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A Harrowing Session Today was my worst trading day ever , measured in dollar terms.

Posted Wednesday, September 01, 2010 (amc) http://slopeofhope.com/ DOW +254.75 SPX + 30.96 NDX +52.62. A Harrowing Session Today was my worst trading day ever , measured in dollar terms.

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A Harrowing Session Today was my worst trading day ever , measured in dollar terms.

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  1. Posted Wednesday, September 01, 2010 (amc)http://slopeofhope.com/DOW +254.75 SPX + 30.96 NDX +52.62 • A Harrowing Session • Today was my worst trading day ever, measured in dollar terms. • I came into the day not just fully short, but margined to about 135%. Virtually every one of my positions was in the red, and I trimmed the quantity of my positions substantially. I picked up three large long positions - GDX, FXE and IWM - although obviously it would have been nice to have bought them at yesterday's prices instead of today's. • All in all, a day like this is disheartening beyond words and makes me wonder what all the hard work is for. • It seems that 1040 as a buy-everything-you-can point has been a good rule lately. If we pass the area marked in yellow (1098.50), it will weaken the bear case (48hrs later this occurred). It we cross the green tint (1129.50), it's time to hang it up. • I'm done for the day and will probably just go crawl under a blanket now. • Posted by Tim Knight at 1:02 PM in Defeat | Permalink | 9 comments

  2. Posted Wednesday, September 01, 2010 (amc)http://slopeofhope.com/

  3. Why do I trade the way I do? • NOBODY KNOWS WHAT IS GOING ON! • Modern Portfolio Theory is Dead & nothing has yet taken its place • MPT is the Nobel Prize winning Basis upon which everyone’s “real money” is invested (i.e. Your Retirement Funds & Long Term Investments) • The “Professionals” are just waking up to this – and are still filling their time arguing over “Fiduciary Standards”! • Day Trading is one of the few strategies that has held up – but I still can’t see wagering “real” money (in size) against “the machines”. • I need a way to consistently generate real income, in size - and for this I need more of an edge than just a great toolbox of technical indicators and the ability to use them.

  4. Vehicles vs. Strategies – what’s the difference? • Vehicles = /ES, SPY, AAPL, SPX, etc. • Strategies = Directional v Non Directional • Are there edges in vehicles? • Are there edges in strategies? • What is Your Edge? If you can’t define it – you don’t have one.

  5. /ES Long Risk Profile Graph

  6. /ES Short Risk Profile Graph

  7. S&P Chart Discussion • Can we make a bet and not have to be exactly right to win? • Binary Outcomes versus Non Binary Outcomes discussion • Can we make a bet on what it will NOT do versus saying what it will do? • Let’s go back to the chart of the S&P and look • One way to look at it is >1131 and <1011 it’s in “new territory” right? • Can we make a bet that wins if the S&P by Sept. 17th goes no lower than 990 and no higher than 1140? • A bet that makes us money EVERYDAY that it stays within these bounds? • Let’s look on the chart and see where that is (next slide chart) • What was Your Strategy on 8/27? – Was it Tim’s? AWWWWWW • Was it the Opposite? GOOD FOR YOU!!

  8. Did YOU KNOW where the S&P was going on 8/27?Were YOU willing to “invest” serious money in your knowledge?Was Your “Edge” that good? GOOD FOR YOU!!I AM NOT THAT GOOD. What I did is on the next slide…..

  9. SPX Non Directional Risk Profile Graph

  10. Non Directional Strategy Plus’s & Minus’s • Minus’s = • Horrible risk/reward tradeoff (our ex. 870/130 or 7/1) • Uses allot of margin (our ex. 870 vs. 130 max profit) in Reg.T account • Requires ongoing risk management (what position doesn’t though?) • Plus’s = • Probability of Profit on our side • Matches our “view” of the chart • Non Binary Outcome concerning Profitability • Time is on our side • “Sold” Directionality to someone else – We are “The House” • Can use to consistently generate monthly income with large sums • Our ex. = 130/870 = ~ 15% in 3 weeks, Annualize That. • Not a “system” you can buy but an actual Strategy – employed by real professionals in the marketplace everyday.

  11. How did our Non Directional Position do 8/27-9/1 vs. Tim Knight?We now have 82% Probability of Profit

  12. We are now up +8.6% yield on the margin (capital) we’re using$3740/$43,500 = +8.6%

  13. What are some of the choices we now have?Remove all risk & play for free for $4k (vs. $4550 shooting for on 43k capital at risk)

  14. Or lock in $2800 (6.4%,6days) and play for $3800Now, we can’t lose and we can’t make any less than $2800.AND we currently have an 82%chance of making $3800

  15. Or take the whole thing off for +$3750 or +8.6% yield in 6days

  16. If we keep the whole thing on what do we look like?Our Full Capital is still at risk AND82%pp,up+8.6%,make $243.50 a day leaning a little short

  17. I don’t know where the market is going • From day to day, week to week or month to month • And I have serious money at risk, and serious money to make • So I trade with Non Binary Outcomes – Heads I win, Tails I Don’t Lose • I trade with Probabilities in MY favor • I trade with TIME in my favor – I make money everyday regardless • These are the Edges I use to make confident trading decisions and to put money to work for me.

  18. How (and why) do options traders think differently? • Options traders generally do “think” differently than most other traders. • Approach trading as an income generating business. • Believe that they must have one or more identifiable “edges” to consistently generate monthly income. • Typically use the unique characteristics found only in options to identify their “edge” (time decay, statistical probability, and implied volatility). • Generally think that “you’re guess is as good as mine” when it comes to picking which direction and how far a stock’s price will go next. • Generally think that the more a trade depends upon “directionality” (i.e. “guessing right”) the more “speculative” it is – and the “smaller” it should be in terms of money risked. • Generally describe price movement in an “underlying” (stock, bond, futures contract, etf) in terms of standard deviation – or, how much it moved compared to how much it “should” have moved. Whether it “moved” up or “down” is typically secondary. • Describe their “directionality” in terms of “degrees of leaning” one way or the other using words like “delta” and “gamma”. • Generally believe that the uniqueness of options provides them another “lens” through which to view the markets which is not available any other way. • View options as a very flexible tool in their trading toolbox, not magic – and treat them accordingly. • Are very diligent about ‘working on the craft’ of trading options and have a genuine interest in, and truly like the continuing learning inherent the craft. • Spend most of their time figuring out what they will do if they are wrong • Trade durations can be 1day to years long but in general are “positions” which are “maintained” (not merely “held”) for roughly 2 to 4 weeks usually. • In summary – options traders tend to think a little differently about things.

  19. Using Options May Help • Options can be used to make both longer term and shorter term “bets” in lieu of purchasing or selling the underlying security (stock or etf for example) for far less capital at risk of loss. • The knowledgeable use of options offers diversification within your portfolio that you haven’t previously considered. • diversification across probability spectrums • diversification into time passing equaling profitability • market going nowhere equaling profitability • hedging (insuring against loss) one investment or your entire portfolio for reasonable sums to reflect your currently held beliefs and/or fears • using options within your existing longer term portfolio holdings to generate a dividend (or additional “on top of” dividends) while simultaneously providing some downside “insurance” against loss • using a pricing element unique to options known as implied volatility as an additional diversification allocation for part of your portfolio

  20. Most Fundamental Aspect of Option Behavior is that ofTIME DECAY • One thing we know for sure is that time does pass • Options decay in value over time • Some Options decay in value faster than others – which ones?

  21. Knowledgeable options traders sell time, and use it as their edge

  22. options traders sell time & trade with probability in their favor.

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