Figures to Seven didn't provide for current needs. That experience exposed shortcomings in my approach, experience, expectations, etc. Some have been addressed; others are in process. Based on optionshouse functionality limitations tied to account balance, and how those thresholds affected my trading decisions, $2,500 was my starting capital target.
Why not start again with $500? That amount is available, it secures minimum access to tools/markets and the original vision of this site remains intact.
One constraint that was notably absent from the documentation in my trades blog was position sizing. I demonstrated some sense of it as my account grew, but it's something that should be planned in advance so one doesn't get lost in the process. Here is position sizing through key account levels:
- 80-100% of account from $500-2,000
- 40-50% $2,000-5,000
- 30-35% $5,000-10,000
- 20-25% $10,000-25,000
- Up to 20% >$25,000
Key account levels:
- <$500 top up account to that minimum level (my restriction)
- >$1,000 optionshouse enables real-time quotes
- >$2,000 optionshouse enables spread trading
- >$25,000 trade frequency restrictions are removed
The position sizing percentages are relatively aggressive, but the risk is partly mitigated by having a plan. Obviously, you have to put most of your account in play with just a few hundred dollars to trade, and risk scales back as the account grows. I capped the sizing compression in this model at 20% to allow for outperformance at higher capital levels.
To avoid overtrading and outsized risk in near-dated options, I will be using contracts with 30 up to 75 days to go. Contract liquidity will be prioritized. The chart interval that matches this duration is the daily, flanked by the 2-hour and weekly charts for trade timing and support respectively.
I will be using stops on debit, directional plays, 20% is a good rule of thumb. I won't be using stops on credit spreads, but I will be closing those positions to capture 50% of available profit when available.
New positions will be opened during the last hour of the trading day. This is the equivalent of playing a poker hand in position - you get to see what opponents do first, giving you the advantage.
I have scrutinized constantly: the reason for this site, its design, organization and content, visitor perceptions and derived value, my processes and deficiencies... The latest rewrite on the about page, I think, captures this endeavor in the simplest terms -- "this quest for capital and momentum..." I want to help others, who share a state of want and an entrepreneurial spirit, accelerate toward their goals by sharing my wins and losses.
This is the next step.
An ideas summary (December 2016 to now):
- Does your trading compliment your life? All inputs must combine to establish and build upon a profitable track record.
- Practice conservatism as knowledge and feel are being built, but balance with the need to take risk to acquire capital.
- Trading more frequently with shorter duration securities and average holding periods is akin to playing too many hands in poker. Don’t be a trading fish.
- Maintain a weekly market thesis with date/time of key events.
- Adapt your strategy to type of market (i.e. strategy in low volatility trending market is different from medium volatility consolidating market).
- Seek out great macro and sector-based analysis; use macro and market health studies for trade context.
- Develop an analytical way to assess all technical signals versus trying to glean direction based on each independently. (e.g. Directional Analytics, a couple snaps below)
- Break down and understand technical indicators at the calculation level. (e.g. MACD Analytics which provided relative predictability metrics)
- Trade a familiar basket of securities and data sets.
- Trade frequency and average duration are not just a function of style; they may be constrained by how much time a trader can spend on trade research and monitoring.
- Maintain a sense of the average trader’s time horizon; generally, use durations longer than you sense market participants are looking.
- Trade the same chart interval (with context, longer and shorter), using a common option duration, targeting an average holding period.
- Open positions in the final hour of trading, after all traders have played their hands.
- Use a position closing strategy.
- Use a position sizing strategy.
- The higher percentage of the account in play, the longer duration the options. Schedule position reassessment at 75% and 50% of days to go.
- Continue trade blogging/journaling.