Adding another pick to my hit list, PKI

The funny thing is that I don't even know the name of the company, the joys of pure technical trading as I don't need to know... although I usually end up finding out something about the companies that I trade along the way. I do enter them in a new feed and every month or so I see if anything interesting has happened.

I am in the process of ranking it against my other picks to see where it fits into my current list of active orders. Halloween sort of got in the way of me finishing though. I expect that it will easily end up near the top of my list that I will likely place an order for tomorrow and perhaps even bump another pick out for now.

I am finally getting around to formalizing my rules and guidelines in order to keep any ambiguity out of my trade decisions and management. It's nice to have a firm set of rules but even nicer when I can refer to them to remind me not to try to do something different... I am prone to trying to "tweak on the fly" and that, often as not, keeps me from sticking with a plan for long enough to make the money that it could have.

I plan to add another 6 or so stocks to my list by the end of the week.

Jeff.

Trading sizing...beating a dead horse?

Position sizing seems to take up most of my thoughts about trading of late. Likely this is due to the potential profits related to larger position sizing, it is tempting to just bump them up across the board.

Seeing as I have three active plans going right now it makes the most sense to split the trading capital up to allow for each to had at least minimum workable trade sizes.

Day trading: This is fixed due to the TFSA account being funded to the current maximum allowed under the CRA rules. Due to loses from last year I was down over $3,000. Add the allowable contribution room for this year of $5,000 and I started out at $6,700... or so. I am now up to $9,500 so running three contract trades allows 12 concurrent trades based on my current $2.62 per contract average price so far. Most days I will not see that many trades but it allows for carrying some overnight and holding the next day. It also keeps losers to a smaller percentage of the account as I cannot add to this account until January.

I will bump up to 4 contracts once I hit the 15 concurrent trade level, near $12,000 account size. This allows 11 trades at 4 contracts...anything over ten is good.

Momentum options: I feel that at least 15 possible concurrent trades should be the minimum here. Given the average prices are $2.05 that should mean $615 trades. That is probably low as there were some trades that I missed that were higher priced... so I'll use the same $2.62 as in the day trading. Trade sizes are $786. 15 trades would use up about $12,000.

Stock trades: Seeing as I can use margin here I can triple the account size to determine my trading sizes. This is also the least profitable plan as it, so far, involves only trading long the stocks themselves. Prices vary greatly but I wanted to use 100 shares as a minimum position size. The most expensive stock so far has been in the $40 range. If I subtract the cash allowance for the momentum options trades ($12,000) that leaves about $10,000 cash for stocks, or $30,000 margin. Using the average price of all stock trades thus far ($17 approximately) I could place 17 x 100 share trades altogether. I figure that some of the less than $10 stocks could use 200 shares and some of the $30 plus stocks might be OK with 50 shares.

Using a 15% stop loss on these stock trades leaves me with an average per trade loss allowance of $255. Seeing as I move these stops with the prices as they rise (which worked in my favour last week) I can easily accommodate this even considering the margin applied.

Enough weekend ramblings for now.

I am looking forward to some more profitable trading this week and I plan on seeing 4 contract day trades into the following week. I think that I will leave the maximum at 5 once I get there only to manage possible losses over the long run. Get the account growing, keep the cashflow at a nice consistent level then consider when to move to 6 or more contracts afterwards.

Jeff.

Could have's and all in with the TFSA vs Margin and taxation

With the decision I made based on my last post, to cash in my Optioneer capital to trade my current plans, I ran some numbers to see where best I might use the transferred cash. I had already put all of the option trades into a spreadsheet in order to see what my 3 weeks of trading would produce if I extrapolated the same results forward. I considered that if I only used the three weeks that it accommodates a possible poor fourth week performance and sort of treats it as if the fourth week only broke even...unlikely but possible. I also set this up as if I were following a truly equal weighted trading plan.

I ran six separate "studies" as follows:

Three used a margin account... which does not help with the option trading except that I could start with more cash. The other three use the TFSA account.

Margin:
$20,000 start up, 4, 5 and 6 concurrent trades (basically using three trade sizes, 25%, 20% and 16.7%)
Taxes are deducted at 40% at the end of each year.
Trade size is only adjusted at the end of each month... so monthly instead of daily compounding.

TFSA
$6,000 start up, 4, 5 and 6 concurrent trades (basically using three trade sizes, 25%, 20% and 16.7%)
Taxes are not deducted, none owing.
Trade size is only adjusted at the end of each month... so monthly instead of daily compounding.
Maximum trade size is $10,000.

Results:

Margin:
Balance at year one: 4 trade = $256,892, 5 trade = $248,855, 6 trade = $239,867
Balance at year two: 4 trade = $526,271, 5 trade = $518,264, 6 trade = $509,245
Maximum trade size reached in months June, June and July respectively.

TFSA:
Balance at year one: 4 trade = $352,452 , 5 trade = $322,513, 6 trade = $291,108
Balance at year two: 4 trade = $787,416, 5 trade = $757,457 , 6 trade = $726,072
Maximum trade size reached in months August, September and October respectively.

I thought about bumping the TFSA up $5000 after next January but what would be the point? The income is already flowing well above worrying about that, in fact the maximum trade size is already achieved well ahead of that. I expect that I will be peeling off cash in order to fund other trading that may involve needing margin, or perhaps not.

The long and short is that the TFSA, once again, beats margin hands down... taxes take their toll. It might be different if I were able to leverage the 3:1 margin for these trades but the max trade size is max for reasons of affecting the trades within the group so margin is a secondary issue.

