Search This Blog

Thursday, January 31, 2008

Now that, is some "really wild stuff"

Challenge Accounts:

Sharebuilder Balance: $131.14 (Dividend Paid Today)

optionsXpress Balance: $583.49
ING Orange Savings Balance: $2.06

We rally, what . . . 90 points yesterday only to fall off at the very end, and end up in negative numbers. Then we open much lower today, only to end nearly 210 points ahead for the day.

This market is not for the feint of heart. However, now, more than ever I'm convinced we are inside the first rally of this current bear market. How long the rally will last is anyone's guess, but since we had the 10 day upmove in December, this rally could last from tommorow, or even as far out as the middle to end of next week before resuming it's down trend. Then, throughout the downtrend, we'll probably have 3 more rallies, each longer than the one before it.

But who knows. Time will tell. I'm all cash for the moment.

* * *

Challenge Accounts:

Sharebuilder Balance: $131.14 (Dividend Paid Today)
optionsXpress Balance: $583.49
ING Orange Savings Balance: $2.06

Total Trades and Investments: 1
Largest Inter-trade Drawdown: $86.51
Consecutive Losing Trades (Drawdown): 1
Average Drawdown: $86.51
Accuracy Rate: N/A
Average Reward: $0.00
Risk Reward Ratio: N/A

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Wednesday, January 30, 2008

Wait for it . . . wait for it . . .

Challenge Accounts:

Sharebuilder Balance: $130.77

optionsXpress Balance: $583.49
ING Orange Savings Balance: $2.06

Ok, the big bit of news is waiting for the Fed to announce it's decision today, in regards a rate cut. We'll get that at 2:15 pm today. Well, I should say, this is the big popular bit of news.

I still believe that regardless of the Fed's decision, we are already in a recession. Therefore, of more interest to me, is the GDP (Gross Domestic Product) numbers. The GDP is the technical indicator as to what decides whether or not we're in a recession or not. But I believe that fundamentally, we are already in a recession. Thus far, it's mild. Our inflation isn't too bad yet, and our unemployment numbers are still holding up.

What's that you say? I'm nuts for thinking our inflation isn't bad? Am I crazy? We've reached $100.00 oil that isn't figured into some of the numbers. Food prices are through the roof. And I'm saying our inflation is low?

As I've often said, I remember the 1979 through 1983 recession very well. During that recession we had our inflation numbers and unemployment numbers in the double digits. For more than a year. As it stands, our inflation right now is 4.08%. Which, to be sure is a rise. But it's still far below the 9.28% of January 1979. From that month, it then went into the double digits, steadily increasing to a peak of 12.61% in November of 1979. It did not return to the single digits until May of 1981.

Our unemployment numbers right now are 5%. In January of 1979, it was 5.9% It then stayed from 7 to 9% until 1982, when it exploded to nearly 10.1% in September of 1982 and stayed in the double digits for 10 months.

So while we are not that bad off yet? We are definitely not well off. I believe that fundamentally we are already in a recession. Consumer confidence is extremely low. Housing numbers have been released, that likes of which are reminiscent of the great Depression. Folks are watching their home values plummet. And consumer confidence as it relates to the inflation rate will reflect and manifest itself in consumer spending.

So while we all wait for baited breathe on what the Fed does at 2:15 today? The more important and interesting questions is how will consumer confidence with the current inflation rate relate to consumer spending, and in the end, our Gross Domestic Product. Because you think inflation is bad now? You haven't seen nothing until you see 12% inflation, and 10% unemployment.





* * *

Challenge Accounts:

Sharebuilder Balance: $130.77

optionsXpress Balance: $583.49
ING Orange Savings Balance: $2.06

Total Trades and Investments: 1
Largest Inter-trade Drawdown: $86.51
Consecutive Losing Trades (Drawdown): 1
Average Drawdown: $86.51
Accuracy Rate: N/A
Average Reward: $0.00
Risk Reward Ratio: N/A

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Tuesday, January 29, 2008

Money Management Strategy: Kelly S

Challenge Accounts:

Sharebuilder Balance: $130.77

optionsXpress Balance: $583.49
ING Orange Savings Balance: $2.06

Ok, all this business of money management. Money management this. Money management that. What strategy do I plan on using for the Challenge Accounts to trade with, once we are in a position to trade past what our incoming deposit from rule #2?

Kellys S.

It's my own little subset variation of the standard Kelly formula, and here is a video explaining it.




It works best with 12 month accurate systems, and a risk reward ratio of at least around 1 risk to 2 reward. My numbers (the 12 month number fluctuates) work out to . . % of Capital = (82% (1-82) / 70 ) / IF-THEN SUBSET.

