Trading Observations and Evaluation (March/2009)

Caught in the uncertain and volatile markets of the past couple of months, I was finding it extremely difficult to yield consistent returns in short-term trading. My options included:

Getting out of trading (for now) and take a break.
Go with buy and hold strategy (at least consider it).
Go with equity options (to accommodate a dwindling capital base).
Go with day trading.

I stopped trading in my margin account for about 2 weeks until I realized that I need to finance my monetary needs. The risks and the losses were wiping me out monetarily and psychologically. Cash was safe but it guaranteed a zero return.

I reviewed my trading methods and strategies and concluded they were sound. So why was I not succeeding? The basic answer is that I was caught on the wrong side of trends as well as being subjected to the stock market volatility. And when I got into trouble, I would not take my losses early enough; I wait and get bigger losses, then I am left with no choice but to rationalize a paper-loss and wait for recovery. Most of these things are within my own control, so I need to shape up. The one area that is not within my control is the volatility. That is the market sentiment at the moment – too much uncertainty where news and rumor would drive the markets to swing in the opposite direction. You can try to react to the volatility (flipping trends) by taking early losses but the fact remains that the markets are volatile.

The thought of a buy and hold strategy lasted for a few minutes until I realized it just will not work. If I knew this is the market bottom and if I knew that we were entering into a long-term bull market, then sure, buy and hold and collect my profit a year from now. Nobody has a sufficient crystal ball.

I started looking at equity options and realized that there is way too much uncertainty and risk associated with options trading. The leverage is there for a big percentage gain requiring a smaller capital outlay – that is an attraction for sure. But the underlying requirement is to get the stock trend direction right. Just as easily as you can make the 50% options gain, you can lose 50% if you are on the wrong side of the trend. Oh, options have an expiry date so the options trader has time. That time costs you in terms of the erosion of the options premium due to the time component. And doing combinations (spreads and straddles) is complex and I’ve never been able to see the light on making them work. I have not given up on using equity options for stock market trading gain; I simply have not been convinced it is my best choice.

Then I got to looking at various sites offering services and systems for day trading as well as options trading. Both were inspiring with claims of 15% per month gains. That got me thinking about day trading since I was already staring at the real-time candlestick minute charts for my short-term inter-day trading. The only difference was to take as many gains as the market would give me with the view of taking $0.05 to $0.10 per position. On a 1000 share trade, that translates to $50 to $100 gain less the $14 commission to open and close a position.

Without getting into the nuances of day trading along with strategies and methods, I ended up making 15% net gain in my margin account from March 11 (after my 2-week break from trading) to March 26 (I was away from trading on March 27). I continue to crank the day trading machine to see if I get continued success in this volatile and uncertain market.

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Trading Observations and Evaluation (March/2009)

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