Having said that I will be using margin for the stock trades that we take, we have taken a few, two today in fact, so restricting my study to only options traded is a bit narrow minded. I don't mind that as it skews the results against me, if you can call those two year forecasts "against". I also did not count the other two services that I subscribe to, which are both in the green. I used very little cash to fund these so I expect to turn up the heat on those shortly.

So, I "could have" been that much farther ahead already had I started "all in".

I am waiting for the cash to settle in my TFSA as I type this, request to transfer was placed immediately after trading on Thursday last week. It takes three business days due to the way that they convert and transfer the cash. Had I known I could have done it same day in a different manner....oh well. I will consider April month one and will reset my stats to match this as time progresses.

Jeff.

Edgy Optioneering and the Next Idea

While I had two losing trades last month they were only losing trades because I closed them early.

I made a call earlier that the S&P500 would re-test 1150 this month which would have meant holding my February expiring trades would have been a good plan. I ended up closing them when the loss was near it's peak... due to the nature of spread trades and the late term volatility spike associated with near strike market levels I got spooked.

So, same thing is happening with my call spreads this month, even though calls are the most risk averse trades on the books they are mounting substantial paper loses.

Should I be concerned?

Probably.

My lowest calls are at the 1160 level and 1150 should produce enough resistance to carry these trades through to next Friday... but it doesn;t have to. The key is that as long as the market closes Friday (including afterhours trading) anywhere at or under 1160 all my spreads will be fine and I will see 100% of the target profits.

Seeing as there is a 20 point spread in the spreads and each point is worth $250 I will see a loss of $250 per point that the market closes above 1160 in one trade and per point that it closes over 1165 in two other trades.

I liked setting my own spreads in Questrade better as I could pick my own levels cleaner... having said that my levels were closer and therefore more risky. So perhaps I just need to back off on my aggressive stance on these trades at least until the market picks up some volatility to increase the spreads for better risk ratios.

I don;t have access to decent futures options quotes... yet... so I cannot judge whether I could produce better spreads or not. I think that I might be able to so I will setup a trial account with a US futures broker sometime to try out their platform and spin the numbers in my spread calculator. See if the same rules can be applied to futures contracts as I applied to regular options spreads.

Always something to keep my mind occupied.

I scanned through the charts that we have been trading in the trading room and I am picking up on some of the trade setups that are suggested. The key is to be able to recognize the setups pre-market and have the right stocks in front at the time. I think I could still do that on my own with a handful of stocks, maybe fifty, sprinkle in a couple of ETFs and trade with the general trend as it sets up in the market.

I could tie this into the bullish percent index charting by having a group of stocks in each represented index and trade among the index stocks while that particular index is doing well relative to the other indices.

Then there is the pivot point relevance, volume confirmations and order flow to know when to buy, where to stop and where to target.

Definitely a theory to pursue... sometime.

Jeff.

Performance reset and looking forward

After last week's fiasco I decided it would be a good idea to write off last week as learning curve as a group and start tracking today on. I kept the numbers for reference but started a new spreadsheet. This week is starting out much better.

I have 8 trades completed with a $22.43 per trade overall average, net losses and commissions so that is a real number. That is $89.72 per trading day. A little shy of my $200 per day average target. I am also trading about half size trades as I am still in test mode. I need to double my position sizing after I have more confidence in the system so I can increase my profits in the same ratio as losses in order to keep the balance between the two...seeing as I do not know ahead of time which ones will be winners and which will be losers.

Keeping in mind that this daily average only counts the daytrading. I have my Futures options and longer term swing trades to add in there as well. I will be counting the whole works together when I come up with my final daily tallies so I expect that I should be able to surpass $200 per day readily enough... even though I would like to see that target met on each individual plan.

Step one first.

Once I get these going I will investigate the few other plans that I wanted to do completely independently.

Following that I want to transfer a bunch of cash to my TFSA and get that up and going again. The thing about margin accounts with Questrade is that, while they do allow 3:1 for stock trading they don't allow any for options. I understand that as options can very volatile and can lose their entire value quickly if not careful. This means that there is no advantage in holding option trades in a margin account so they may as well be in a tax sheltered account. I plan on transferring chunks of cash in large enough quantities to cover one or two trades at a time.

Jeff.

Cutting back...and withdrawal

Well, do to the much reduced trading activity my Questrade Pro platform is going to cost me $20 a month...or is it $30? No matter, my trading volume is next to nothing right now so it hardly justifies keeping the nicer platform. I liked being able to easily click between accounts and set trades on the fly while watching the real time data stream along, pre and post-market as well.

Now I suffer the withdrawal of not having real time information to work with... although my current trade plan does not need it it was very addicting to have and will be missed.

Having said that, most of what I am looking at trading going forward has more to do with indices than stocks and seemingly I can get free access to realtime S&P500 charts and some other indices.

BPI charts are EOD anyway, I was using trade entries based on previous day numbers, even P&F charts are all EOD. All of my trades are going to be in the 30 day range for now so I really don't need the up to the second information.

Well, due to my needing access to my trading account I wandered over to the QuestraderWeb and the Webtrader browser based trading platforms. The Webtrader is almost unusable for me now as it is just far too restricting. QuestraderWeb is OK. I forgot how much information is available through that platform...tons of company stats, ETF listings, sector lists and news feeds. Quite a bit looks to be realtime as well.

This platform should look after my newer trading needs nicely. With the new options format it will be easier as I can check options without having to try to decipher which option I am looking at anymore.

So, I am down to paying for a monthly subscription to Esignal with an EOD delayed data connection...and that is it for my playing. I could count the Optioneer fees but they haven't kicked in as of yet. I will make liberal use of the stockcharts.com for BPI and P&F when needed.