Again, the advantage is that when you're doing well, the formula will automatically scale up your position size so that your reward becomes higher. When you start having losses, it will scale back your position size.


Don't forget to subscribe to this daily blog via email, or your favorite reader. As well, you can subscribe to my YouTube channel here, and you will be updated as soon as I upload a new video.

* * *

Challenge Accounts:

Sharebuilder Balance: $130.77

optionsXpress Balance: $583.49
ING Orange Savings Balance: $2.06

Total Trades and Investments: 1
Largest Inter-trade Drawdown: $86.51
Consecutive Losing Trades (Drawdown): 1
Average Drawdown: $86.51
Accuracy Rate: N/A
Average Reward: $0.00
Risk Reward Ratio: N/A

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Monday, January 28, 2008

Low Funded Challenge Accounts: What have we learned thus far?

Sharebuilder Balance: $130.77
optionsXpress Balance: $583.49
ING Orange Savings Balance: $2.06

I thought we'd take a second out, and take a look, just recap some lessons learned from the Challenge accounts since October 2007.

Lesson #1: Although you can gamble with $500, the simple math teaches us that $500 is too little money to invest or trade with. :smiles: We looked at investing, and with the numbers we had, decided on a ratio of 15 shares per $45 dollar stock. Which would require about $680.00 or so. And for trading, we need to make sure we're preserving our account capital, which usually means we can't trade more than 3% of our account. We technically went beyond 3% with the Sugar trade. But at the same time, we really didn't, because with the addition of funds due to rule #2 our account capital is still preserved (and higher) than when we began.

Lesson #2: If you are low-funded you must have a strategy that allows you to regularly add capital to your account. Period. This is my "rule #2", wherein I split up $100 to the accounts each month. This is absolutely vital for the low-funded trader and should really, be the first priority.

Lesson #3: Patience. This one we've learned a couple of ways. First of all, from October to December, we just spent that 3 months building up the accounts with capital. No trades. No investments. Just relying on rule #2 to build up capital.

Another way we've had to learn patience? Is letting trades pass by. For example. I was recently looking at the possibility of a Soybean trade for this account in the next couple of weeks. Where I might partake in this trade for my regular account? The risk is much too high for the low-funded account. So we have to patiently wait for a trade to line up with our risk tolerance, with the proper risk / reward ratio, etc.

That's ok though. Because of rule #2, while time is passing by, our account capital is increasing by another $100.00 in February.

When you are patiently awaiting a trade, something you will learn? There are always opportunties. They may not present themselves today, or right this second. But if we patiently wait for them to turn up? They will.

Lesson #4: Money Management principles and strategies. I'm not going to get out of a blog entry without saying those words. :smiles: Seriously though, it's not as much about my psychology, my methodology or my risk tolerance. If you have a verifiable good system, with good risk reward ratios, good Money Management numbers? That fits your psychology and risk tolerance? It's all about the money management. Not the system. And for the low-funded account, we have to view money management differently. How?

Again, it goes back to rule #2. For money management reasons you have to add capital to your account frequently.


* * *

Sharebuilder Balance: $130.77
optionsXpress Balance: $583.49
ING Orange Savings Balance: $2.06

Total Trades and Investments: 1
Largest Inter-trade Drawdown: $86.51
Consecutive Losing Trades (Drawdown): 1
Average Drawdown: $86.51
Accuracy Rate: N/A
Average Reward: $0.00
Risk Reward Ratio: N/A

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Friday, January 25, 2008

What is your Lifetime Bias? What is your Methodology Bias?

A couple of days ago I mentioned that in my trading accounts, I was all cash. This prompted a very good question by "A", that reads:

"I was sort of under the impression that with 'trading' especially options, one can make money if the market is up,down,or the same...just wondering if you could elaborate a bit more on why your trading accounts are all cash - or what factors you are taking into account when you decide its not a good time to trade?"

That is a fantastic question, and I'm glad it was asked. It relates to a few things I'd like to touch on.

First of all, we all have what I term "a lifetime bias". Some folks are like me. I love to be long in stocks. I'm a bull. I always have been. I've come to understand why I have this bias, and it's based on a few factors. Suffice to say, I like the 'feel' of being long in the markets.

Some folks are straight bears. All they do is short. Very, very few short players become successful. I was watching a statistic on "Wall Street Warriors" that stated that 99% of all short stock players lose eventually. It's a difficult game to play. But it's been done, and can be done. There is, afterall, that 1%.

Some folks don't care. One way or another. They are long just as much as they are short.

