Revival today, sort of.

I expected another non-event day today... or at least some small gainer trades again... while I was not completely wrong it ended up on a better note than I initially anticipated.

Seven trades closed, 5 new ones from today and two older ones from last month that I decided to hold even though the group closed them for losses already... group dynamic thing. I still have two more that I have set very modest sell targets on but my account looks MUCH better now than it did this morning.

I updated my stats for June on my main page.

I almost doubled my profits for the month to date just today (yah, June was THAT bad)... it was a $421 day. Nice note to end the month on. I held positions today ranging from 2 to 12 contracts. The best part was catching the end of the day plunge as I watched the market sell off heavily in the last 30 minutes. I setup all my remaining positions so I could market order to sell them with one click per trade so I closed five trades between 1539h and 1543h for pretty close to maximum gains as the huge down move lost momentum. Actually I called the bottom well enough as it hit bottom at 1545h and bounced for less than 3 minutes before recovering a few points.

I checked the difference in commissions. Not all of my trades were under the new lower rates as two were open from before but even so it would have cost me over 35% more. That's about $62. Nice to have a little extra in my pocket like that. I think switching to IB may only be a break even game now...except for the increased efficiencies in the platform and the i-phone trading application.

I think that this may be the last month that I run two sets of charts to compare various methods of sizing as I have hit upon what looks like the best method now. That will save some time in setting up July's tracking chart at least.

Jeff.

Position sizing re-visited yet once again

I know I keep coming back to this topic often and, although this is not a change since last time I mentioned it, it is worth observing.

I had raised my trade sizing up to an average of the entry prices and considered that every trade was going to be equal sized, and that looked like a decent plan. The trouble was that it out sized a few losers and under sized a few winners which will tend to skew the result to the negative... even though, historically speaking, it worked out very well. But "very well" isn't my thing.

I set up a spreadsheet to give me scale entries based on option prices based on 50 cent increments and it calculated the appropriate quantities for me. That was OK... but "OK" also isn't my thing. This method restricts me to increments that jump 4 and five contract increments in the lower range which left me guessing a bit when the price was between, say $2.00 and $.50, or even worse when it was between 50 cents and $1.00.

So rather than reducing the pricing I decided to let the trade size determine the entry price levels. So for every single contract increase in trade size the price self adjusts to my trade value based on cash and number of trades with a 20% cash holding buffer (basically I will only trade up to 80% of the account cash left and I figure that I will not actually get all trades filled anyway so it ends up being larger cash holding). This way the 50 cent trade sets the bar by using the trade value to produce the largest trade in the bunch, then it auto-increments down to 1. At certain points I have it set to decrement in 2's, 3's and 4's as the trade size gets larger to make the chart more manageable... but then again by that point I will probably be trading with IB and they have this as a setting to auto size the orders.

My point was that my average contract count per trade ends up being just OVER my estimated trade size if it were based on same sizing. Right now it is at 5.81 for June when I did 400 for the first week, 500 for the second week and now value sizing for the last two weeks.

The other thing that I just realized is that when averaging down on a trade after the price of the option has moved down against the entry price I can increase the contract count for the second entry which will serve two purposes.

1) it will average the price lower than an equal contract count second entry

2) which will allow a greater leverage of the entire position

A trade that I am in right now, for example:

FSLR first entry at $3.55 for 2 contracts (total value $710)

FSLR second entry at $2.90 for 2 contracts puts me at $3.225 average (total value $1,290)

I could have entered the second for 3 contracts and brought my average to $3.16 for a total value of $1,580. Seeing as my trade value is set at $736 the first trade is under and the total position puts me a bit over based on it counting as two trades.

When the stock moves I will see a higher absolute profit...if it moved against me the reverse is also true though. But that is the nature of the market.

Jeff.

Apparent new plan...timing or what.

It would appear that John is shaking the tree to weed out the small accounts and the uninitiated or inexperienced traders. Today's trade were small and could have been let run for larger gains instead of the 10% gross returns. This plays hard against small accounts due to the larger relative commission cost and the net profits not being large enough to cover operating expenses.

The last three days have barely netted me $100. That would make a month barely cover the cost of the service without counting any other data services and whatnot. Even taking June altogether the daily average is about $41 due to the largish losses due to expiry's and closing a few positions in the interest of starting from scratch.

Even just going to IB for the exact same trades I would be at almost $200. My daily June average would be $99 and I would have at least doubled the expenses for the month.

Then taking all my current capital and doubling the trades my daily average would have been $198. More respectable but I am planning on tripling my startup right away as a minimum which has me at the $297 mark. Keeping in mind that I have not been equal weighting my trades this month and this includes taking a $15,000 loss in the mix... that would not happen given the new trading plan. Just reducing the big loss to a smaller loss, which I did the calculations already once, puts me at a $700+ daily average.

Of course, as always, these are projected numbers but they serve to give me an idea of where to place my expectations.

Yesterday I had made a list of action items to take me to the next phase of my trading and it included buying an i-phone to allow trading while away. Upon looking into doing this I see that the i-phone 4 is due out next month. Given some of the increased functionality (multi-tasking is a big one for me) I will wait and get one of those instead. The larger battery will be nice as well as the newer email setup.

Among the other things to do this week were transferring my free cash into my margin account, completing the IB account application, continuing trading in the TFSA for now to finish out this month, liquidating my stocks.

So my timing is very good. I am just getting ready to increase my daytrade capital when we are shaking out small accounts, buying a new i-phone when the i-phone 4 is due out, setting up an IB account at the time when I might expect to be able to fund it properly next month.

I'll update my stats after the end of this month, as poor as they are going to look.

Jeff.

Consolidation and extrapolation

Time for some hard thinking about my day trading... what is the next level?

Between yesterday and today I posted somewhere under $60 in net profits based on a gross profit of $165.03 less commissions. With IB my take would have been around $146... which is 240% higher than my return. The trades are only between 9 and 21 cents per contract so I need to consider increasing my capital to trade more contracts as well as decreasing my costs as I am not certain that there will be as many large profit trades going forward. The format we are using now, although a return to the original, has a twist. We are not holding ANYTHING over night or even into the later day. While that may change I cannot bank on it and therefore I need to consider that we may just be taking more smaller and incremental profits.

