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Home >> Stock Forums >> What were your rules?

What were your rules?

drdan said: "Didn't want to hijack a thread so I am posting a new one here - [QUOTE=Rickster]During my first 9 months of trading I profited on 85% of my trades but lost 10% overall. Discouraged, I went back and reviewed my trades. I found that I had taken the little ones and given the market the big ones. It was as if I had been playing with a pool shark. I vowed to get on the other side of the action. During the next 9 months, I was profitable on 45% of my trades but up 85% overall. Basically, I limited my losses and let my winners run. Everyone has a different tempo that works best for them. The bottom line is to make sure your average profit is bigger than your average loss.[/QUOTE] So Rickster do you remember what rules you changed to change your win/loss ratio and your profitability? I totally agree with your statement here and I think it is important for new traders to realize that a simple change in rules can change your outcome so dramatically and that even if you lose you can still win. For example - what percentage did you cut your losses at? Did you start using trailing stops or what criteria did you use to sell your winners? Other changes you made?"

Rickster said: "That's a good and fair question Doc. Briefly, before I go to bed, my biggest challenge was coming up with a strategy that fit my personality. I am a nuclear engineer. That means too things. I am excellent at analysis and I have to be right. It isn't acceptable for guys in our business to be right most of the time. The risks are too great. So, when a trade goes against me, I will hold on too long, instinctively believing that the market will ultimately prove me right. I have learned to not trust myself to honor stops. I turned to options because they have a high upside to downside ratio. I used the knowledge I had gained through day trading to spot what I called "imminent train wrecks." At this time, 2001, options weren't as widely used as they are today, and it was possible to find good setups that hadn't been priced in. These were normally found in low volume options. Sometimes I had the majority of the open interest. I held for at least a 300% gain or broke. A fair percentage of the time I got over 800%. I was going for home runs. Taking the big ones and giving them the little ones. I had to be quick when the time was right because a nice profit can get cut in half in a hurry. Then gradually, my win percentage dropped as the option market changed. Over the next 6 months or so I slowly bled half my winnings back into the market before learning my next lesson. The market is constantly changing. Since then, I have shifted to what I call handicapping. I look for setups that I feel have at least a 3 to 1 upside to downside ratio. Then I buy and hold the stock itself. And I diversify to smooth out the swings in my portfolio. How I handicap is a difficult to describe here, because it is constantly changing and mainly based on experience. But overall, I would say the most important lessons I learned were: Things are not what they seem. Find a risk management technique that fits your personal strengths and weaknesses. AND CUT YOUR LOSSES! Adapt to changing market conditions."

Paq13 said: "[QUOTE=Rickster]That's a good and fair question Doc. Briefly, before I go to bed, my biggest challenge was coming up with a strategy that fit my personality. I am a nuclear engineer. That means [B]too [/B]things. I am excellent at analysis and I have to be right. [/QUOTE] ....i'm sorry, but that little typo just made me spit out my coke :) Ok, now that i'm over it, i'm really interested in options trading, etc. Not for me now, but for when i become MUCH more comfortable with the market and my own setup. I just have a ton to learn about options trading and how to make faster moves in the market. I appreciate your insight, though, so far, as it contrasts against my own shortfalls in the market: Namely, i find a hold onto a stock an hour or a day longer than i should and end up losing half my profits. i generally tend to think a bobble in the road is not a significant downturn, then panic when it does become a downturn.....Luckily, i have been fast enough to get out before i started losing money..."

Rickster said: "Haha. :) It was getting two late. :o And I must confess that timing my selling is currently one of my biggest problems."

Rickster said: "OK Doc. Your turn. What have you learned (in a nutshell)?"

drdan said: "[QUOTE=Rickster]OK Doc. Your turn. What have you learned (in a nutshell)?[/QUOTE] Here are my quick fast rules to trade by - 1. Trading is not investing - different rules for each! 2. Cut your losses - playing options 30 to 40% loss maximum 3. Let your winners run - trailing stops or a specific TA point such as price breaking through the 7 day moving average for short term plays. 4. Stick to your plan so as to take the emotion out of it - no Fear or Greed. 5. If the market is undecided or you are unsure about it - stay out! 6. The trend is your friend, do not play a put on a uptrending stock or vice versa 7. Do not place a trade before 10AM eastern (amatuer hour) 8. Do not overanalyze - keep it simple otherwise you will suffer analysis paralysis 9. Set up a watchlist and WATCH IT at least once a day 10. Never stop learning about the markets and trading so as to perfect your system while maintaining its simplicity. 11. Playing earnings is gambling! 12. Money management is the key to success in trading - no more than 10% of your entire account in any one trade if your account is $10K or greater. No more than 25% if it is less than $10K only because you need to risk more to make more intially. These twelve rules were told to me through my short time, I think 5 years now, learning to trade options. I was told many more however these ten made it to my list because I have had personal experience with breaking each one of these rules to the detriment of my account. I hope they help someone else."