I will ride out January and see where I go for my play trading next in February.

Jeff.

Change in tone...new definition of risk

I took advantage of yesterday's lull in the market to trade some currency in order to fund my US trading account. Friday's CDN to USD was low and I like buying US when it is cheap.

My plan, which I keep saying is cashflow over return, needs to be solidified and I took the weekend past to do some thinking along these lines... which led me to today's decision.

RISK is putting on the line that which I am willing to lose in favour of the chance to make a gain. This is what trading is all about... speculative or otherwise.


ABSOLUTE RISK is the total dollar amount that is at risk at any given time on a per trade or account basis, I always called this the Maximum Loss Allowance (MLA).


REWARD TO RISK RATIO is the ratio of possible reward over absolute risk. I used to like 3:1, possible win of 3 times the amount risked. I turned this on it's head lately though...and then some.


RISK LEVEL is the chance of a trade creating a loss. Tough one to determine


WIN RATE, this is the toughest part of the whole thing, nailing down what the win rate might look like. Classic rates are in the 60% minimum range for typical trading in order to make profits.


Classic trading uses risk optimization based on the account and individual style to minimize the absolute risk (MLA) at times when it appears the risk to reward is 3:1 or better and the odds of using that MLA are smaller. Larger individual wins can skew the risk needed for future trades. Quite a dance, lots of fun though.


I have turned this over and created a whole other profile.


ABSOLUTE RISK remains similar in it's definition, that cannot be changed as dollars risked are dollars risked no matter how it is spun. Now the amount of risk per trade is much larger though.


REWARD TO RISK Going form a classic 3:1 ratio I now am in the 1:12 to 1:19 range, quite a change in numbers, but it is the rest of the risk profile that determines the real factors at work here.


RISK LEVEL. I feel that these trades as a close to risk free as can be had and still garner a decent return on risk or on investment.

WIN RATE...the real clincher here. I have run strategies that have had very good win rates and a few that have had poor win rates. This current strategy has it's very nature in sync with the idea of a high win rate due to two factors.... opening a trade puts cash in the account immediately...it's easier to keep than to make... and 75% of options expire worthless which is a 100 % profit target achievement for sellers. I expect just under the 100% win rate mark.

Tie this all together and I end up with a very different looking profile of what risk means to me.

Rather than a risk of losing capital I am now at risk of not having capital in the game, this is a higher risk then the old school absolute risk. Shorter timelines let me roll trades over quickly while maximizing the time that the cash is active. Placing a 30 day trades for 1.3 points profit (about $250) compared to placing a 45 day trades for 2.0 points ($372) works out to the same long term result. 15.8 net points at year's end or $3950.

45 day trades don't work anyway as when a 45 day trade expires it will not be an even 45 days for the next trade. using a 100% "in the game" approach can be on 30 day trades or 60 day trades...some sort of rolling forward method aiming for longer term trades will force me to be skipping weeks at a time while aiming for the short game.

So, given the high expectation win rate, the reversed and skewed return ratio and the idea that risk is more a missed opportunity risk than a capital risk, generally, my trading plan has shifted substantially from where I thought I would have been after 2 years.

Jeff.

So much for sector spreads....

I checked the various SPDR ETFs for suitability for applying the spread trades that I am looking at using and only one, Energy, works. It has penny option pricing and enough interest and volume OTM to be able to produce some credit in the spreads, not a lot though.

All the rest, the primaries anyway (utilities, financial, consumer, materials etc) have very little OTM interest.

Time to review the options playbook and see if another strategy might be suitable for these types of options. I am thinking along the lines of a straddle perhaps, something non-directional that can use ATM or slightly OTM options for short to medium term trades...I prefer credit trades but I will not discount other styles either.

Jeff.

Odds are....

I had a longish dissertation on my impression of the general odds of trading spreads over trading stocks. Not only did it get long and tedious, it started getting complicated. So rather than going on and on about any seeming edge, here is a synopsis of the whole mess.

Buying or selling stocks based on support and resistance, indicators and oscillators is well grounded and a statistically sound methodology but is prone to subjective analysis and losses while one method stops working due to a shift in the trend.

Around 75% of options expire worthless (various sources), this puts the odds in favour of the option seller by the very nature of the options market.


Selecting and diligently applying risk strategies, position sizing and money management to any plan will enhance returns and keep losses at bay.

Goal setting in a broad sense is important to have an overall impression of the long term expectation. These goals must be realistic, quantitative and achievable. Short term goals are needed to be set and tracked in order to remain on track. Checkups are critical along the way.

Selling credit spreads to generate premium income puts the cash in my account immediately and the trick is to manage the trade in such a way as to keep as much of this cash as possible. I feel that having the cash up front creates an edge all of it's own. It is easier to work to keep than it is to work to make. Besides, getting paid in advance to work the trade just sounds better.

Adjusting the plan to accommodate varied price activity should prove far easier as the price action is being bracketed with credit spreads income strategies so price direction may not necessarily important. Amplitude of the next move is though.


Odds are that I have a much better edge in working toward keeping the premiums paid to me to place the trade than putting up a bunch of capital in order to try to generate profits. This has become my goal, smaller more secure gains made consistently.

I look at this as a front end load strategy rather than a back end load stock strategy, that is how the mutual funds work so why not me? Odds are this little paradigm shift is for the better in the long term.

Jeff.

Strangle targets

I did some serious spreadsheet work tonight and revamped my Optioneer strategy as far as entry levels are concerned.

