Thursday, March 18, 2010

A few things I am considering

I am considering a few things in the context of my trading strategy and trading business plan. I mentioned the other day that I am going to at a overall trading strategy to my business plan, Trend/Momentum trading. This will act as the overall theme to my trading and all my trades will be in the context of this strategy. So I guess that then the strategy has to be broken down on a more micro level as to how I trade the trend, I guess these would be called tatics? I haven't ever written a business plan but I vaguelly remember the elements from a marketing class I took. To me the tatics would really be comprised of the different options strategies that I would use to play up, down, or sideways markets. And I think if I break this down with more granularity than I will also need to break down my risk/reward constraints. Because I think a position like and Iron Condor is much different that a flat out buy. In an Iron Condor I may be looking for a minimium return on capital to put the play on. I know on flat out Call and Put purchases I want a minimum 1:2 risk vs reward (based on my stop loss, not on the capital required to put the trade on). Although a call/put purchase in itself is also a limited risk trade by nature like the Iron Condor I find it more likely that I would leave an Iron Condor on and potentially let it expire vs letting a call or put go to zero. With Calls and Puts I am trading directionally and if it doesn't go in the direction of my position than it makes sense to get out of the position when the stop is hit and not loose all the premium. But with an Iron Condor when you are betting a stock will close in between two ranges it may make sense to hold onto it even if it briefly trades out of the range. This example is limited in scope but I hope I make sense at where I am getting at.

I guess I am just trying to get at the fact that I think I am ready to take my business plan through its next iteration and add more detail and clarity.

Another thing I am thinking about is a way to limit my scope of stock to trade. As we have found out there is an endless pool of ideas out there. So one thing that I am considering is Focusing on the stocks that are in the IBD 100 which is a list that I look at regurally and are realeased every friday which I can then download and upload into a watchlist. These stocks are ranked and rated based on multiple fundemental and technical criteria. I will elaberate on this further as I explore it more. But I would also leave it open to make trades on ideas that come from and a few other sources that I get ideas from. I would just be limiting my own search and would rely on these other sources to put ideas in front of me that I may not have seen on my own. In addition I would leave also include the SPY and VIX open to trade as well, mostly as hedging vehicles to my portfolio.

Please share your thoughts.


  1. My thoughts are that the formal policies you are setting out are really for yourself to use as a guideline and not set in stone requirements. A year ago your policy might have said you were strictly an equity day trader, obviously things have changed. At the rate things have been changing, I think you should probably review your policies monthly for updates/changes.

    Obviously different asset classes or option strategies have different risk/reward characteristics. I think setting a basic risk/reward threshold for particular strategies like an Iron Condor or long calls/puts is a good idea, but I would also keep in mind that each position is actually different. Your long SPY puts at a 111 strike I think, those you might be willing to let go to 0 as they are a hedge. Long speculative/directional puts are probably a different story and I would agree with your post that if they move against your opinion then you cut losses rather than watch them go to zero as I've been guilty of in the past. So each is a long put, but each has a different objective behind them.

    On the issue of scope, I think what you're getting at is you want to kind of formally tell yourself what to focus on rather than constantly be pulled in many directions because there is so much to chose from. I struggle with this myself. I don't think its fair to say there is a right or wrong as far as how you limit your scope. If you said you were only going to follow 5 names I would say that's too limited. If you said you wanted to follow 200 I would say that's probably not efficiently possible.

    This is something I'm going to try and define for myself as well come June. I don't have the time or interest to try and trade or follow everything. I currently have no interest in currencies or bonds, I'm comfortable with equity options and find no limit on trade ideas. I'm kind of leaning towards following 20-30 names religiously and then seeking outside ideas for other exposures. Since we both agree that idea generation isn't hard to find, I think setting an overall portfolio strategy is the first key, then limiting or picking through ideas to match the strategy. I'm kind of making some mental notes to myself and will get around to trying to make something formal in June, then of course revising constantly I'm sure. But I do finally understand the importance of at least having a road map. I think it will help limit the anxiety.

  2. I agree it is really important to have a road map in place. But like you said it will always need to be revised because there will be things you do not consider when formally writing it becuase you either did not think about it or you just don't have enough experience to consider it yet. It will always be a working document. But my goal is that I will eventually get to something that only requires little tweaks here and there. Meaning I will not have to re-invent the wheel from scratch.