Having said that, Tuesday and Wednesday were not bad due partially to more trades and partially to some better gains. My concern is that many posted that they were able to make the $500, or close, gain for the day and there may be a move toward keeping to the lower profile format trades. This would not bode well for a smaller account like mine.

The IB route will help but is not going to happen until my current momentum trades are completed later in July and even that timing may depend upon what profits that are to be had from those trades still in progress. If they are not so great then I am going to have to build up cash with day trading first. Also, I cannot use less than $25,000 which is a benefit in and of itself.

So the plan now becomes one of consolidation of my capital. Taking my current trading and extrapolating the results based on possible cash transfer balances results in a relative increase of my profits once I take the switch to IB. That and applying the decreasing relative commission costs should give me a rough guide as to where I might expect to be.

As it stands I can double my cash by moving it into the margin account then work with those increased profits to create a larger base to move to IB faster even given the high commissions. This assumes that I take 100% losses on all of my current positions, just as a worst case scenario.

Seeing as we are not going to hold trades overnight I can eliminate the June 18th losses as they were expired contracts. This gives a better idea of where June may have been otherwise, then doubling my profits and applying the IB commission structure for a comparative purpose only. I dropped all the losers to a 20% loss to simulate the current plan...we are looking at about that for stop losses right now so it is about right even though some of the losers were from the prior month... I will remove those as well for realistic results.

TFSA with Questrade:

Profit = $4900

Monthly ROI to date = 38%

IB recalculated:

Profit = $6349

Monthly ROI to date = 49%

Questrade recalculated after consolidation at June startup figures:

Profit = $8183

Monthly ROI to date = 38%

IB recalculated after consolidation at June startup figures:

Profit = $10,602

Monthly ROI = 49%

IB recalculated using a $30,000 base for June startup:

(my minimum target deposit, which I will likely overshoot once profits are taken into account at the time of transfer)

Profit = $14,602

Monthly ROI to date = 49%

Well, taking the current TFSA recalculated June profits of $4900 and the IB based on $30,000 base of $14,602... or $8761 after worst case taxation, I am obviously ahead doing a full consolidation and transfer. Had I realized that IB was an option at the very beginning I would already be there and be seeing the results directly instead of having to wait for cash to become free in order to get this plan rolling along. I was too focused on the tax free implications and lost sight of the fact that there were other cheaper and better brokers for the plan that I was going to implement. Nothing against Questrade. They have been a very good first choice while I played with my small account balances to see where I would end up, something I could not have done with IB from the start anyway. April I could have switched but to be honest it was not the right time... now is.

Jeff.

BP and annoying email offers

I keep getting emails that have the tag line "Last chance to buy BP at$##.##".

Of course the whole email is a marketing ploy to get me to sign up for some service or other that is based around this individual's television personality...no not Cramer, but a similar name. Funny thing is that the price to buy BP keeps getting lower and lower each time. What a load. I think it started around $36 and change.

Rather than rant about any of this I thought I might take a quick look at the technicals for BP...given the Gulf crisis I think that the foreseeable future looks pretty bleak for the stock prices.

Here is a monthly chart that covers the stock since listing. I noted three major monthly support and resistance levels and some of the important periods that the price was playing near these levels. Note the next support level is around the old $20 mark... it has a bit of a ways to go but if I were even considering trading BP I would be shorting it heavily... in fact had I been watching it at all I would have just bought some 55 strike July or August puts back when the price was toying with $62.50 as it is an old resistance level from 1999. But that would not have been the only reason although this would have been pre-gulf disaster time so that was not a factor at all, it has just been a huge catalyst.



Taking this down to a weekly chart I left the same S/R lines and added a rising wedge trend. I started using the Aroon indicator lately as it shows trends as they establish. I am not familiar with how it does this as I am with other indicators and oscillators but it seems to work. I'll get around to the math some other time.

Meanwhile, the downtrend was indicated as established late March while the price was approaching the retest just over $60. Given that the resistance and moving averages were converging it was a nice setup to short or buy a put.

Looking at the price move through the lower red resistance line I would have to say that resistance at this point is next to nothing.

Looking at the daily chart it is plain to see the day things turned nasty. The rig explosion took place on April 20th and everything that followed just added to the mayhem.

The green support is about $21 and is the next possible stop for the price...depending on what happens in the gulf and some government actions. I would still consider getting in on this railroad ride but I have all of my trading capital allocated right now and I would rather not over extend myself.

I wonder when they are going to stop trying to call the bottom. Best is to trade it when it appears.

Jeff.

The jury is back on TFSA vs margin and new brokers

I did a commission comparison for Interactive Brokers compared to Questrade for strictly option trades.

Questrade is $9.95 for the trade and $1 per option each way. That is $29.90 for a 5 contract trade round trip. Doing 5 of those per day is $149.50 for the day...but that will be a smallish day.

Interactive Brokers charge $0.70 per contract with a $1 per trade minimum. A single contract trade would be $1 in and $1 out. The 5 contract example would cost $7 and the 5 trade cost would be $35.

The difference in costs are $114.50. Substantial, especially if it were a breakeven day without commissions.

Using my spreadsheets with all my data since April 1st to date I ran the trades as if they were using IB commission rates and saw a difference of $4121.29 in commissions that I could put into my pocket as profits...for less than three months trading.

OK, there must be a downside.

Well, no TFSA or RRSP accounts. These guys take options trading seriously and figure that anyone using them are serious or professional traders and will not be trading the retirement money.

They observe the $25,000 minimum levels with regard to pattern daytrading. Anything less and the account cannot be daytraded. Back to serious. No playing about with $10,000.

This all boils down to full taxation on the profits. Well, I ran some numbers comparing TFSA with the limited balance vs using a typical account, again. I set them up a bit differently this time as I noticed a slight error on some references (I was using one balance to apply a return for the following three months... fudged against me so it was fair, I just thought I would correct it).

This time I set the ROI per month to decrease each month by a variable amount (1% - 5%) to reflect the growth of the account and the lowered efficiency of trading a larger account. I set the stop to hold at 9% monthly return once it hit that level.