I had been figuring on aiming for the 1.9 point minimum target, or $397, and anything over that I would allow the difference to add lenience to the trade (the amount that I let the broker use to meet the bid during the day if needed to fill the trade). A 2.2 point target could get filled at 1.9 or higher which is a 0.3 point lenience. Anything over the 1.9 would be considered a bonus.

I have not been getting orders filled using this so far, even when I had a 2.2 point target once, so I decided I had better rethink how I view the targets. This is going to creep over into my options trading in the TFSA I am sure as well.

My goal, or ultimate plan, is to be able to replace my income allowing me to choose what I may want to do for "work" but not necessarily just do nothing. Nice thought but retirement to me is not just out playing golf and trying to manage a fixed income getting chewed away by inflation.

Cashflow is the key. I determined my daily cashflow target, conservatively, and figured out how much capital I would need in the Optioneer strategy in order to allow enough concurrent trades to produce an average daily before tax profit and came up with about $51,000. Of course I would want to figure some overhead in there for a few losing trades and perhaps a bad run of not getting fills, so add $10,000. This is based on $10 per day per trade with each trade averaging a 37 day duration (trades are between 30 and 45 days long)

$60,000 would provide enough cash to fund 12 trades, or 6 double lot trades. How the market is moving will determine how many trades I will need to double or triple up on in order to remain diversified and still keep most of my capital in play.

Things that I have not figured into this, which amounts to my fudge factor against me would include tax claims of interest on debt (figuring I can pull a Smith maneuver or something similar) and any other items that I can claim against my income tax. It also does not count compounding and increasing the trade size, as if I were drawing the cash off the account and keeping only the $60,000 to work with.

My plan would have me continue to build the capital base in addition to working the TFSA with options, funding my DRIPs that I previously setup, perhaps dropping some cash into the RRSP to get some immediate tax sheltering on some profits. Basically working many angles at the same time to produce a varied source cashflow.

So, my spreadsheets have me moving my target quite substantially to my surprise.

A 30 day trade could target as low as 1.55 points or $300 over 30 days
A 45 day trade target would be targeting 2.15 points or $450 over 45 days
Roughly each day under 45 the target can drop by $12.50 and I can still provide a $10 minimum daily average return. There will be times when cash cannot be immediately reinvested as well as times when the target is higher than my minimum and these two factors should cancel each other out.

I placed a trade for tomorrow with a target of 1.9 points. With my new calculations, and the trade being at 36 days I could accept 1.80. Friday I could accept 1.75 and on Monday as low as 1.60 points.

I could also add a trade doubling factor in here. Once the expiry is less than 37 days (the average expectation) I could double the trade if the expected target is higher than my minimum. This allows for the capital to work quicker for me... I will not consider this until I have enough to manage 5 or 6 concurrent trades though. With my lower entry targets these trades would be almost sure to fill and I would not need to, but could, tweak the call protection to add the 0.15 points as well.

Jeff.

A little cleaning house

I reviewed my positions over the weekend and decided to start cleaning some of the trades out that are not in synch with my current plan.

I am targeting trades that are not in my TFSA primarily and trades that are not specifically recommendations.

I decided to play the trades as recommended by the services that I am trying and not to play trades that involve only placing half of the strategy they are using. A number of the trades involve selling naked options to fund the underlying long option purchase for the actual price move. Nice idea but naked options are very risky if not covered by a stock or long corresponding option. So buying just the regular option puts me at a disadvantage as I am not taking advantage of the credit from the premium sold to fund the purchase of the long option. If they have suggested a net debit trade combo then I will consider it as there is open risk at the outset...other than the naked option that is.

I also will stop buying longer term options to try to take advantage of cheap time premium in order to have less EV degradation as the expiry approaches...some trades are the inside month. While the time premium may be cheap, it drives the price of the trade up and therefore the risk is greater and it also reduces the position size that I can take which will drive total profits down. So I will stick with the recommendations.

I see that they have been closing trades and all are in profit, which is nice to note.

I did a check on one service, the active one that I may keep, that has a track record and find that, over all, they make a healthy profit. Picking trades here and there could reduce the profits should I pick the wrong trades, so I will try not to attempt cherry picking.

Today I closed a trade for a loss, about 13% and closed another for a 100% win. Both were outside of my parameters and the winner I should have closed yesterday when it was at 140%.

I adjusted my stats accordingly.

In order to save a little calculation time I setup a daily return formula on my spreadsheet that uses my dates to calculate the numbers. The average is a straight average of all the trades which does not reflect a return on capital, only a return on the capital used in the trade. I would like to see that number up to 100%, which I think is possible. I will put an average trade capital in some time and that number may mean more when relative to this average.

I did some more work on the Williams %R strategy, mostly thinking, and came up with a method that may work quite well. The trouble that I did notice is that it seems to not work well in a transitioning stock. It is great for established trends, up and down as well has horizontals, just not as the stock switches from one to the other. I think that tracking the performance regularly and placing trades frequently will give a good result overall. I am going to check this against a sector rotation scheme using sector ETFs and come up with a balancing plan to weight the trade sizes according to the performance results. I am going to guess that the horizontal pattern will be the best as it allows taking both side of the trade while up and down trends are best only trading with the trend.

Jeff.

Jeff.

Plans, plans, plans...

Plans always change...

I had decided to put my P&F chart trading on hold for a while and test only the trading service trades. Now that I have migrated most (all but 4 of 14) trades over to my TFSA I have a ton of cash sitting in my RRSP not being put to work. All my trades right now would easily fit into less than a $5,ooo account.