Why is it important to know your bias? Well, let's take the bulls. This is the camp I fall into. Historically, the stock market always goes up in the long run. So what does this say? I should have a long term investment portfolio that I look to accumulate shares in for dividend investing. Bulls make the best dividend investors. Bulls make great portfolio keepers. And when we have a bull market (which is most of the time) bull can make some good money trading.

What about the bears? The most successful short sellers (I've seen a couple) I've seen stick to the penny stocks that have been pumped up to around $4 to $5 region, and short those. I do agree that bears who are good at what they do provide a valuable service. They uncover the "Enrons" of the world. But shorting huge Blue-Chip companies is a way to get quickly burned. The Street is littered with people who have tried it. But some folks just have that bias.

What about the third camp? That really don't care? They make the best overall traders. And these folks, make a lot of money. They'll go short as much as they'll go long. So why they may have a long term portfolio? That really isn't where their interest lays. They are fantastic for understanding, not what the news means, but what the news means to the market and how the market reacts.

Ok, now how does this fit into your methodology? As I hinted above, I think your methodology should match your bias. There are many ways to trade the market. Some methodologies fit some people better than others. Why? Because of two things. 1) As I already mentioned, your lifetime bias, and 2) Your risk tolerance.

Let's take myself as an example. When it comes to trading? What's my risk tolerance? Well, trading, my psychology (something I have to talk about a bit more) is more short term. I'm no day-trader. That's just too frantic for me. But I like short term trades lasting, ideally, from 3 to 5 days. That's it. That fits my personality. To meet me in real life, you'd find I have a very gregarious, fast-paced personality. I'm not focused enough to be a day-trader. But I do like getting in and out quickly.

If I'm in a trade for a long period of time? I've found that it starts wearing me down. Emotionally and physically. Thus, I don't have the risk tolerance for longer trades. Thus, I'm no good when it comes to selling options. It drives me batty. I can make money doing it? But over the long haul, I'm just going to get burned out. And I'm in this for the long haul. With my chosen methodology (which is pretty discretionary) it does very well in bull markets (thus my boredom) and short term swing trades. I also look for increases in volatility. Thus, though other people have a hard time buying naked options? I do well at it, as my money management numbers attest to. It fits me.

It's sort of like the Forex. Some people do very well at it. I've tried my hand at it. But truth be told, I just don't like it. It's hard for me to explain. I don't get the same excitement and satisfaction from Forex currency trading. Some people do, and more power to them. If I tried to concentrate on the Forex, I could probably do well for a while. But I'd burn out.

Basically, what it comes down to is this. I enjoy my methodology. It fits my personality. It fits my psychology. It fits my risk tolerance. Now this leads to what I believe is your primary question. When do I know not to trade the markets?

I have to be aware of when my discretionary methodology does well? But equally important is when it does not. My methodology struggles during bear markets, and it struggles with odd market intervention. In other words, with the current market conditions? With interest rate cuts all over the place? With a stock bear market? My methodology does not perform well. I'll still be taking some trades. I have my eye on one at the moment as a matter of fact. But I just won't be taking as many. In the end, my methodology performs very well, because a bear market will offer us the gift of cheap stock prices. But with the state of the economy, it means I have to develop that oh so important quality of patience.

Now, this moves to a third area - this blog. My primary goal is to demonstrate the most important aspect of trading and investing. Money management. For instance, I performed a Sugar Trade this month. We took a loss. The primary thing I'd like to get across is not neccessarily how I implemented a trade in Sugar? But my risk reward ratios, as it relates to the rule set for the Challenge Accounts, as that relates to account equity preservation. The fact that I risked a total of $89.00 for a reward possibility of $200.00 using a methodology with a given set of accuracy and drawdown - is much more important, than the method I used to get there. How I'm managing such low funds is the most important thing. The risk per trade. The rule set. Those sorts of things.

What does this mean if you have a methodology that is different? But still apply the money management decisions that I apply? If you still keep your methodology to sound performance analysis numbers? Then once these accounts start to grow, people may have a methodology that lets their small funded accounts grow faster than the ones I display here. Heck, some people may decide that they see what I mean, and they can add another $600 of at-risk funds to their account, and try to trade with the account money management principles that I've mentioned. More power to em! 8^) I have to keep to the rule set I engaged in, well, for consistencies sake.

But the important thing, is performance and growth. The most important thing, is money management principles.

Again, great question, and I thank you for asking it!

Thursday, January 24, 2008

2nd Wave in the Stock Bear Market?

It's not surprising to see approximately 4 or 5 legs or waves in a bear market. Each leg, or wave, is a short lived rally, but it is longer than the previous rally.