Running all my numbers of TFSA vs margin account starting the TFSA at $15,000 and the margin at $30,000 has the TFSA outstripping the margin in 3.5 years at the earliest. This assumes identical returns for each, so both Questrade commissions.

Using Questrade vs Interactive Brokers and some loose estimated commission differences I stand to save over $130,000 in commissions in those 3.5 years.

WOW!

Now, the account balances are much higher than I might expect given my trading right now, but they may not be once I really get rolling along later so I won't discount them as possible. Using my fudgyist fudge of a 5% per month decrease in return based on each month's balance I will be down to making an ROI of 8% in a year. That is starting at 50% now. I had 45% last month so that is not out of line. Even at that I show a balance of over $2,000,000.

So, is it worth it to struggle with the TFSA and higher commissions? Not really. After 3 or 4 years I won't complain if my multi million dollar account is not quite up to par with the possible tax savings to be had in the TFSA.

I actually expect that the government will cap the allowable profits once they see people starting to use them as their sole source of income anyway. More likely they will just start taxing the income withdrawn once it reaches a certain point as the intent of the account is not to produce an income and, like those who tried to take advantage of the over contribution loophole, they will find the loophole closed.

Other advantages will be that the IB platform is really nice and fairly intuitive with more selection in order types and a better layout for pre-setting up options for immediate trade executions. They also have a setting for trade value that automatically selects the contract count based on a dollar limit. Nice with my shift to same value over same size.

So, time to start the paperwork to get this going. I only have to wait for my medium term trades to turn the profits, liquidate my TFSA, close the stock trades and pull all my cash together to transfer over in order to start trading the account in July...or perhaps use July profits to pad the account as I don't want to have just $25,000 in the account. A couple of losing trades will sap it enough that it could halt trading for me... that would suck. I see a few in the room that have had that happen to.

Jeff.

Whew! We're Back!

After a false start yesterday trying yet another slight format change in the day trading room we hit the rhythm today. $739.75 profit, basically enough to add one more trade at my current reduced trade size setup as I toy with the same value trades and place trades in the $600-$700 range. I thought that this would take up too much time in the order placement arena, and I was correct, except that with the new format that is a moot point.

On a performance note, my heavy loss taking on Friday has been at least balanced as the month is now back in the green even if only by a little over $100. There are still 6 more trading days left... in theory I should be able to see a few thousand dollars to finish the month off.

OK, the format now includes getting setups ahead of time, like we used to, having trades called out in quick succession, like we used to, relying on our own discretion for trade sizing, like we used to, and relying on our own discretion with respect to market vs limit for exits, like we used to.

Well, seeing as everything is back to the way that "we used to" do it I guess there is nothing new other than a return to the old format. Cool.

There is one difference this time in that John makes one, two or three recommendations with respect to the possible strikes traded and we can choose which we want into. This is an effort to spread out the trades so as to not affect the one strike too heavily. Personally I will always choose the smaller of the priced option (a little farther out of the money) due to the increased trade size based on my small capital. I would rather trade 5 contracts at $1.50 over 2 contract at $2.50 even though a 20% profit is similar it lets me bump the contract count up in small cost increments. the respective trade values of the mentioned two are $750 and $600. Bumping the $2.50 up turns it into an $850 trade... outside my zone.

I changed my format as I have only two option chain windows available on my platform but I have 5 stock order windows. Loading the entire option chain for a stock takes a few moments whereas loading only the specific option in a stock box takes milliseconds as it is only one item. I can use my market window to preload all of the possible option selections called out pre-market. Then all I have to do is select a stock box (I can use only one if I want here to save one click) click on the option in the market view...it autoloads my pre-set contract quantity and order type (market today) into the stock box and now all I need to do is click on "Buy" or "Sell" depending upon which end of the trade I am on.

Fast, Fast, Fast. Today we entered 8 trades in 3 minutes. One more was added later. All trades were closed by 1030h so we all closed flat. A few who were trying to get limit orders in got less profits and may have gotten stuck in a few trades... speed is of the essence here.

It was mentioned off the start that all trades were going to be market orders and that is exactly what I did in all cases.

Tomorrow should prove to be even more interesting as we pick up the pace with up to 15 trades.

Due to the increased volume and the climbing commission rates I am considering looking at a more option oriented broker. The rates actually aren't climbing but they are just large. Today I spent over $200 on commissions... that is about 20% of my profits eaten up. I know that I get decent service and all with Questrade and I didn't really mind paying commissions based on the fact that I am making money, sort of like taxes, but any decrease in cost is easier than increasing the profits.

The other factor will be ease of trade entry. An option-centric service may have better spreads, more flexible order entries and other "features" that make them better for this sort of trading. I would love to have 10 order boxes to pre-load my orders into. Even though what I have set up is fast it could be less cumbersome to execute.

I'll do a comparison this week and see what the difference may be.

Jeff.

Margin vs TFSA, the great debate

Every time that I run the numbers comparing the returns from a TFSA account tot he returns of a margin account I have always come up with the TFSA making more sense in the long run. I have been rethinking this based on another factor that, while I had considered it, I hadn't really accounted for it fully.

Flexibility.

My determinations have been comparing using a particular balance in the TFSA then looking at needing a larger balance to produce the same results if within a margin account. The tax advantage of the TFSA seemed to be rather large. It may be.

The other advantage of TFSA over margin is the ability to carry US cash in the account while I carry Canadian in the margin. Converting US can be a benefit when the USD is higher than the CDN$.

That advantage is also a disadvantage. In margin the US gets borrowed for the term of the trade against the CDN cash I have, then converted back when the trade is closed. I don't actually have to pay conversion fees this way, but there will be some interest charged. I figure that if I consider taxation at 40% then it accommodates the small interest charge as well.

The reason I am re-considering this is due to my current drawdown. Even though I have still a good profit, in the 80% area yet, my account is not as large as it was recently. Our new trade plan has use doing 7,8,9 and 10 trades per day starting next week.. not that that has changed, it's just that I don't know if I want to fight the "small account" syndrome any longer. Very small trades are tough to make any headway when we change to tighter stops and smaller value increments in the trade movements... that basically means more contracts.