This afternoon I am attending, if you can call it that, a webinar put on as a training guide for the next service I am likely to try out...the expensive one. Should this look extremely good I may be moving most of my RRSP over as a longer term plan. It really looks promising now that I have had more time to tweak the trades and do a little varied back testing. I have some current live fake trades that are turning into profit mode so it is nice to see an active progression.

In the meantime, my plan is to re-introduce the P&F chart trading into my RRSP account but I will be concentrating on covered calls to generate a slightly different line of income. I may be able to use some of the advisory trades to do this but substitute stocks for the calls then sell the calls based on the stock holding rather than perform a true option spread. I have updated my option level to level 2 in that account now, minimum balance to do this is $2500 so I updated my TFSA as well.

Should the service trades look promising I will use mainly those but I will pick up to 10 stocks from my final list of 50 or so P&F charts that are the most promising patterns and use those as the basis of my own covered call trades. These are going to have to be under the $20 mark though as I need to be able to trade in 100 share increments in order to sell a call against them. That alone will whittle the selection down considerably. Even so, checking the option chains for activity that corresponds to my charts will be interesting. I don't have any fancy software to do that for me so I cannot get too many going for this as I will be using my broker platform for this...which is really restrictive when it comes to studies.

Should the RRSP not get transferred I will consider liquidating some of it and transferring into the margin account to top it off to $5,000, plus a bit, to allow me to perform spreads... $5K is the minimum required account value to do this. I think that I would not likely use naked option writing so I won't worry too much about getting the account up to $25K. Once I have that in place then I will investigate getting into strangles as that is where I can produce some nice long term low risk regular gains. That will just be a rather complicated dance and I am afraid that the commissions are going to be prohibitive or perhaps just restrict me to one style of strangle or perhaps just one side, a spread, for now.

Back to the downside of any trading in the margin account...taxation.

Plans, plans, plans.

Jeff.

Latest option trading service and time value

I was driving in and out of the city today and I always do some good thinking while driving and playing some decent tunes. I pondered the idea of trading as a whole, at least as I have approached it.

My trading has run the gambit from initial DRIPping, long term buy and hold to loose daytrading, swing trading, position and counter trend trading, back to day trading then into point and figure based trading now into options. Up until this point I have strictly been following my own strategies and plans. The one that shines over the whole of my trading so far has been my tight money management as that has, above all else, kept me with cash to stay in the game.

The part that has been lacking is the sticking to a particular plan once I prove that it is viable. Part of the issue has always been the time needed to actively manage the accounts and trades as I tend towards micro-managing even when it is not necessarily warranted. I spend too much time poring over the charts and worrying about the stops. The P&F charting reduced that immensely and that plan does work. Some of my recent trades have been based on that and have produced some nice returns.

My thoughts turned to the idea of the best way to make money. The three independent means that I can directly control are owning real estate and becoming a landlord, starting and operating my own business and stock market trading/investing.

I already am directly involved in our family business, second generation. One of three. Now I am into stock trading, so two of three. I investigated real estate and decided it was not for me so I scratched that off the list long ago.

While in a business the best way to continue to make money is to have a staff that can operate the business mostly independently. I am working toward that goal now and I am able to do other non-business related things and let a lot of the business run itself.

I considered the same approach with stocks. I have been doing all my own work, until recently, research, charting, trading etc. So why can I not hire some of this out? In come the trading services. They have access to more and better information than I do and I don't care to try to acquire all the data services that they need and use to give the information that they give (or sell). So I am considering using a few services to maximize potential returns. They each have their strengths and all are option based.

In a business having good staff is important for a smooth and profitable operation. Good staff costs money in wages and benefits. I expect that good trading services would require no less or a consideration when being selected. So I consider the cost of the service a trade for more free time. The old saying that time is money is not really far off the mark.

So....

The latest service that I mentioned earlier looks after the executions as well as the advisory. If it were not for the substantial upfront fee and the need to open another brokerage account I expect that I would already be trying them out. I have been paper trading for some backtesting and now I am caught up in that my paper trades are active current trades.

I may yet try them out but I want to be very sure that this is a service that I will use for a long term before sinking the cash into the fee and setting up an account. I feel that I need about $10,000 USD in the account to start in order to cycle 9 or ten trades continuously. So $14K converts to near $16K CDN I expect.

In my backtesting I picked a particular issue (E-Mini Dow Jones) to trade exclusive of any other offerings, just to give me a worst case baseline starting last September. They 7 issues taken from the S&P500, S&P midcap 400, Russell 200 and the Dow Jones Industrial. Of these three are trades under $1000 using the particular strategy I chose...to keep trade capital to a minimum.

Annualized returns on these are between 50% and 100%+. The idea being that if I place a trade, let it expire then immediately place another in the same issue I can keep that $1000 working for me to produce an average 75% annualized return. Of course I can rotate trades as I enter an additional trade each week. If $1000 can return $750 a year then I expect that my $10,000 should be able to return $7,500 per year.

2009 shows 33 trades closing, two losers and a total net return of $1841.00. Checking the number of active trades, I see that only eight are ever active at the same time which makes $1841 a 23% return for nine months...hmmm. Considering that this is worst case, not selecting better trades and not compounding by adding trades as cash allows.... it still beats most mutual funds. I keep in mind that this is a long term plan and service and it does not preclude me still making the other more speculative option trades in my current accounts. Just one more piece of the pie.

The CSR I talked with briefly mentioned something about how the trades are managed. I suspect that because they use strangles that they may close the losing half of the position and give the option of letting the winning half run a bit so the protective puts for the call side can appreciate...that is what I would do. That is sort of what I did with my straddle and the winning side is around $2 while I cut my losing side for a 80 cent loss.

