Sep 22 2008
Trade plan for 9/23/2008
I want to dump all of my puts and go back to 100% cash.
Limit order to sell 2 IWM Oct 80 puts for $9. Will require IWM to be under $71. Closed at $71.95.
Limit order to sell 1 XLF Oct 30 put for $10. Will require XLF to be under $20. Closed at $20.55.
I need both underlying securities to fall a bit to get these orders filled. Based on my chart analysis, I think I might be able to get these fills tomorrow morning. I am hoping for some downward momentum in the morning.
Ever since blowing up my account in July and going from +31% YTD to -2.5% YTD in a week, and sitting out of the market for a month to really think about things, my trading style has drastically changed. I am no longer a stupid bear. After one month of responsible trading, I am now +22.6% YTD. It is very tempting for me to ride my current short positions until I break 31% YTD, but responsible trading is what has worked for me in the last month and I have no choice but to get out of my short positions at a reasonable target.
Right now is the 3rd time this year my account balance has been this high. The last two times I was this high, I had my account blown up. (The first time it got blown up, I went from +27.6% YTD to -14.5% YTD in about six weeks.) I will not be a pig and blow up my account this time. I think what happens to me as a trader is that when I have a string of good trades, I become overconfident, my bets get bigger, and eventually my account gets blown up. I realized that if I can be consistent and keep losses small, I would have so much more money than I do now. I’ve traded responsibly before. February was an amazing month because I wasn’t a pig.
Let’s consider this Markov chain…
Starting state: State 100
50% chance of advancing to state 110
50% chance of declining to state 90
State 90
50% chance of advancing to state 99
50% chance of declining to state 81
State 110
50% chance of advancing to state 121
50% chance of declining to state 99
In each state, there’s a 50% chance of going to 1.1*(Current state) and a 50% chance of going to 0.9*(Current state). After n=infinity number of state transistions, what this Markov chain says is that your trading account balance will go to zero.
Now, if you are a stupid trader like me, this is what the Markov chain actually looks like.
Starting state: State 100
50% chance of advancing to state 120
50% chance of declining to state 80
State 80
50% chance of advancing to state 96
50% chance of declining to state 64
State 120
50% chance of advancing to state 144
50% chance of declining to state 96
In each state, there’s a 50% chance of going to 1.2*(Current state) and a 50% chance of going to 0.8*(Current state). I think for this Markov chain, your account balance goes to zero much faster.
In order to not end up with a Markov chain that approaches zero, you cannot get out of positions as a reaction, that is, AFTER it goes against you. You need to take profits while they exist and not be a pig. You also need to cut losses quickly.