If I take all my working cash right now, leave all my day trade holdovers as they are technically still valid trades and add that to my margin account and even perhaps liquidate my stock positions (they are quite profitable but 100-400 share trades are not going anywhere fast) I could muster together a $20,000 trade account. If profits only match my current performance (not counting the mass liquidation of the last day) then the next quarter could see a $25,000 profit, taxable to bring it to $15,000 at year end. Seeing as I get to continue to use the full profit before taxes for the entire year it covers the cost of the taxes through the compounding over the year.

Cashflow is my primary goal so comparing the two:

TFSA, current profits = $10,889 (162% of %6700)
Margin extrapolated = $32,400 (162% of $20,000)
TFSA extrapolated using current balance = $13,395 (162% of $8,269)

Of course if I had $20K in my TFSA I would not even be considering this but the TFSA is limited in contribution room so I cannot add to it, I HAVE to grow it or wait until January to add up to $5,000. Meanwhile my cash flow struggles to match my targets...although I am doing well enough.

Is waiting three months to have the $20K balance worth the wait? Or is that assumption even correct... math and spreadsheet time again.

Well, it turns out my idea was wrong even though my three month assumption was correct.

Starting with $20,000 now and using the past three month's performance (fudged heavily against me though, using 125% overall instead of the real 162%) then doing the exact same progression based on the $8,269 TFSA yields some interesting results.

The race ends even in 2.5 years after accounting for full 40% taxation being applied each year. At this point TFSA pulls ahead. Adding the $5,000 allowable contribution in each January actually makes this race even at 1.5 years as the tax hit drops the margin balance to match the TFSA balance, then TFSA takes off.

I have not added any accounting to claim expenses or anything here, I doubt that it would make much difference.

So, I need to decide which way I am going to go and just plain stick to it. Assuming that all of my swing trades in my margin account pan out as expected I would have a larger account base to start with if I wished, the $20K is assuming that I am only using free cash and stock values and does not account for any future trade profits pending. If I add even $10K to make it $30K startup the timeline to even is pushed out 3.5 years, but TFSA still ends up ahead in the long run.

I guess that I am undecided right now. I expect to decide so I can set up the transfers, if I do, in July as I am not trading the first week so it gives the brokers time to convert and transfer the cash ready for week two in July. Meanwhile I will continue with my TFSA plan.

Jeff.

Heavy losses and a change in format.

Well, today was interesting.

This has been the worst day since I started tracking this in April.

We have been holding overnight, trying various methods of trading to ensure that the group, as a whole, is profitable (aiming for $500 days) and trying to bring everyone up to speed. Mostly to no avail as it turns out. Some members need to be dropped, they just don't know it yet but questions still come up that should not have come up even on day one. Shit disturbers are disturbing the shit and some just will not listen to reason.

I suspect that we will drop back to the 300 range from near 500.

We will be trading very liquid securities options to allow quick order execution and to allow the larger traders to not block the fills for everyone else.

We will not be holding anything overnight. This is sort of too bad as some of our overnighters have been hugely profitable BECAUSE they were held through gap downs when we could not have possibly gotten into the trade once it started to move.

We will be concentrating on first hour, or so, trading as was the initial intent.

As a result we closed some held trades for losses rather than holding them, even though, technically, there was no real reason to need to close them. Just starting out on a clean slate only in cash on Monday. I chose to close some but not others, my decision. This closing out added to losses already incurring from having three other trades go against us off the start.

The interesting thing was that I was annotating charts on the fly, trend lines, support and resistance etc and I saw the break point were we pretty much knew that the trades were toast...moments before they were called closed. As a result I closed them when John started to mention to close them and I was out before anyone starting farting with limit orders...therefore I got better exit prices than most anyone. Still large losses in addition to closing other trades and having three expire worthless today.

I have not done the math yet but I am sure that most, if not all of my June profits (close to $5,000) are gone. But there is still a week and a half yet and all of the momentum option trades to work out. It is just a shame that I cannot add to this account to top it off or I probably would just to increase my trading capital base from my other account that still has some cash in there.

So, Monday should be a good day as we return to the beginning where the trades were all short and we are finished and in cash by morning's end.

Jeff.

Normal Trade Expectations Resume

I know I have mentioned about varied trading styles within the day trading plan. The original premise was that it was going to be a day trading room where we place and close trades within the first hour or so or the market open. We gravitated towards holding a few positions overnight then over a week then to expiration. Well, there is a service that buys options specifically to hold for medium term timeframes. I considered it duplication and I emailed the powers that be this very issue.

Today was a test of returning to the original premise. We opened only two trades and closed the trades within minutes. We were done by 1000h and both trades averaged 45% net profits for me and most anyone else who was capable of actually doing the trading required. This signals the return to this format starting tomorrow. Everyone liked it better, at least enough to make it count.

The setups were for AMZN and X, both are very liquid stocks and I could tell that John was up to something different as he was having us plan on trading June options...seeing as they expire tomorrow there was no way he was going to have us hold these trades overnight. I doubled my trade sizing, setup the option chains in the order boxes for market orders and left them active in separate boxes for speed of execution. On click to buy and one click to sell.

Market order in once he even breathed the timing to get in and market order out as soon as he finished asking about our various entry prices as that usually is followed immediately by a sell seeing as we were up near the 50% mark. I did wait for the word "sell" in fairness to the group and in order to not get out too soon. Sadly both trades could have been held for another 30 minutes or more and the average return would have been over 100%, but that was not part of the exercise.

I got very good prices in and out and was quite satisfied with the trades. Some people didn't get in in the first place... which baffles me. Perhaps they have broker issues but an order on a very liquid option with price spreads in the pennies needs to be a market order for speed of execution as that will win every time over waiting for limits... or at least will win more often than limits on average as trades are missed completely on limits, in and out.

So this has me re-thinking the i-phone as this would be the main reason why I would get one, in order to be able to exit orders when they need to be exited due to day trading holdovers. I don't really need it for the other services as they are not quite so time sensitive. I may get one anyway though as today I made up for the paper loss on the exit I missed due to not being able to get a WiFi connection on Friday.