We saw a 10 day rally around Christmas time, before the market tanked. Now, the market is making an attempt. Is this going to be our 2nd leg / wave in the bear market, lasting approximately 15 days? Yesterday was the start of a strong seasonal buying period. It's watch and wait time.

I did scratch a little bit of an itch however today. In the NON-Challenge accounts, I did pick up more BUD for my long term investment portfolio at $48.60. It helped DCA my overall BUD position.


* * *

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Wednesday, January 23, 2008

Challenge Accounts: New Account to Open

Ok, I'm a bit bored. My trading accounts are 100% cash right now. I figure better to earn 3.18% on them, then buy something when the market is down about -12% so far this year. So what else can I do?

Well, I figured I'd open up a new account for the Challenge. To begin with, this will be a normal savings account. But I'll be rolling the account as it grows. So I decided to go ahead an open an Orange Savings account with ING that is dedicated to the Challenge Account. I had to stick something in it to open it up, so I broke Number 2 rule slightly. But I only dumped $2.06 in it. That's it. From here on out, it will adhere strictly to rule #2 for the account. As it stands, for money management reasons, I can have one trade in the optionsXpress account, as long as the total risk is under $100.00.

Challenge Accounts to Date:

Sharebuilder Balance: $130.77
optionsXpress Balance: $583.49
ING Orange Savings Balance: $2.06

Monday, January 21, 2008

The First Installment of Airelon's Holy Gospel Hour

I thought back at the end of December we were at the start of a Bear Market. On January 2nd, I put up some thoughts regarding "Doom and Gloomers". On January 4th, I put up some thoughts about the possiblity for a bear market.

But something I forgot? The only thing worse, than listening to the "Doom and Gloomers" - is being in a bear market with Doom and Gloomers.

I do it to myself. I get on various forums. But I believe in spreading sound education in regards to investments. Make it as fun as possible. But throw something out there to help. And what do I run into? Post after post of "Zeitgist" crap - and how Ben Berneke is actually the Beast of Revelation.

We've been in MUCH worse spots folks! It's not the end of the world. Jesus hasn't shown up (yet) to take it all down - so I wish the gold bug Doom and Gloomers - above all WOULD SHUT UP! Does this mean that I don't believe we are in for a rough time?

By no means. I definitely believe we're in for a buster of a time. It's going to be tough. 1979-1982 type tough. I used to think we were going to see the DOW hit 11,500. But now I'm thinking we'll see it further down. But there are a lot of people that weren't around during the recession that started in 79'. I remember it quite clearly. We were middle class, living in a 40k house in 1978 (Which was good for that time, equivelant to a 2900 sqr foot home now). But when the recession hit? I remember Dad not being able to buy gas for 3 days during the oil shortage. I remember never eating name brand food. All our food boxes, as I called it as a kid were "in black and white" no-brand. Much of what we ate was food out of the garden. If we turned our nose up some days, we didn't eat. Because there was nothing else. We drove an old diesel (Peugot 505). My father would leave and go around the country looking for work. The man worked like a freaking horse. Why? Because at one point during that recession, the unemployment rate reached a whopping 14% (as opposed to the 5% we have now). He'd take 6 months stints in Texas, Ohio, wherever he could find work. I honestly believe that's what we are in for. We will be very fortunate if we climb out of it in the markets by 2009. But the point is - we will climb out of it. This is simply the next peg down - which I agree - we need to take down. It's all part of the cycle.

But the fear I'm seeing is not justified. Everything has become so sensationalized. It's the culture that brought us "Entertainment Tonight". Now the same sensational fear is being applied to the markets. Talking with Dad? I found out that I was right in my childhood recollections. There was not the sort of fear out there in 1979 - like we're seeing now. Even when you factor in (at the real inflation #'s site) energy and food, our inflation is still far below where it was during that recession. As are our unemployment numbers. Our standing are living is 20x's higher than what I had in 1979. But the consumer confidence is what I see as out of whack. The fear that's being spread about is the most serious part of the situation. Not the underlying economic factors - which while serious - don't match up. We've been in far worse spots, with less fear. The fear will screw us up faster, and farther than anything else. Fear causes market crashes. Not economic conditions.

Can you honestly imagine your middle class kid trying to live like what we experienced in 1979? Heck, even their parents? We've become a nation of crying babies. How would people react today if they simply could not buy gasoline. They flip out now if they can't get a freaking whopper.

Regardless, on many forums, I run into the doom and gloomer types that are trying to tell you that because of the financial situation - we are facing the end of civilization as we know it. When we hit the apocalypse, it won't be due to a financial situation. Last time I checked, the end of the world was in God's hands. Not ours.

