The hard truth about losses

Losses are not fun but they always provide lessons to learn from... it's either that or the lesson is not learned and the losses are repeated in the same manner as before. That usually means that there was a way to mitigate the loss that was either a result of ignorance or ignored in greed.

Of course there is over confidence, but that is a side bar of greed of it's own reasoning.

Enter the largest possible single day loss that I may be racking up this Friday. While I will not count it out yet I will learn from the potential loss as if it had already occurred.

This is primarily in the momentum trading account, which is now combined with the day and trend trading, but that matters little.

Last month I ratcheted my trade count up to 5 contracts per trade. I already had a number of positions of 3 and 4 and now a few in the 5 area. Then we entered some "second string" trades, basically averaging down but still counting the additional contracts as if they were a separate trade. These I did not enter as five contracts per trade but 2 or 3 contracts were added. All in all I end up with 17 separate options in play with about 104 contracts in total. This is about $21,000 in options purchased, most of which are expiring this Friday. Seeing as I have combined my capital and trades I can count all my profits together and know that this eats up a great big chunk of my total profits since this program's inception as that $21K could be a 100% total loss... although I think some of it can be recouped with some careful trade management assuming that the market, or at least some of the individual stocks drop in price by weeks end.

The lesson, which is more important than the loss, is that better trade sizing would have made this a much sweeter pill to swallow, or at least not quite so bitter.

Seeing as I like my spreadsheets I created one to track all of my momentum trades as if they were of equal weighting, similar to what I am doing with the daytrading now. This serves to make a trade returning 20% no matter the option pricing, return the same dollar value as any other trade returning 20%. This also keeps the maximum loss of any single trade to the same maximum loss of any other single trade.

Total trading profits to date = approximately $21,000

Current trades as if 100% loss = approximately $21,000 loss (Yah, Ouch!)

Trade size = $1,000 from inception total profits = $30,000 (without changing my daytrading)

Current trades as if 100% loss = approximately $11,000 in profits retained

This is due partly to the same valuation of each loss, nothing oversized but also to the fact that a smaller priced option would have the exact same weighting on the profit scale as any other option given a similar actual ROI. 20% of a $1000 trade of 50 cent options would be the same as a 20% gain in a $5 option... with some variation due to commission structure.

So, if I end on a sour note on Friday I will be re-visiting my trading sizing overall once again in order to determine where best to apply my capital in order to maximize the profit potential going forward.

I think that I will consider daytrading the primary method of trading for right now, concentrate on the short term in and out trades while aiming for that $500 daily average. If I use 15 possible concurrent trades and apply 80% of the trading capital I should end with a decent buffer and be able to increase the trade sizing gradually while reducing the amount of trading capital in use. At some point I will get back into the momentum trading with small trade value sizing once I have $5,000 that can be applied as 10 $400 trades (using only 80% in total)... perhaps a month or two...perhaps less.

Jeff.