Closing the day flat all the time will be a nice relaxing change of pace for the trading room.

Jeff.

Smart Phones and Trading

I have the typical cell phone that can send and receive text messages, nothing fancy. I have my trading alerts sent to it in order to tell me that a trade may be at a profit target or may need to be closed. This is a part of the service provided with the trading room on trades that we have open overnight if any need attention.

I thought I was doing well as I am normally near email most times, or within easy reach of WiFi at least. I did investigate getting an i-phone but I already just bought an i-pod touch a few months ago so I did not really want to spend the $250 again.

Friday changed my mind as I had a position that needed to be closed. I received the text message. I wandered over to Starbucks to use their WiFi as I can trade the web platform on my i-pod. I have used this service at this particular Starbucks in the past but on Friday it would not connect. No big deal. I held the position and I still have it now. The trouble is that over the weekend I lost more on it than the phone was worth if I even included 3 months of data as well. Today I am at a point where it is down an i-phone and 7 months of data. Now, it is a July option so I might come out ahead but that remains to be seen.

So, once I get this week (expiration week) under my belt and see how the profits for this month stack up I will be purchasing a new phone. I happen to be camping in the first week of July and no phone will work where I am going anyway but I will feel better knowing that it is one less thing to have to look after later.

Oh, there is no trading in that week either, room is closed.

Jeff.

Erroneous math and a new angle

I made an error in my spreadsheet that ended up using the same account balance for both styles of trade size determination, trade size by value and trade size by contract count. I believe that it stunted the returns in the size by value figures but I changed the starting balance for each quarter so I don't think that it was a huge factor... so I did not run the new numbers again.

Instead I ran them a bit differently today, after correcting the reference error.

Once again starting with $6,700 in each style except that I capped the trade size at 100 contracts. Now the trouble with this is that a $3 option trade is going to cost $30,000 to put on and at that point I would be best trading the stock compared to a $1 option using $10,000 in capital. So I ran a 25 contract cap and a $5,000 value cap.

Contract sizing hit $413,663 in one year and Value capping hit $435,391 for a difference of $21,788 or about 5%.

Back to not making much difference again.

So I thought I would throw a wrench into the works by dropping every 10th trade to not only zero profits but a 100% loss. I doubt that is possible given the methodology we are using but lets compare the results anyway.

Contract sizing starts at 8 contracts per trade based on $25,000 ($6,700 won't stand the losses at that level). By the end of the first quarter the account is down to $23,718. Not only is that a little unexpected that the profits are lower but that the account actually SHRINKS. I don't have to run the rest of the year to see where that is headed. The lowest balance is in the $13,000 area so the account is able to recover somewhat but that sort of a drawdown is not in my books.

Value sizing again starts at $25,000 but ends the first quarter at $34,003 for a gain of $9,000. The account balance dips into the $15,000's but recovers much better due to the equal value of all risk trades. A large option price does not net any larger a loss than a smaller option price.

In the end I think that the value sizing will win out for me as I see the loss mitigation that this method automatically incorporates. Thus a 20% trade on any position is the same dollar profit but also a 20% loss is also the same dollar loss. Having one big $6 option hit zero does not wipe out the gains from six or more $1 trades (12 if they were all 50% gainers). That is worth more than the chance that the $6 option might make 50%.

So in trying to keep trading as simple as possible I checked with my broker to see if they had any easy way to use a dollar amount for trades rather than having to calculate it out then enter the trade quantity... no luck. I know that some US brokers have this but I really don't want to switch. I am going to go back to my trade valuation chart that I set up a while ago when I started this and create a table for quick reference.

It seems that the exits need to be the fastest execution due to the volume of trades closing at the same time driving the option prices down quickly. This is not a problem as I just need to double click on my position then hit SELL. Buying is going to be slowed down somewhat but at least I can pre-set a default "average" trade size and only have to adjust it up or down a few contracts.

This has been prompted by some trades that are going to likely expire worthless this week on me, not that they are big losers but it just got me to thinking about sizing losses similarly as sizing to accommodate losses is at least as important as sizing for gains.

Jeff.

Size vs Value....continued

OK, so I am a sucker for running numbers when I have a bit of spare time.

I ran the same study while substituting a compounding factor by increasing the trade sizes as the account grew but only using 80% of the capital at any given time, the drawdown buffer. I capped the trades at 50 contracts per and ran the comparison until both methods were trading all trades at 50 contracts. 1 year. While the numbers may be high the relative values are what is important. I did not factor in any efficiency differences in trade executions, losses or missed trades in this one, bad enough with the regularly compounding.

At the end of one year trading 217 trades per quarter based on the last three months stats trading fixed contract trades based on 80% of the account balance divided by the average contract price of $2.50 (it's actually $2.68 which is also why I used 80% capital application) the final account balance is $1,691,801.

Compared to using trade size based on equal trade value for the same circumstances and attaining a balance of $1,905,013.

The final balance is higher by 12.6%. I thought it might be a larger difference... even so that is $213,212.

Applying a HUGE fudge factor and figuring on only making half the profits I would expect that the difference may be relatively similar. I tried capping the trades at 25 instead of 50 and got a 5% difference, $58,182 in cash.

Running a 10 contract cap puts the difference at 2.5% or $13,752. This pulls the forecasted account after one year down to the $620K - $650K mark.

All in all, as large as some of these numbers end up looking the goal is still $500 per day within the room placing the trades that we are placing. That is a $120,000 year based on 240 trading days... that's one year less 4 weeks for holidays. I expect to exceed that average as it is based on a $25,000 capital account and I am nearing that average with far less. I think that the idea is to cap trades at 10 with some exceptions so after running the comparative study based on that (above) I pretty much figure that his estimation is likely low.

Hmmm.... one more test. Starting with $25,000 and comparing the two methods while capping trades at 10 contracts puts the equal value behind the equal size by about 2% after only one quarter and 1.5% after the one year mark. So much for John's idea that equal weighting is an advantage if he suggests capping trades near the 10 contract mark.