I feel like throttling the doom and gloomers while screaming: "We've been in MUCH worse spots folks! It's not the end of the world. So SHUT UP!!"

The sort of fear I'm seeing out there IS what causes a crash. A stock market crash is NOT AN ECONOMIC PHENOMENON! IT'S A PSYCHOLOGICAL PHENOMENON!! Our current economic situation won't cause a crash. FREAKING OUT WILL! And we've been in much worse spots. But our current "fear sensational" culture? Is just spiraling.

So in the end? I just end up blowing up. I had a 10th grade Architecture teacher. Mr. Jabe. He was 27. Really cool guy. But we were High Schoolers. We gave him a ton of crap. Every once in a while - when we had gotten to be too much for him? He'd lose it.

"You can all sit down, and shut up. I've had about all I can take. So you get to listen to me rant, on the K. Jabe Gospel Hour. What is it with you guys? . . . . ."

And off he'd go. For the full hour. Decrying the lunacy that was going on around him.

I understand Mr. Jabe now - so much better. I had my own "Gospel Hour" as noted below:



Saturday, January 19, 2008

Welcome to Your New Bear Market . . .

For new traders and investors, the question is: Now what? What do we do? What's going on here? We seem to have confirmed a bear market is occuring, and we are in a recession, as I discussed on January 4th.

First of all, don't freak out. Fear is a reaction. It's not a solution.

The next temptation may to start trying to predict the bottom. But we can't predict accurately. This is a matter of trying to figure out something. What's that?

Where Time and Price Intersect

Where that will all occur? I'm not sure. Much is still coming down the pike, and prediction is a difficult thing. As much is still coming down the pike - then it's a matter of waiting. Everyone IRL that asks me about it - the biggest thing I'm telling them is: Forget the market, pay off your debt. Pay off all your credit cards. Do whatever you have to do to get debt free - because very shortly - being debt-free is going to be the new 'sexy'. Then when time (the mess has completely unfolded) and price (the reaction to that mess as reflected in the broad market) intersect? Then we'll be in a better position for the next bull run - when ever that occurs. Be it 2009 or 2010.

Keep fear at bay. Don't freak out. Just relax, and live under your means. Fear doesn't have to enter the equation. Fear is not a solution. It's just a reaction.

Wednesday, January 16, 2008

Money Management Strategies . . .

Ok . . . now that all that is done with, we can now look to building a money management strategy.



There are other strategies that what mention in the video. But I urge you to look up different money management strategies, and pick on the fits YOUR risk tolerance (not other peoples risk tolerance, or my risk tolerance). Don't forget to subscribe both to this blog (via email if you're not one for using readers), as well as my video blog!

* * *

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Tuesday, January 15, 2008

How to Simplify Money Management?

Ok, we have all of these money management topics running around in our head. Numbers. Ratio's. Risk tolerance. How do we take all of these concepts, and put them in a easy to understand format?

Performance Analysis statistics. Here's a short video of how to do it, as well as the benefits it will bring you . . .



Don't forget to subscribe both to this blog (via email if you're not one for using readers), as well as my video blog!

* * *

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Monday, January 14, 2008

The Sexiest of Money Management Topics: Accuracy Rate

If it's one area of money management that is considered "Sexy" or exciting? It's accuracy rate. Unfortunately - too many folks focus in on the number when it comes to accuracy, and not how that number should relate to other aspects of money management. Below is a video introducing accuracy as a money management principle, and how your money management principles affect your accuracy rate, and vice versa.



Inside the video, I referenced a video by Dave, or "Informed Trades" at YouTube. That video can be found here. It makes extremely insightful statements as to why people get pulled into the hype regarding high accuracy.

But remember. Accuracy Rate only counts for one fifth of money management principles.

* * *

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Saturday, January 12, 2008

The Most "Un-Sexy" Investing Topic

"Un-sexy" investing topic? You bet. Money management is already considered boring. But within the subject of money management, there is a topic that is considered the most droll, un-flattering topic there is.

Drawdown.

Here's a short video describing what it is, and why you need to consider it.



Something else that should be mentioned when it comes to drawdown, is it helps you to understand the worth of a system. I've had people promoting a given methodology or system, and when I ask about drawdown? Their response was: "We don't have to worry about things like drawdown, as other systems do"

BBBBBBBBBBBBBBBBBBBBZZZZZZZZZZZZTTTTTTTTTT ! ! !

Wrong answer.

Everyone has to worry about drawdown.

If, on the other hand, someone offers a system, and they have no problems discussing it's drawdown, some statistics, as well as what markets the system generally performs best in? This is a clue that the system may have some merit, and be worth investigating.


