Sick...

I was sick this week, so while I stayed out of the office I got a couple of trading days in. I was mostly trading the SPY on Friday. After some very succesful day trading days, (on some other very choppy days but at a much lower position size), I had quite a bit of trouble on Friday.

The biggest problem: Psychology! After all I read about the mental aspects of trading, I finally got to experience things first hand in a real way. I upped my position sizes this week, and it made a big difference trading in positions 75K in over. After having a great morning, I basically stunk it up in the afternoon, got impatient, made poor desicions, cost myself money. I kept creating stops in my head, and then letting my stops get taken out.... truly terrible!

The biggest problem was not having a game plan in the latter part of the day. I had a game plan when I sat down to trade in the morning, but didn't really have much of one in the second half of the day. I went short and long. My short trade was probably the best of the day. I think I got a little overconfident because my first two trades performed exactly as predicted. I'll chalk it up to a learning experience (it could have been a great day, but I ended up slightly down).

The other really big problem, and I really want to hit myself for this: Base your position sizes on volatility. More volatility = less position size. What this means... look at the previous daily volatility, use that to base position size (AAPL is a whole lot more volatile that SPY).

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Now for the other half of my journal, system development. Lately I've admitadly still been slacking off in coding anything. I however can't wait much longer. I have no excuse, as wealth-lab has announced a .Net version to be realeased in the coming months. This means I don't necessarily have to move brokerages (even though that may be the best move in the long run). My plan is to start coding up libraries/strategies entirely my own code in C#. Then when they realease the new version, I'll plug it in and use there order management system.

So again, what is my strategy going to look like. I saw an old post on elitetrader.com that summed up my basic strategy:

identify your trading fractal (time frame).
identify your desirable trading frequency during the ebb and flow of the market during the day.
identify the point of change in this ebb and flow where the old trend is ending and the new trend is beginning.
enter now.
hold in this new trend.
reverse from one trend to the next when that special point of change appears again.

notice in the above prediction is not a prerequisite to success nor is it employed.

notice in the above that you are simply keeping up with what's happening now. sometimes the market is a little tricky and requires you to do a couple reversals in short order...mostly this is not the case. You bank profits between reversals.

I told you what you have to do to make money in the market consistently. You simply need to devise a method for doing so...and it has nothing to do with prediction.

It is anticipating the car in front of you changing lanes even though it didn't use a turn signal...you've seen it happen many times before and you simply 'know' what will happen.

Okay, that is a simple statement, but it describes the basics of any trading system. To summarize again:

Set your position size (based off volatility)
set your entry based off of your criteria (Indicators, your lucky numbers...etc)
set your stop (based off volatility
set your exit criteria (Indicators, lucky numbers, whatever floats your boat)
Repeat

Okay, now I've really just simplified the statement to trading in general. I think it's important to put this down because from a coding standpoint I can write all these things very generic. Set a position size, simple give me volatility, available capital, security in question and current price , and return. Obviously entry and exit are a little more difficult, and could/should change on every bar.

Okay, now I know what to do, and just need to start writing some of the framework so that I can plug it in to any system that has an api for recieving data and placing orders.

A few trades and my own Personal Finance

I placed a few trades going in to this weeks fed meeting. I bought some more DBV in the 401K. It looks to me like a good way to get some diversified currency exposure.

The only trade of note was opening up a position in HPQ. It's been a strong bullish trend here for a little bit. It appears that the trend has slowed down a bit, and I'm seeing some resistance at 53, however it It has been pretty steady through this past volatile week.

My strategy is to hold it for another few days and see what it does, if it closes past 53, than I will keep it till earnings, if it flounders back down I'll be out.

To abruptly change subjects, I am considering selling my condo ( in the midst of these truly terrible market). Although not directly related to my trading, it will have a significant impact on my net worth and my trading capital. While currently, I'm not planning on digging in to my trading capital for my next property, I would be able to afford a bit more if had this ability.

This really comes down to an investment decision, is my money better off in real estate or in the markets? Well obviously it more liquid in the markets, I can sell whatever holdings I have at any point, transfer it to the bank and have cash in minutes.

This is kind of a change in philosophy for me, but owning real estate really doesn't equate to financial security. To be financially secure, you have to enough reserves to pay your mortgage for some amount of time. You must have enough liquid assets to pay for food, and other necessities. I don't think many Americans live in a world where that is possible. I know many of spend irresponsibly too, but that would have to be a topid of another post.

So what is a good reserve amount. That is highly dependent on the person. It is also dependent on your age, family situation, real estate owned, and monthly expenses. I think a good rule of thumb is to have at least 1 years total expenses. I am always conservative in my numbers, so I will aim high for myself: mortgage is 2100 a month plus 250 condo fees, plus roughly 1000 a month in expenses (this number could be cut but for the sake of working through this). This is roughly 40K.

So 40K in reserves, not too bad. 2 years, 80K, 3 years, 120K, 4 years 160K. Right now, I am somewhere above 2 years reserve. If I buy and sell, that will probably drop a little, but not much.

I think to really to be "really" financially secure, you would like to someday own your home outright (yea, I know, Un-American). This would allow for any income made, to go straight to savings and monthly expenses To get there I would need to be in a positive liquid net value situation. Where the amount liquid assets (not houses) are greater than any liabilities (mortgages). I think this is quite possible in ten years in my current line of work.

At any rate, I think it's important to aim high, while living responsibly. So my current goal for the 1 to 3 year goals:
year 1: reserves of 138K
year 2: reserves of 193K
year 3: reserves of 256K
While maintaining a mortgage of less than 380K. That is quite a bit of work, but I think quite possible. This assumes savings of 48K, 55K, and 63K each year for the next 3 years. The assumption should be something more like this: 30K saved (120K total plus roughly 15% earnings = 138K).

Obviously I would like to achieve quite a bit better than that with some systematic trading approach producing gains more like 40%-60%, but this is a more reasonable path to shoot towards.