Well, having said all that between these two posts I figure that I am still better off trading the equal sized trades over the equal value trades. I also figure that at a certain point, say at the one year mark, I will be better off trading stocks over options due to not having a cap and being able to make trades based on values when it makes more sense... a $25 stock will not move the same as a $250 stock afterall.

Meanwhile, I'll keep plugging away at the trading plan as it is and I will stick with same sizing at this point in order to maximize the trading speed of execution.

Jeff.

Equal Value vs Equal Size

I tried to weight the size of trades based on the value of the overall trade early on and I found it cumbersome and I ended up being selective as to when I would choose to apply the rule strictly and when I might fudge it based on my judgement, whether right or wrong.

Hence I ended up adopting the same sizing rule. I must say that it is working well. Of course some downsides are that I will be trading a smaller priced option for less potential profits as the trade is closed out for a smaller dollar value gain even though it may be the same percentage gain based on the option price.

So, taking a minimum trade size of 2 contracts and starting with $6,700, roughly my startup, and comparing it against sizing according to a 10 concurrent trade at $670 per trade the results are interesting.

All trades taken since March 1st, 217 trades.

2 contracts every trade = 121% gain over all
2 - 26 contracts per trade based on $670 trade value = 206% gain overall

Based on scanning the spreadsheet I would say that about half or more were 2 contract trades so the difference in performance might not be as great as it could be. So, let's bump up to a $25,000 account and see.

At $25,000 splitting into 10 trade sizes leaves $2,500 per trade. Comparing that against an average price of $2.68 per contract producing a 9 contract per trade possibility for every trade the results are interesting, if not as profound as I expected.

9 contracts every trade = 207%
3 - 100 contracts = 283%
3 - 50 (the accepted sizing cap) = 259%

As the account grows and the trade sizes grow with it the difference gets less pronounced again, especially as I need to introduce a trade size cap into the equation. I figure that a cap of 50 contracts per trade is about where it should be, even though 10-15 is the suggested maximum I have reasons and methods to use the higher count to not affect the trade setups or to at least equate the option trade to a stock equivalent.

So a $50,000 account with a 50 contract cap:
18 contracts per trade = 215%
6 - 50 contracts = 256%

This leads me to question how much of an advantage same sizing based on trade value is over same sizing based on contract quantity per trade. Taking this a little farther, and not getting too complicated, I took the cumulative profit for all of the trades based on $6,700, $12K, $25K, $37.5K and $50K and treated the current trade count as if it were a quarter's worth of trading (close) and compared them. I bumped to the next level each quarter for five quarters.

over the period 2 - 18 contracts per trade = $264,931
Same period, size based on value capped at 50 contracts = $334,362

Only a 26% difference (still, that's $69,431).

OK, I could use an extra $70K anytime BUT is it worth it in the end?

Consider that execution is the key in getting into and out of trades with more profits. Today, and yesterday, I managed to get into all of the trades at the suggested prices or better, I am fast and my platform is fast. Stopping to change the quantity before hitting the order button can make the difference in missing an entry or taking a lower bid to get out, this is daytrading afterall. A few pennies here and there don't sound like much but if I made and average of 2 cents more over all my trading (easily possible) it adds up to $18,364 over the five quarter sample.

Take that one step farther again and consider that I may miss, on average, 1 in 10 trades due to that delay (it has happened often enough already) and I may get on average 2 cents less per trade overall. That would be a $20,460 missed profits and $18,264 in lower profits or $38,724 overall.

Basically it starts getting to the point of splitting hairs. If I were trading based on value all the time I would be quick enough on the buttons that it would be less and less of a factor over time. As it is, I am satisfied with my current performance numbers. The value trading over quantity trading makes more of a difference on the lower account size and that is changing every day. I also am increasing the trade sizes regular enough that the previous comparison would be much more complicated to set up as I grow in trade size more often than quarterly. This may have skewed the results in favour of value sizing over same sizing so I will consider perhaps using some wider sizing guides to have a few different sizes based on a price range, less thinking or referring. 5 might be the default and 3,4,6,7 might be the slight adjustment factor if the price is much higher or lower than the $2.68 average.

Jeff.

Today's Trades and Trend Trading Analysis

Today was a decent day in trading. John (the moderator) changed up the format today to accommodate both newer members and to even the playing field with regards to trade sizing... suggestions that help to minimize competition within the group for the options that are available for trading.

This is as easy as it can get.

He posts a chart, gives the entry target with some leeway, suggests a trade size and, at the end of the day (1030h), sets a reasonable profit target. All this came about after some discussion in the room on Friday...the day last week that I missed. Today's profit targets are based on a 20% return on the four trades that we placed. If all four hit then we will see just under $1000 for the day and if everyone used the trades size recommendations then everyone stands to at least hit the $500 daily average easily enough.

I closed two of four trades for $410 in profits so my averages are holding pretty close, $444 daily. I am not looking forward to next Friday as I have a couple of trades languishing as the option expiry gets closer. While I don't expect them to expire worthless (100% loss) there is a distinct possibility of that occurring.

So, my plan of using the same trade size for each trade is becoming an accepted way of sizing trades. a small trade, or higher risk, is 3 contracts, a normal is 5 contracts and a large size is 10 contracts. Sounds familiar although I plan on going past 10 contracts in a manner so as to not disrupt the trade that is ongoing and not suck up all the options available. Using stocks was discussed as well and may very well be the direction I go sooner than anticipated...except short selling is not an option in the TFSA account I may just have to keep that reserved for use in the margin account.

I set up a spread sheet to analyze all of the past trades for the newer trend trading service. There was data from January 2008, 229 closed trades. Not bad in the performance department as there was, depending upon trade sizing, between 106% and 160% gains over the two and a half years. Those returns are without using margin so that could be over 200% easily enough with margin use. The winning trades are in the 83% area as well, nice odds.

