Now What?
Friday, June 8, 2007 at 10:08AM
I am very impressed that everyone kept their composure this week. We've witnessed a lot this past week and if you look around, you'll notice...you made it!
If you are following the core principles that I try to teach you'll notice that you are doing just fine. Sure money might have been lost yesterday, but I got 100 e-mails from people yesterday that claimed it either "wasn't bad" or "I made money!"
The biggest thing on everyone's mind is "What do I do now?" Is this a big enough event to change strategy, do I ditch positions to start others or should I close up shop all together? I will tell you that me or my strategies don't change and I don't feel you or your strategies should change either. "I think you should stay the same wonderful person you are today."
However, I have one exception. I mentioned this on the Marketcast last night, but take a look at the VIX.
If you have followed my blog for longer than 6 months, you'll notice I only bring up the VIX under rare circumstances. This is one of them. With volatility being a measurement of risk, you can see that risk is priced a lot higher than it has been in months. The question is how does this effect an option addict?
It makes buying options less desirable, and selling options more desirable. The only time I ever get involved in options selling is at these times when it actually makes sense. When I am getting paid excess premium to do so. However, I don't want anyone to think I am selling out here. I still analyze every chart and every trade the same way. My preferred strategy stays the same, however during these times inflated premiums are going to have a negative impact on the risk/reward ratio for an option buyer. I do think it makes sense to diversify a little by perhaps selling a few options to offset having a HUGE delta position in a market that is likely to be directionless for a little while.
Final thoughts... can we say for sure that the market is changing? There are a few warning signs that have been discussed, but you can never be 100% sure of what will happen tomorrow. As the professionals always say, they are less interested in predicting, but more interested in reacting. I mentioned that emotion is likely to surface here with the market gyrations, so make sure you scale back your position size to protect yourself. I scaled out of a few winners yesterday to lock in some gains, and I feel fine about it. I love to add to winners and scale out of losers. I don't want to have a lot on the table when I can sense the environment is changing.
Continue to look for the best trends, the best breakouts, and the best trades available. Don't feel compelled to trade, but keep your eye out for the next compelling trade. Trade small, and add if you are right. Shorten your time horizons perhaps? Trading trends might be tough here going forward, so perhaps shorten your sights to the smaller movements within the trends.
For the trades you have going, keep them! The chart is the chart, and if that chart doesn't provide your signal, don't exit. Protect your profits with stops and be extremely sensitive to your environment. Make sure you are diversified and KEEP A POSITIVE ATTITUDE. As soon as you start to feel sorry for yourself, doubt your abilities, or start to second guess your goals and aspirations, you will self destruct.
This is just another hurdle in a life long race. Keep your head up.
If you are following the core principles that I try to teach you'll notice that you are doing just fine. Sure money might have been lost yesterday, but I got 100 e-mails from people yesterday that claimed it either "wasn't bad" or "I made money!"
The biggest thing on everyone's mind is "What do I do now?" Is this a big enough event to change strategy, do I ditch positions to start others or should I close up shop all together? I will tell you that me or my strategies don't change and I don't feel you or your strategies should change either. "I think you should stay the same wonderful person you are today."
However, I have one exception. I mentioned this on the Marketcast last night, but take a look at the VIX.
If you have followed my blog for longer than 6 months, you'll notice I only bring up the VIX under rare circumstances. This is one of them. With volatility being a measurement of risk, you can see that risk is priced a lot higher than it has been in months. The question is how does this effect an option addict?
It makes buying options less desirable, and selling options more desirable. The only time I ever get involved in options selling is at these times when it actually makes sense. When I am getting paid excess premium to do so. However, I don't want anyone to think I am selling out here. I still analyze every chart and every trade the same way. My preferred strategy stays the same, however during these times inflated premiums are going to have a negative impact on the risk/reward ratio for an option buyer. I do think it makes sense to diversify a little by perhaps selling a few options to offset having a HUGE delta position in a market that is likely to be directionless for a little while.
Final thoughts... can we say for sure that the market is changing? There are a few warning signs that have been discussed, but you can never be 100% sure of what will happen tomorrow. As the professionals always say, they are less interested in predicting, but more interested in reacting. I mentioned that emotion is likely to surface here with the market gyrations, so make sure you scale back your position size to protect yourself. I scaled out of a few winners yesterday to lock in some gains, and I feel fine about it. I love to add to winners and scale out of losers. I don't want to have a lot on the table when I can sense the environment is changing.
Continue to look for the best trends, the best breakouts, and the best trades available. Don't feel compelled to trade, but keep your eye out for the next compelling trade. Trade small, and add if you are right. Shorten your time horizons perhaps? Trading trends might be tough here going forward, so perhaps shorten your sights to the smaller movements within the trends.
For the trades you have going, keep them! The chart is the chart, and if that chart doesn't provide your signal, don't exit. Protect your profits with stops and be extremely sensitive to your environment. Make sure you are diversified and KEEP A POSITIVE ATTITUDE. As soon as you start to feel sorry for yourself, doubt your abilities, or start to second guess your goals and aspirations, you will self destruct.
This is just another hurdle in a life long race. Keep your head up.
Reader Comments (13)
Always great advice and I appreciate the time you take to pour it out here! THANKS!
wow
brendan
What is that all about??
do you roll in it today b/c i didnt yet...either way...go X
brendan
I smell so bad, my X is leaving me and running, big time.. :)
Sarah
Thanks, MikeH
What X did today explained completely why you don't get out of a stock except for what happens on its own chart. It was hard to hold on and see the profit in this go but I held because it was still in its trend despite the pullback and then WOW. You know if it weren't for the last week of posting and learning form almost everyone of the posts here I would not have known what to do. Thank you all of you. This is like having the study group/ morning report in Med school where you do so much of the practical application you only read about in the books. Again a heartfelt thanks to each and every one of you guys. You are awesome.
The funny part is it is not just from X that I learned. Although It had the most positive effect on my account, the others that I was able to exit for a loss also taught me that it is really the idea of being able to let the losses go based on the chart and not emotion that will eventually end up having an overall positive effect on the account and my ability as a trader.
XLU or UTH for the utilities
brendan