Yes, I think that I have made up my mind... now to free up some cash...

Jeff.

A more advanced option trading service

Of course more advanced means more expensive. More than $4K CDN start up plus some access and commission fees as this is a broker/trader platform that only works with one broker...and it is a US company. Now, they have a track record in the sense that they have been around since 2000 or so and I can back test to 2004.

The core assumption that the system is based on is that close to 75% of all options sold expire un-exercised...this is a loss to the buyer and a gain to the seller. That alone is quite an edge over just buying options. I sort of knew that I was going to need to get into selling options in order to secure a smoother cash flow and I also knew that a lot of options expire worthless...but I didn't know the numbers.

The second assumption is that big winning home runs are not looked for. They promote the idea of very tight risk management that will, by it's nature, provide a good return compared to any other investment vehicle. In this, compounding, even though they don't mention it, will turn a small account into a decent size rather quickly.

The strategy is sound and my back testing has yielded an over all win rate higher than anything I have back tested yet... in fact in 2009 I have yet to produce a single losing trade. Looking at their strategy, this is plain to see why. The only "worst case" scenario involves a huge run up or sell off in the market and I think that they tweak things to accommodate this on the fly, somewhat.

I was able to create some large losses in September last year as there was a bad run down in the market which fell outside of the current strategy parameters...it may not have been near as bad as I tested as I was just going with current settings and strict exit criteria. Pulling out of the hole that I virtually dug in September and October took me until May or so. I must admit that a hole in a mutual find account would still be there. Plodding along doing the exact same thing for each trade using the same strategy and same index (I won't get into what they trade but suffice it to say these are not stock options) worked. I expect that I could have mitigated the loss by not trading when risk factors were high in that month and boosted the returns by selecting trades that had higher risk/reward numbers initially and shorter time lines.

They have a 30 day money back exit guarantee and a 10 trade guarantee to have the initial fee reimbursed while still staying with the program. Now they specify which trade strategy that this guarantee applies to and I can see that they are next to guaranteed that they will never have to pay me back should I sign up. But, in that case I will have paid for it through trading anyway... win, win.

There are downsides to even trying this as it is a US company and I am not sure how the taxation applies to me yet. They do let me paper trade the service for free first, which is nice, but setting up an account through them could be onerous and I may have to do some sort of online US banking.

They use a proprietary formula to determine trade entries, exits and monitoring. The trades are complicated enough that I would not really want to have to try to set them up myself, at this point. Commissions alone in my current account for a single trade would amount to $152 USD. The paper trade setup accounts for commissions through their system so my testing is not "frictionless".

The trading appears to be easy enough. They make about 10 recommendations each day. I select the style of trade from three styles, select the size of base trade and pick which ever one has the shortest duration, select how many units and hit "Trade"... more or less. Then check the position each day to determine if is remains a keeper or to close it due to high risk factor. They look after making the corresponding trades (up to six trades for a single position) and send a notification as to whether the trade was filled or not. Oh, there is an allowance for how far outside the trade prices that I am willing to go to get the trade filled.

I think that there is also an automatic exit setup that will close a trade at a certain point that I determine ahead of time as well, sort of a stop loss even though that is easily looked after by checking myself.

They make their money from the commissions, data fees (loosely speaking there are data fees monthly) and I don't doubt that they take some from the spreads during the trades as well.

All in all this looks like a decent system and I am seriously considering trying it. There would be a significant cash outlay to test this though. The 10 trade guarantee uses minimum trades that are in the $16,000 range...US. I cannot do this through an RRSP so there would be tax implications in the spring. My 10 trades would take about 10 months to complete if I were not able to do multiple trades, which I won't. Putting up $20K seems like a lot...but how much have I dumped into mutual funds hoping for the best? My wife has just given me the OK to transfer her RRSP account to trade but I really hesitate to do that just yet. My RRSP is play money, hers is not.

My other option would be to dump $10,000 USD into this and go with the smaller trades, about $1000 per trade and run them like a laddered GIC plan, one trade per week and roll them over as they expire or close. I would consider the $4K cost as a trade deficit to start so I would not be tempted to pull cash out for anything and I could continue with my RRSP and TFSA trading in my CDN account.

I am torn as I see the huge long term potential here.

I have been in one of their webinars, done some serious playing in a test account and have booked another webinar next week. Overall I have about 6 hours into this so far. I think that this company is willing to spend the time to get anyone up to speed and help facilitate the account setup and funding...after all, it is their business.

Jeff.

On trading advisory services

Well,

I still have two trial subscriptions for option trading services. I find that they are more information scanners for me as I may or may not make the trade that they suggest. One has a 90 day trial which is actually pretty good as that gives me time to really run it through it's paces. They also include a blurb that guarantees 9 money doubling trades in that period but I can still cancel even if those are met, no strings. This one does some decent checking on the stock as well as the typical data scan and they do not pull in much "technical" chart analysis that is easy for anyone to do.

The other only has a 30 day guarantee and uses more chart analysis... although it is a cheaper service.

Having said that both have access to information that I do not, or will not, choose to pay for as it would be more expensive than paying them. I have open trades from each of the services now.

Both have almost covered the initial cost with the trades that I have taken. The more expensive as given more trades and profitable positions so far (none sold yet) and the cheaper only one active trade, as I have had it for less time mainly but it does provide fewer trades overall.

I may keep one or both if they prove fruitful while still running my own trading alongside...seeing as options are cheaper I can do that easily enough.