Another spreadsheet that I did does some forecasting based on the daytrading only and I like where it is heading. As each month progresses and each trading day is closed the numbers used are less and less a forecast for the month and more based on increasingly real numbers. Today the current month daily average is driving me over $100K annually based on a 240 trading day year. I not only expect to be trading more than that I also expect that each month will surpass the last in performance so the numbers will continue to drive upwards. As it stands right now June has equalled May profits, within a few dollars, so I might expect to see a double in profits for June over May. That may depend upon the languishing trades and what trades get entered from here on into the end of the month but I will see at least some sort of increase.

Jeff.

Same Old, Same Old...

Well, some new trades opened and closed, profits taken, more momentum options purchased...just more trading stuff.

It was very interesting to note some of the profits mentioned by other members of the group... even though I had a $600 plus day I am on the low end of the scale. There were ranges anywhere from the $500 to the $14,000 mark...just for today. Now, $14,000 would take 75 contract trades for each trade closed today... or getting better entries and better exits, although that is not as large a factor as straight trade sizing.

75 contracts is doable in the options that we are trading as they are very liquid (QQQQs for example) I could place a large order to buy then sell with successive orders of 10 or 15. I should double check the software as there are some flexible option order entry selections but I won't need those right away as I am only just hitting the 5 contract trade size (makes for nicer profits on the very short term small gain trades).

Jeff.

Early exit of a mover and the stock comparison

I exited a trade today that came within 50 cents of the target... bought 4 contracts at $2.20 and sold at $3.50 instead of $4. The end of day produced a large move down that netted one individual $3.70 for 20 contracts but I was a few minutes later looking at it. I managed to squeeze it from $2.90 to $3.50 within the last two minutes of the day. This bumped all of my averages up a bit and skewed my forecasting model heavily in my favour. Perhaps had I had held it it may have cleared the $4 target...or perhaps it would have bounced and headed back under $3. I'll see tomorrow.

There is one problem with setting automatic cross referencing spreadsheets, I lose the old numbers quickly so now I am not certain what my average was prior to that trade...although my average after today should count the whole day... it doesn't really matter then.

I am tracking the stock entry and exits, as I mentioned before, and comparing the performance between trading the stocks and options. The cool thing is that stocks can get me into more trades as I can just hit market on a stock that the options might run away on us and set a VTSO and let it go... those are gravy trades and I would have had two of them today.

All in all I am comparing trading 4 contract option trades to stocks to produce an equivalent profit.

This month I have a realized profit of about $2400. I would have to have traded 115 shares per stock trade to come up with the same $2400 profits. As much as I would love to be able to just trade in 100, 200 or even lots that may be a stretch cash wise.

Oh, taxation....the daytrading is tax free but the stocks would be taxable, particularly the short selling as that is all we have done this month. So I would need 185 shares per trade to come up with a pre-tax $4000 to yield the net $2400.

Here is the kicker. Based on the entry prices of the stocks and the concurrency of the trades this month I would need $51,000 to just cover the trades in cash. That means I am using $152,000 total so I would be margined out with no buffer at $51,000.

The secondary kicker is that in order to continue to match, dollar for dollar stocks vs options, I would have to continue to grow my account larger proportionally which means I would be no farther ahead trading stocks until I max out the option sizing and run at full trade size for long enough to grow the cash to cover and then some the stock trades. The exception might be to start trading the smaller priced stocks when I can to work my way into it... but that has it's own set of problems and I wouldn't do that until I had more trading under my belt for managing the multiple short term trade types and related styles.

Jeff.

Increasing trade sizing soon

I just cleared 120% ROI on my daytrading since April 1 and my trade size chart indicates that it is already time to go from 4 to 5 contracts per trade. I base this on an 85% participation assuming that there are a maximum of ten trades with an average per contract price of $2.50. Lately it has been a lower average and the trade count has been less than 10 concurrent trades as we are aiming to not have too many on the books at any given time... no more than 10 or 11.

So tomorrow I will add one more contract to the default setting on my platform so that I start the day with 5 contracts on the order windows. In all three of my forecasting models I had June as only a 1 contract increase month.

In the ultra conservative I had 1 per month for 12 months.
In the medium aggressive I had 1 in June, 1 in July and 2 each month thereafter.
In the way out there I have 1 in June, then the progression is 1, 2, 3, 4, 6, 9, 13, bringing me up to the 50 contract maximum.

The first two are just regular increases but the third is progressive based on profits and increasing trade size while keeping account participation above 60% up to the 50 contract sizing.

Then I figured I should use the actual daily averages for the current month in here as that is a more accurate representation of where this aggressive account should expect to be..instead of the arbitrary $250 per day average. I applied a restrictor to keep the increases down to 80% of maximum to avoid increasing too fast and to keep a bit more cash on hand while still planning on regular withdrawals in July.

The new contract count progression is 1 in June, then 2, 3, 5, 8, 12, 19 to the 50 contract maximum. This makes a difference of three months to maximum sizing and starts me off with almost a double withdrawal allowance... $4,400 instead of $2,500 per month.

I will maximize sizing increases and re-forecast the move to get to the largest account base quickly.

Rollin', Rollin' Rollin'....

Jeff.

Old goals, new timeline

I was scanning back over some of my older posts...May 2008. My very first goal set was to double my money each year.Now I realize that once a trading account gets large enough doubling the account is not necessarily feasible but it is a good start.

Seeing as that goal was set just over two years ago and now I haw doubled my money once in less than three months I feel that I will not only meet my goal, on average but that I can meet that goal in August, if not sooner.I need to double my money twice and change in order to just be on track.

I am not sure at what point I will stop trying to compound my returns by continually increasing position sizing. Some dollar amount per period, some position size per trade... I guess I'll find out once I get to a point that is comfortable for me... then go bit farther. Perhaps I will not stop as I find new ways to trade to continue to maximize my returns, I am sort of performance driven that way.

Jeff.

Friday Update

With the market gapping down and not filling the gap it proceeded to head South. This makes for a very nice day to be in puts.

I surpassed the 100% in my TFSA daytrading account after closing three trades, two mediocre ones and one decent one for a net 60% gain. The benefit of now trading 4 contracts is an increase in profitability as this month I am sitting on $1568.90 in profits with all 4 contracts whereas I would have been sitting on only $1131.90 with three contracts. That is an increase of 38.6% in profitability based on an increase of 33.3% in the trade size. The seeming disparity is due to the reduced relative commission costs of the slightly larger trades.

