A good day on the hill, slippery day in the markets

With a good day of skiing and a hohum 20pt drop in today’s S&P, here are some thoughts.

As I transition my seasons from trading season to ski season it takes some adjustment. The clothes are certainly different. If you knock on my door in the summer I am probably still in my PJs. The putting on multiple layers, making my way up to the hill and teaching @ 10,000-13,000 ft all day. But during the winter I am up early reviewing my contingencies for the day. I may still have 50 orders on when I am off to the mountain. None of which are very large.
I also turn on my Blackberry service during the winter time to keep track of market events and fills.
During the winter I reduce my total risk on a directional strategy below .5%, and between 1-3% on a non-directional strategies. All and all, pretty small and it keeps me sane while I am away from my office.
Today was pretty darn good.
Long DRR – 43.52
GLD – puts @ 84.05
HRB – Apr/Jan 20c – Added =2 units to go with my 17.5p calendar and 22.5c calendar
PSY – Exited 75% @ 6.08. 18% in 3 days.
KLAC – exited 1 unit of dec/Jan 20p calendar for .93
SAI- bought 1 unit of Feb/Jan 20c
It was a busy day for being present on just 2 of my trades. The ski day was exceptional, and people I skied with were a joy. Being up .6% on the day was a bonus.
I was asked about building Tranches to establish a position and create a basic trading plan. Here was an excerpt of my reply. Now I just have to learn how to pyramid positions when it is going my way. I am very good at doing this with Calendar spreads and short Iron Condors, but I have trouble doing it with directional positions.
Here was my reply:
On directional trades I may risk 2% of my capital on an idea. Let’s say a 100,000 acct. I am willing to risk 2K.
Here are my numbers using the “Max Shares” Formula using 3 tranches, but you can do it with a number of tranches.
i.e 3 tranches: My first tranche I am willing to risk $2000/3= $667/tranche
Start buying @ 10. Profit target @ 16, loss target @ 8. Trade target Jan 25, 2009
Tranche 1: 334 sh @ $10/sh
Stock Price Tgts:
Profit Exit: $16.00
Entry: $10.00
Stop Loss: $8.00
Max Shares: 334
Potential Reward $2,001.00
Reward/Risk 3.00
Cost of entry $3,335.00
Target Date Jan 25 2009
Tranche 2: 667sh @ $9/sh
Stock Price Tgts:
Profit Exit: $16.00
Entry: $9.00
Stop Loss: $8.00
Max Shares: 667
Potential Reward $4,669.00
Reward/Risk 7.00
Cost of entry $6,003.00
Target Date Jan 25 2009
Tranche 3: 1334sh @ $8.50/sh
Stock Price Tgts:
Profit Exit: $16.00
Entry: $8.50
Stop Loss: $8.00
Max Shares: 1,334
Potential Reward $10,005.00
Reward/Risk 15.00
Cost of entry $11,339.00
Target Date Jan 25 2009
So, If we get down to 8.50 I will own 2335 shares. And my risk stays at $2000 if the stock goes down to $8. To use this method, it is VERY IMPORTANT to be strict about using your stops!
The risk in this market is of a gap down below $8. If it does, then the losses get steep. I use the 2% in a bull mkt, but I may use 1% or less in this market. This will offer added protection if there is a gap down open.
Using this method, I may also look for spots to trim my position. If I have 2335 shares on, and we get a rise to a resistance level @ 12, then I may take off a portion of my trade. And trade around a core position. Say…. $1000 of risk. And bank the profits on much of the position. Then if the prices moves back down to a support, I may add on again using the same tranche style set up.
I am doing this with PSY right now. Although, in this bear market I was up 18% in 3 days, I decided to take 75% of my position off. If we get a move back down, I will pick more up in 25% risk increments (approx $500 per tranche)
Before going into a trade, I know I will get out:
1)by a certain date
2) by a certain price (gain and loss)
3) with a certain reward/risk relationship

2 thoughts on “A good day on the hill, slippery day in the markets”

  1. John,
    I’ve been following your blog a little while now and really like your opinions. I was wondering though, if we could possibly help each other drive traffic to our sites? I started a blog as well – http://www.thebullzandbearz.com. If you are interested, could we post links to each other’s blog?
    Hope to hear from you soon! Thanks in advance for any help.

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