Saturday, January 3, 2009

Three Rules For The New Year

I can attribute a huge part of my "unsuccessful-ness" this year to one trade. From this trade, I will draw up three rules that I will follow this year. I've never been someone to do "resolutions" as I found it stupid to do for generic life stuff, like, lose weight, and lose weight; But, I feel that having rules/resolutions for my trading system would be very helpful for me this year. I've had mental rules, but I've never set them out on stone. Thus, I will do so here.


Started building call positions in LDK late spring/early summer for their 2Q earnings announcement on 8/11/08.

By 7/23, I had built a position in LDK calls that was just about 1/4th of the account value, which is a lot.

What happened:

LDK had blowout earnings, and resulted in a subsequent move from 34 PPS to just above 50 at the peak, in less than two weeks. My calls exploded in value and I was quickly profitable on that trade by about 60-70%.


I lost 50% of the initial investment when it was all said and done. How can that be possible you may ask?!


I was greedy and no longer thinking with a level-head. Add to that, I had no rules set in place at that time.

The Chart:

This was probably the one trade where I "bet the farm" and "backed up the truck" for 2008, and I blew it. I made a profitable trade and let it slip right out of my fingers. I urge everyone who trades to take a look at this and draw your own conclusions as to what went wrong, as well as take in what I feel I did wrong here.

My lessons:
  • First and foremost, looking back, I realize how well it actually turned out when compared to what could have actually happened. I did not account for the fact that it is possible, that LDK had a bad quarter and I could thus lose the entire trade.
  • Based on the above, I should have set a stop under the bottom red line (just under $31) as it found support there numerous times.
  • After the gap up, at the very least, moving my stop up to just under the gap, or enter in a trialling stop would have been very smart.
  • By the time LDK broke the previous high at $48 (upper red line), I should have moved the stop up to just under $48. Had I done that, I would have been out of the trade the day after it broke above $48, and only would have missed out on 4 more points to the upside. Whereas, I ended up holding, and lost 4 more points to the downside.
  • The VIX crush post-earnings really hurt my trade, as you can see- I exited above my purchase price on the underlying, but on my calls, they were down.
Three New Rules:
  1. Stops on every single trade. Near the end of last year, I was still trading without stops on some trades. Why? Because I was trading with the expectation of where the price will go, without regard for what the market was actually telling where it was going. Regardless of a stop or trailing stop, or how tight or how loose, a stop must be in place!
  2. Cut your losses when the trade goes the wrong way. This goes along with the above, but I've always had a good mentality about, "letting your winners run," as seen in the above example; But, I also had a bad habit of letting my losers, lose. This would have been apparent in my trade above had LDK reported not too hot earnings, and with no stop in place, it would have resulted in a far worse trade than what transpired.
  3. Be very cautious with options around earnings. Made the right call on the direction, but the VIX crush moved against me. A Rule? Well, just need to always be mindful and wary of volatility crunch, especially around earnings.

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