thezster said: "I think those rules are a great basis for everyone, regardless of whether they're playing options or buying stocks outright. - I personally have a couple of additions to that list that I live by - but we've covered those numerous times. ie: never chase...., etc. -- And I disregard #7 - cause I love playing early - but that's just me."

Rickster said: "Yes, excellent rules Doc. Worthy of printing out. Here is a little more detail on my risk management methods. When using the homerun (all or nothing) approach, I would pick an out of the money option that I felt the hope had been wrung out of, then put in a limit order at half the current bid price and let it sit, sometimes for weeks. I was shooting to catch someone throwing away options, or an amateur writing options, or the dealers just trying to get me out of the way. I did this because I found that I seemed to be cursed with 50% drops if I relied on my own timing. I got some great deals that way. And in doing this, I doubled my upside/downside ratio. I was capitalizing on the law of small denominators, typically buying options in the $.25 to $.35 range. I used 2% to 5% as my position limit instead of your 10% because I was accepting 100% losses (not using a stop). Since your stops are at 30% to 40%, our risk management limits were practically the same. I once experimented with using options to play weekly swings. I used 7% as my position limit and 50% as my stop (total risk 3.5%). I bought highly liquid options (on the Qs for example) that were just out of the money. At that time (and I presume today as well) option value appreciation accelerated as the strike price was reached. I held for a 50% to 100% gain. 75% was typical. Basically, I was buying them just out of the money and selling them just in the money. It worked very well because I had a high kill ratio and I honored my stops. I dont know if it would work today in that volatilities are a lot lower now (IIRC, the VIX ran 30 to 40 at the time). One other thing saved my bacon. I would set back half my winnings as untouchable. That way, when the market changed and my technique went cold, I would not give back more than 50% of my profits before moving on to something new. I think this is an important and often ignored rule. Some guys get imprinted on a method that once worked for them. Then when it quits working they stubbornly cling to it thinking their luck will change. Ultimately, the get drained dry. I better go get something done."

drdan said: "[QUOTE=Rickster] One other thing saved my bacon. I would set back half my winnings as untouchable. That way, when the market changed and my technique went cold, I would not give back more than 50% of my profits before moving on to something new. I think this is an important and often ignored rule. Some guys get imprinted on a method that once worked for them. Then when it quits working they stubbornly cling to it thinking their luck will change. Ultimately, the get drained dry. [/QUOTE] Fantastic rule! I guess I am doing that already actually more than that. My account is static at around $10K all my winnings go into keeping the account at that level (covering losses) or get cashed out into my investment account. When my investment account is where I would like it at then I will look to go to $25K trading account. Basically I have to wait for my stock/ETF/Mutual fund investment account to grow enough so that I am not playing options with more than 10% of the total account value. Does this make sense? Good rule Rickster may have to add that to my list!"

Mr. Gekko said: "[QUOTE=drdan]Here are my quick fast rules to trade by - 1. Trading is not investing - different rules for each! 2. Cut your losses - playing options 30 to 40% loss maximum 3. Let your winners run - trailing stops or a specific TA point such as price breaking through the 7 day moving average for short term plays. 4. Stick to your plan so as to take the emotion out of it - no Fear or Greed. 5. If the market is undecided or you are unsure about it - stay out! 6. The trend is your friend, do not play a put on a uptrending stock or vice versa 7. Do not place a trade before 10AM eastern (amatuer hour) 8. Do not overanalyze - keep it simple otherwise you will suffer analysis paralysis 9. Set up a watchlist and WATCH IT at least once a day 10. Never stop learning about the markets and trading so as to perfect your system while maintaining its simplicity. 11. Playing earnings is gambling! 12. Money management is the key to success in trading - no more than 10% of your entire account in any one trade if your account is $10K or greater. No more than 25% if it is less than $10K only because you need to risk more to make more intially. These twelve rules were told to me through my short time, I think 5 years now, learning to trade options. I was told many more however these ten made it to my list because I have had personal experience with breaking each one of these rules to the detriment of my account. I hope they help someone else.[/QUOTE] Good set of rules. I think I'll print these out as well. :)"