* * *

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Friday, January 11, 2008

Trade Management Illustrated



Don't forget to subscribe both to this blog (via email if you're not one for using readers), as well as my video blog!

* * *

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Money Management: Risk Reward Ratios Illustrated



* * *

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Wednesday, January 9, 2008

DOW at 12589.07 and the S&P at 1390.19

Phew. What a day. The DOW punched into the support zone, and then a little bit beyond it yesterday, to close at 12589.07. The S&P remains at 1390.19. Today should be interesting.

Whether or not this is our bear market confirmation, I still have to wait to see. However, I will say that if we stay below this level for the next 5 trading days - yeah - we're in a new bear market. We'll have to remain below the support zone for that eventuality to come to pass before I firmly believe that. But here we are. At 12589.07 The downward slides are lasting longer than the brief rallies. In addition, we're making lower lows now, but have not attained Higher Highs.

So what does it mean if we are entering a bear market? A bear market can last upwards of a year, and can shave off 30 to 40% from the market. From the outlook of a long term investor (10 year plus) this means that you must look at your long term portfolio account, and emotionally be prepared to withstand those sorts of losses. It also gives you an opportunity to save up some cash.

If you are trading the short side, then it means that you must watch the 'waves'. Those who are experienced with Gann material will understand what I mean by that statement. Gann wrote that the market tends to move in five waves. When looking at any possible bear market from that route, I would say that if you are trading the short side in the small term, just be careful of the small, very explosive bear market rallies that occur. When they do, they are usually very sharp. So beware of getting 'whipsawed' out of any short positions.

It should prove to be a very interesting five days.

Don't forget to check out my video blog at YouTube, and subscribe so that you will be alerted to any updates.

Tuesday, January 8, 2008

Money Management - I'm at it again!

I started a visual recap on what I discussed earlier in this blog. The holy grail of investing and trading. Money management principles.

Don't forget to subscribe to my YouTube videos, so you will be instantly updated when a new video is uploaded. I'm not sure why, but at 4:44 - the video blanks out for like 20 seconds. Regardless, here's the first one regarding Risk Analysis:



* * *

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Monday, January 7, 2008

Sugar #11 and Money Management recap

Ok, we've had our first options trade, at a loss. Here's the money management numbers as they stand for the Challenge Accounts.

Total Trades and Investments: 1
Largest Inter-trade Drawdown: $86.51 (Including Commissions)
Consecutive Losing Trades (Drawdown): 1
Average Drawdown: $86.51
Accuracy Rate: 0%
Average Reward: $0.00
Risk / Reward Ratio: N/A

Too little data to draw any conclusions whatsoever. Our attempted goal on the Sugar trade would have been .21, or $235.20, which places our risk / reward ratio at 1:2.71 - which is a great ratio and will serve us with a system that runs 50%. On all of my public trades (not including investments, or private trades) for the last year, with the above trade, here are my stats:

Total Trades and Investments: 16
Largest Inter-trade Drawdown: $86.51 (Including Commissions)
Consecutive Losing Trades (Drawdown): 2
Average Drawdown: $39.30
Accuracy Rate: 81.25%
Average Reward: $207.85
Risk / Reward Ratio: 1:2.05 (1 risk to 2.05 reward)

So the money management numbers are in good shape. Now moving on to the Challenge Accounts. The number one goal here is preserving account equity. Trading optionsXpress account now would be a bad move, as the capital isn't there with only $483.49. $100 is incoming on the 23rd of this month to that account, raising our account to $583.49, which still has our account larger than where it was at the end of December. As far as future trades, we'll have to see. If I see another trade where there are good technicals and fundamentals my risk is under $100.00 and the risk / reward ratio is good, then I'd take the trade.

* * *

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Saturday, January 5, 2008

Sugar #11 Stop Loss and the Uncertainty in the DOW

First of all, we were stopped out of Sugar #11 at .03 - so we sold the option back to the market at $33.60

But what of the uncertainty we're now facing as the DOW sinks lower? I discussed that in my most recent Video Blog entry . . .

(Video Included. If you're seeing this entry elsewhere and cannot see the Video? Click here to view the entry ...)




Remember ... at any point, try to evaluate the total amalgam of all the 'for' and 'against' that is a marketplace.

* * *

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Friday, January 4, 2008

Sugar #11 Stop / Loss and YouTube it!

Public Challenge Account:

Currently Long one March 08 Sugar #11 10.00 Put at .08 ($89.60) in optionsXpress Account
Profit goal for the option is the .21 to .25 area ($235.20 to $280)

Value of option at the time of this writing: .08 ($89.60)

* * *

As a new feature of this blog, I am going to introduce an accompanying Video Blog on YouTube. The very first video can be found here, as well as above in the "Buzz" slot.