Ooops...I just closed another trade...but I won't change my above numbers. Call it one more small profit anyway, just closing one that was opened this morning.

Jeff.

A small reminder abuot "other people's plans"

From a blog entry that I started on June 3rd:

"One thing that I have always said is that if I plan to trade someone else's plan that I must plan to trade the plan exactly as it is laid out...otherwise I run the very real risk of spoiling the results or even posting losses when the plan is profitable.

Today was a small reminder about that idea as I decided to close a trade for a small profit. It was the only call option trade of 15 and the trade has been at the 80% loss level at one point, over 100% gain at another point and I closed it for about a 15% gain. Given the market I thought it prudent. Of course it went down to a loss position and headed back up for a higher price than I closed it for. I don't mind as I was fretting over it just a bit... even though it was a 2 contract trade... funny that."

Well, that trade was a June call...the only call on the list and I didn't really feel like letting it close for a loss. So it is fine that I decided to do what I did but today I would have been able to close the $1.95 contract for up to $3.70... trade the plan. Now, on the other side I have made a few deviations that were more profitable than the plan, but I expect that those are harder to get right if not by accident.

Jeff.

Stocks vs Options

I started running the numbers for stock trades along side of the option trade for the month of June with respect tot he day trading only. I fully expect that playing the stocks can be more lucrative on a straight cashflow basis as opposed to a ROI basis... back to ROR or Return On Risk I suppose.

Three days in and the numbers surprised me a little. While we have only had a few trades this week this is more for a comparison.

Options:

6 trades closed, 4 contracts per trade
$708 profits
Average trade size $2.66
Maximum capital in use at any given time $5,000
ROI and ROR are 14%

Stocks

trades closed, 100 shares per trade (200 shares per trade)
$688 profits ($1436 profits)
Average trade size $126.30 ($252.60)
Maximum capital in use at any given time $47390 ($94,780)
ROI = 1.45%, ROR uncalculated yet but assume 10% at risk it would be 14.5%...same for 200 shares)

Now, that is considering that the capital used is all cash. Seeing as there is 3 x margin the numbers change a bit as I only put up 1/3 of the totals but keep (or lose) the full P/L

ROI with margin used = 4.4%, ROR with 10% of the trade at risk is still 14.5% BUT if I lost 10% of the trades I would lose close to 30% of my cash thus reducing by 30% my buying power for the next day.

This one factor makes using margin not work it but does point out that trading stocks is better for the bottom line than trading options once the cash levels are high enough that the trades can be considered as a cash deal rather than a margin deal.

I can lower the risk by keeping tighter stops than 10%, in fact, in daytrading that is a very loose stop as in the largest trade, AAPL above $260 per share, I would have been using $1 stops at the largest which is really only an overall loss of 0.3%, not 10%.

In that light let's assume that a 2% stop is used overall. This puts the loss allowance down to a much more manageable 6% of the account assuming that all trades move against me and stop out... which none did yet.

The other advantage is that often John will call out a trade and the price will run away so we may either not get in the option trade OR may pay a higher price to get in. In a stock that is as liquid as the ones that we trade options on market orders are the norm as the spreads are very tight, usually no more than 5 cents. This lets me get into trades that run away from the group and close for a profit as soon as John decides that we are no longer watching it... or just set a VTSO or stop at that level to take advantage of a run.

There were two such trades today. One that I missed and would have produced a small profit but had I been into the stock it was a $2.50 move... $250 on 100 shares.

The other was a second opportunity as the trade was followed even after most of got out. It was an AAPL trade. The first move I was in for but sold too low and only saw 30 cents per contract, but still a profit. Others stayed in as the price bumped up then turned south once again to gain an additional 15 cents per contract. Had I been playing the stock I still would have sold on the first signal but I would bought back in on the pullback as there was another move expected. I tried to re-enter the option but missed it.

Total stock profits would have been between $2 and $3 per share which is about double the option trade based on 100 shares vs 400 contracts.

I hope by the end of June to be able to have a good idea of where I need to be in order to be able to trade solely stocks.

Having said that, the AAPL trade was a put or short stock play, as most are right now. I will have to split things up depending upon the market as I can buy puts and calls in my TFSA and buy stocks. I would have to short sell in my margin account so I can just play the puts instead of shorting in the TFSA and buy stocks long instead of calls. Either that or figure that the profits are large enough compared to options in order to make it worth while doing all my daytrading in the margin and just switching to the momentum options in the TFSA as that will always be options.

Always more food for thought and always requiring more capital to be able to do exactly what I want...it will come though.

Jeff.

Relative Risk and Account Growth...and Other Odds

Today was "Newbie Day" in the trading room as this month's batch of new sign ups joined... that typically makes it a slow day as we planned on only one trade. John called out the one main and added a quick put in the QQQQs. I already had that trade on the go so I doubled it and then went over to the momentum account and doubled that longer term put as well. The market is heading down so why not catch today's highs to lower my average costs and increase my position sizing on some small priced options... about $1.

I added a relative risk function to my current tracking spreadsheet that gives me the percentage account usage for ten trades at $2.50 contract price average for sizes from 3 to 10 contract trades. It runs off the current balance as I enter the day's trades so I get a sort of live indicator.

Anything under 80% usage is clear to trade and right now 4 contracts put me at 77%. I currently have 9 trades (6 and three are double sized which counts as two per) and the average price is $1.97. My account cash balance is actually near my initial start up so I am only using about half of my total account and I am already near my 10 trade maximum target... lots of rubber room.

I guess that, since I have almost doubled this account since April 1 putting only the profits at risk is a good thing. Soon I expect that I will be putting less and less of the profits at risk which effectively reduces my relative risk.

BTW, my doubling up on the QQQQ trades has me at paper gains of $300 after the afternoon sell off... I would have been at $28 otherwise. I like the "would have"s when they were avoided and the "did"s are better.

I am well set up with puts for the upcoming drop in the market and, should we all be wrong, not putting initial capital at risk in any account now. That and all my gold plays are doing reasonably well.

Jeff.