I have not quoted any figures or trades from these yet but I have 60%, 44%, 55% with one that is -20% and some others just in the green.

These numbers are a little deceptive, or can be. My trades have been deeper ITM so the percentage will be lower even though the actual dollar return may be higher. Some of the service trades were smaller ATM or OTM trades so 60% is not as impressive...until I count that I took a 4 contract position in that case due to the low cost. That is not too high as the trade was for $1 options and I would have bought 300 shares of the underlying stock had I bought the stock and both cash returns would be in the same ballpark.

I need to rethink my loss allowance on these smaller trades and make use of some of the leverage available at some of these $1 or less options. I could have made the one trade with 6 contracts and been at my loss allowance as I would stop them at 50% loss or $300. These have opened my eyes to the ATM trades as being not as scary as some may have led me to believe.

Like anything else in the trading game, risk and loss management are the key to profits, or at least the key to still being around to play the game.

I hope not to gain a reliance on advisory services so I am learning what they use and finding other ways to gain the same sort of information. These two seem to be on the ball where all of the others I have seen and tried (some were very expensive) have missed the mark altogether.

Jeff.

Plan the trade and trade the plan

I don't know how many times I've said this in the past but I have probably deviated as many times as I say it. Lately I have not followed my plan, with various good reasons I suppose.

I have all of my picks charted and all of the charts have nice clean trigger prices. The previous trades missed were the gold trio that I follow. They peaked and are dropping back again so that would have been two of three nice profitable trades... and could have been executed right by the charts.

I noticed three others this morning that also could have been traded profitably right by the charts and I have only found one or two that would have been questionable flat trades to possibly small losses. What this amounts to is I should have just followed the setups exactly as I planned them.

I think my trouble has been that I am converting to options and am hesitant to get into stock trades so I put off checking the options for each of these setups. I have eight trades in process and I am only using 1/4 of my capital whereas trading the stocks would have me all in. While specifically not trading stocks and not checking the options for these soon to be triggered stocks I am missing the boat.

Next step...

I am going to pare down my stocks as some are not performing according to my criteria. I expect to drop at least ten from the list. Then I will be going back to the drawing board and visually scanning for a slightly wider price range of stocks to choose from. Last time I went from 700 to 50, or so. I ended up with an over weighting of stocks that started with A and C as I was not as discriminating until I got going into the list.

I don't expect to be fully up on option selections and charted stocks until next week now but I do plan on sticking to the plan closer once I am there.

Jeff.

The active trading list expands

I keep waffling between sticking to ten stocks on my hit list and all 50+ stocks from my visual scan last week. I looked over my 10 list and looked over my 50+ list, why should I myself to ten stocks? I figure that, as long as I am organized, there is no reason that I cannot place trades up to my cash (and margin) balance in each account.



Pros to using all 50+

-more trade setups at any particular time = more money in play

-more trades = smaller loss allowances per trade

-more selection for sector rotation or just diversification

-feels like I am doing more work toward trading, no boredom

-better selection of price ranges to use in the varied size of my accounts



Cons

-overly complicated if not organized well

-should there be many trades selecting which ones are best could be an issue

-possible over exposure to one or two sectors

-lack of familiarity with any particular stocks



Pros to using 10

-easily managed trading

-familiarity with stocks and their tendencies

-always enough capital to take all of the trade setups (with the exception of a lot of shorts)



Cons

-small sample base to use for studies

-fewer trades means that cash may be sitting unused

-leads to larger position sizing to get money working more often

-boredom as there may be little activity some weeks



Well, there is no glaring point that stands out for or against either method so I feel that it is more of a personality issue. I liked the daytrading, kept me active while keeping me from too much studying after trading hours. Daytrading is hard to work on when not trading even though I do reading and whatnot to keep up to date with some of the blogs that I follow.

This trading method reduces the intraday work, by close to 90% and allows most of the studying and trade determination to be done on weekends or evenings...even placing the trades can be done after or before hours.

The only one real drawback that I see is having money in play overnight and, especially over a weekend. I am more prone to gaps. Now, I am hoping that gaps will more often than not go in my favour only because the support levels that I am using may tend toward a favorable move but I am realistic enough to know that news sometimes forces gaps in either direction without regard to previous history.

I am setting up to use the full 50+ list for active trading. I have printed all the current P&F charts to use for manual notating. I can scan through the charts and see the setups in about 10 minutes. A quick note for each stock's trigger and a separate note for each one approaching it's respective trigger to setup trades.

Today I have 12 stocks nearing a trade entry. I have four active positions, two of which I may just liquidate to free up the cash as they are not on my new list. I will need to determine which ones are actionable based on account balances. My short sells are restricted due to the small margin account and most of the setups are shorts...shame.

It comes down to the fact that the trading decisions are pretty simple to make based on using support and resistance on a P&F chart so there is no reason not to be able to make more. Exits are cut and dried as well so there really is no trade management to mull over. Trigger, trade, scale in, stop set. The only hassle is knowing when and where to move stops but even that can be cut down to two or three strategies depending on the chart pattern.

Jeff.

Patience and the Nitty Gritty.

I have two trades that I still have open one from last week and one from last month.

My other trades ended up in the red overall so I am not overly impressed with the method that I was using...that was the test of the service. Even had I exited the few that did turn green at the peak I suspect that I would have ended negative for the test anyway. That is not anywhere near enough of an edge to sway me into using this particular service. Of course, I shouldn't have been surprised.

So on to the next more serious trade plan with a healthy sprinkling of patience. Now that I am using all of my own picks and entries I don't mind getting into the nitty gritty of what I am really doing...so here it goes...