The purpose of the video blog will be to summarize much of what is discussed here at my daily blog. In addition, at times it's best to use charts to illustrate various strategies and a video blog will allow for expanded teaching methods. Therefore it gives some of what is discussed a different flavor. Expanded content is never a bad thing. Each time I update the video blog, I will also put the new video above in the "Buzz" slot for a day or so . . .

Onto Sugar #11 news. The market surged ahead yesterday, and then again last night. I'm going to sell the option back to the market as soon as possible to recoup any possible loss. There was a seasonal tendency for the market to be weaker during this period, but the market continues to make higher highs. No sense in holding onto the option if that's the case. Remember, the only way to hold onto gains made from the market, is to not allow our bad trades to wipe out any gains.

So I went ahead and cancelled the profit stop order, and then entered an order to sell at the market. I was filled at .03, or $33.60

* * *

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Thursday, January 3, 2008

The Challenge Account: Sugar #11 Profit Stop

Public Challenge Account:

Currently Long one March 08 Sugar #11 10.00 Put at .08 ($89.60) in optionsXpress Account
Profit goal for the option is the .21 to .25 area ($235.20 to $280)

Value of option at the time of this writing: .08 ($89.60)

* * *

Ok, my average time in an options play, one way or another is 11 days. So in the optionsXpress account I went ahead and placed what we call a 'profit stop' on Sugar #11 to sell the 10 Put at .21 limit on a GTC order, or "Good Till Cancelled". In plain language, this means that the order states that at .21, to sell the option back to the market, at .21 ($235.20) or a better price, but no lower. This order will remain active until it's cancelled. We often call such an order a "Profit stop". In other words, the order that will cause us to exit the markets with a profit.

Without the value of the option, this account stands at $465.14. On the 23rd of January, the $100.00 will be deposited, which will cause the balance, not counting our option value, to be worth $564.14. Just a little over $3.00 less than where we started out before our option purchase. About two weeks after that, another $100 will be inbound to our optionsXpress account, causing our balance to be approximately $664.14 - not counting whatever we gain from our option trade.


* * *

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Wednesday, January 2, 2008

Beware of the "Doom and Gloomers"

Public Challenge Account:

Currently Long one March 08 Sugar #11 10.00 Put at .08 ($89.60) in optionsXpress Account
Value of option at the time of this writing: .08 ($89.60)

Profit goal for the option is the .21 to .25 area ($235.20 to $280)

* * *

One extremely important piece of advice I feel I always must give people trying to start out in this business, is to stay as far away as possible from what I call the "Doom and Gloomers". When you start out, it won't take long before their email and snail mail starts showing up at your doorstep. I've been in this business for 12 years. And from my very first year, these people have been doing their thing.

What 'thing'?

Generally, a doom and gloomer will try to convince you that the worst meltdown in the history of the financial markets is on it's way. A favorite phrase of theirs is "that will make the Great Depression look like a walk in the park". They do this in an attempt to pump some investment scheme of their own.

But doom and gloomers will not simply forecast bad times. If bad times are on the horizon, it is only prudent and wise to try to foresee such possibilities. A doom and gloomer does not do this. They forecast the end of the world. Catastrophic times. They won't tell you a bear market is on the way. They will tell you that a stock market crash is on the way, and you'll be rationing off your children for a piece of gold. I'm not kidding. My wife knows nothing about this industry, but the spam mail we get nearly every day in the mailbox? Even she can quote from it and understands the rediculousness of the claims on the part of the 'doom and gloomers'. And they've been doing it for the 12 years that I've been engaged in trading and investing. Through one of the largest bull-runs mankind has ever experienced; they have been predicting the 'Crash of 1996'. 'Crash of 1997'. 'Crash of 1998'. 'Crash of 1999'. 'Crash of 2000'. 'Crash of 2001'. 'Crash of 2002'. 'Crash of 2003'. 'Crash of 2004'. You get the idea.

Why do people continue to fall for the predictions of the 'doom and gloomers' year after year? Paul Kedrosky wrote an excellent article entitled: "Why Bears Always Have the Best Arguments", that pretty much covers all the bases for that question.

So will we experience a financial catastrophe? Perhaps. But that doesn't mean you should listen to 'doom and gloomers'. Even a broken watch is right twice a day. Doesn't mean you should use it to tell time. It is much better to look for warning signs, and come up with a strategy that can survive bad times. But succumbing to fear is not a solution. It's a reaction.