I went through some back testing of the two trades that I am in right now and found how the particular stocks seem to work with respect to my indicators...more on those another time.

Badger Meter Inc. (BMI)

This stock moves well and has a nice pattern of observing various support and resistance levels far more often than breaking them. Volume levels are clean and well delineated and the price ranges often enough to produce a good number of trading opportunities. It's a keeper in my arsenal of stocks to trade.

There have been 26 trade setups in the last 12 months. 8 did not meet the entry target, 2 were losers (less than $2 ps) and the rest were up $55.50 ps.

I bought it on Friday at $38.50 based on a signal, but not mine. It was a buy under $40 but I had it down as a buy under $38. $38.50 is not too far off and the price entry has some reasonable trend support so I will play it out. The up target is $44.00.

Lincare Holdings (LNCR)

LNCR is the other longer term trade, it is a short placed on June 30th at $23.30. This one is a slow mover and I would not have traded it had I realized that it would tie up capital for so long to make it's moves. I did not do all of the back testing that I would normally plan as I doubt that I will continue tracking it. It does trade decent volume and I wouldn't mind so much holding it as a long position but it is in a serious long term downtrend right now....has been for almost three years and it has only moved $15 overall with a large drop of $12 in 2007 that took 6 months to finish.

Wider stops, more patience...I should check to see if I am going to get hit with a dividend payout soon.

The down target is somewhere just south of $20 and I will cover this trade rather than letting it go much farther.

That's it for active trades and I have nothing else tested yet. This is where the patience comes in. I will not just enter a trade until I have done the one year back test and determined that the stock is a good candidate. I plan on having a number of stocks, perhaps forty, to choose from at any given time. They will all have pre-set entry targets and use rule based following stops.

I estimate that I can choose a stock in a few minutes after doing a scan for my criteria. It should take about an hour to do a back test so I may only end up with a few per week to add to my list.

At some point in the future I will set these up with a semi automatic trigger program but I need to see some returns to justify the necessary time investment involved in writing that kind of software.

Jeff.

All in.

I am now up to five long and two short positions.

My plan has me going "All in" but not by increasing my position sizing just yet. That would place the loss allowances needed to start these trades too high, or I would tie myself down to only a few possible trades due to needing the price to get closer to my stop setting before entering.

Right now all my trades are 50 shares. Maximum loss allowance of $150 ($3 stops) even though most will come in tighter than that. At 50 shares I can get three shorts in my margin account, 6 or 7 long in my RRSP and 2 or 3 in my TFSA. This allows for some diversity as well as bringing my active trade quantity up to give me some data to work with for determining how successful this trading may turn out.

I think I will add some cash to the margin account and put up with the fact that there will be income tax owing as a result. Once I get my TFSA built up then I should be able to avoid having to do that in future. I just like the idea of having 3X margin available in addition to the shorting capabilities.

So, here's to going all in.

Jeff.

TICK trading the S&P 500 using SSO

Here is an interesting TICK triggered trading plan worked out for yesterday. This is, more or less, what I was trying to accomplish on Friday. I did catch a good chunk of the two largest moves of the day but working strictly off of the 200SMA is somewhat profit restricting. I have liked the idea of fading to the 200SMA and have tried that a few times with limited success (read: more loss than profit).

So here is an example of back testing a day using some of my newer ideas. I know the day is recent so the results may be to optimistic but the theory is sound and the charting is a great exercise. I will do the same thing for the SSO side of the day, although I would tend to try to not trade against a trend setting day...once I realized that is what it was.

For the TICK chart (second chart):
Plot the 25 or 30 SMA, red
Plot the 200 SMA, green
Bollinger Bands at 20 period, 2 standard deviations (I just like these, I don't think I would use them for triggers though. I like the narrow and wide indication of volatility.

Here is the SSO chart for yesterday:

I know the TICK chart is tight, I use it much narrower and with wider spacing but this is easier than trying to split the day into two charts.
May 8th observations:

TICK strong off the start, 25 over 200 and both UTing.


Trades as charted:

0938h - Entry on first up bar after a bottom... coincided with a 200 entry.
NOTE: Expanding volume confirmation after entry
0950h - Exit on second full bar below the entry bar in TICK, R1 failed test as the primary
1051h - Entry after first positive TICK bar following 25 over 200 cross pullback to -800 range
NOTE: This happens to have been the second test of the primary pivot point
1120h - Exit after failed test of the 200SMA, no TICK reason, could have held
NOTE: the next entry the tick level was lower yet produced an even price from the previous exit... sign of an UT in progress.
1150h - Enter test of 200SMA, TICK testing low trend line
NOTE: 25tick SMA steeper slope than 200SMA, UTing, more positive TICKs
1221h - Exit second failed test of R1 (R1 is a good resistance level)
1251h - Enter following low TICK, bear -800, VWMA test, increasing TICK
NOTE: TICK not trending, horizontal ... tight stops or target trades, aim for R1 again
1258h - Exit, R1 again, don't wait for the fail due to third time testing and neutral 25SMA TICK
NOTE: no new highs or lows for the next period, wait for the 200sma test.
1400h - 200SMA test and TICK low reading
NOTE: TICK returns to small UT here, breaks R1 on good volume, stop at VWMA
NOTE: TICK lows do not produce new price lows, stop to R1
1455h - Exit as yesterday's high test failed for 4 or 6 bars, TICK turns DT afterwards so exit imminent anyway

The rest of the day TICK highs and lows do not produce new price highs or lows. I don't care much for trying to play the EOD volatility anyway.

Jeff.