Take 2007. We experienced some horrendous news, and somehow, still managed the DOW ended up having an up year. It is still to be determined to see if we enter a bear market. So why not react to the market, rather than try to predict it? Because the last time I checked, the only person capable of prediction is God. Not any investment analyst.

That being said, I'm not some starry eyed optimist that can't see some serious handwriting on the wall. I would not be surprised to see lower prices. If 12800 is violated on the DOW, we're probably in for a bear market. It's not the end of the world. The end of the world is in God's hands. We make the markets go round. In fact, a 30% drawdown bear market is a healthy thing every now and then, and something to be expected every few years. But I won't go around crying like chicken-little with my head cut off, as would a 'doom and gloomer'. Instead, I'll attempt to look at the situation objectively and in a balanced manner . . .

***

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Tuesday, January 1, 2008

The Low-Funded Challenge Accounts: January 2008

Todays Challenge Account Sharebuilder Balance: $130.77
Todays Challenge Account optionsXpress Balance: $554.74

Long one March 08 Sugar #11 10.00 Put at .08 ($89.60) in optionsXpress Account

I was filled on that March 08 Sugar Put yesterday, as you can see, at .08.

These sub-accounts were created by me back in October 2007 as a main feature of this blog. Their purpose, as well as the purpose of many of the articles in this blog, is to assist the low-funded trader understand what principles he needs to consider when entering the market. That as long as one enters this business with the proper principles, education and emotional discipline in hand, anyone can 'make it' in this business. These are actual sub-accounts that I own, and I will look to for growth. I will announce actual trades and investments that I perform in them, and the reasons for my decisions as a means to educate others.

In the beginning of this experiment, I placed $130.00 with Sharebuilder as a long-term investment account, and I placed $370.00 in the account for trading Futures options. I thus termed this the "$500 Challenge". Since we now have $685.51 as a cumulative total in these accounts, not $500, I will term this the "Low-Funded Challenge" instead of the "$500 Challenge". At times I will refer to them simply as the "Challenge" accounts.

I also had three rules for the "Challenge" accounts. At the beginning of each month, I review and consider where we stand, and how those three rules impact the current months decisions.

Rules for the Challenge Account:

1) The initial investment is $500.00, to be split amongst the accounts. We did that back in October of 2007. $130 went to Sharebuilder for longer term investments, and $370 went to the Xpresstrade brokerage for futures options purchases. Xpresstrade was later bought out by "optionsXpress", therefore this is now the optionsXpress account.

2) Each month, I can contribute $100.00, that can be split amongst the accounts however I choose. In other words, I can send $30.00 to Sharebuilder, $70.00 to optionsXpress; or $100.00 to optionsXpress, and nothing to Sharebuilder, etc. Last month I contributed the entire $100.00 to optionsXpress, thus raising our balance to $570.00 in this account. We received a dividend payment in our Sharebuilder account, thus raising our total there to $130.77.

Now we have arrived in a new month; January. I am going to contribute the entire $100.00 to the optionsXpress account again. I'm currently long one March Sugar 10 Put, but my risk is under $100.00. I will be transfering $100.00 to that account on 1/23/2008. Which means it probably won't clear until about 1/28/2008, or so. Therefore, I face a situation that although I can lose about $70.00 (Considering I would sell the option back to the market if the market completely turned against me), the account equity would remain about the same due to this deposit. Therefore, I face a situation with the optionsXpress account, thanks to Rule #2, of a) Risk $70 and end up with about the same account equity balance if the trade turns sour. Therefore, the risk is low b) Making approximately another two hundred dollars from the trade. Not a bad situation.

The Sharebuilder account remains idle at the current time. Given the state of the economy and market, this isn't a bad thing at all. The commissions would eat me alive for what little shares I could purchase in the Sharebuilder account. We discussed last month that for every $45.00 stock we buy, we want at least 15 shares, or $680.00. The Sharebuilder account will earn approximately 4.18% interest on the money that's in there 7 day yield, and there are no fees for either account.

3) I'll be using regular investment and trade vehicles. Bonds. Stocks. ETF's. Futures Options. In January, we're using Futures Options. But only one trade for now, to preserve our account equity. Open-mouthed

If it is one thing that I've learned, is that the next time I perform this experiment, I will start out with a higher amount than $500. Probably $1300.00. Open-mouthed


Return on Investment to date: $0.00
Total Trades and Investments: 1
Largest Inter-trade Drawdown: $15.00 (Current commissions is all)
Consecutive Losing Trades (Drawdown): 0
Average Drawdown: $15.00
Accuracy Rate: N/A
Average Reward: $0.00
Risk Reward Ratio: N/A


***

This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment advisor, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders

Search Investing and Trading Articles and Products