Saturday, September 28, 2013

Meta-Trader - Forex Shutdown

Welcome back, Meta-Traders.

The time has come to shut down the bulk of my Automated Forex Trading operations.  As you know this blog was created to chronicle my experience with Automated Forex trading through the Meta-Trader platform.  After nearly 4 years, 263 blog posts, and countless hours spent coding, testing and analyzing Automated Forex Trading systems, its finally time to throw in the towel.

I suppose this post is a long time coming, but I wasn't quite ready to admit defeat.  After all, I have wiped out in Forex before, once with FXCM in 2007, then with Zulutrade in 2009 as chronicled on my prior blog ZuluTrade News and Views.  So this effort would be my third failed attempt to trade Forex and (as the saying goes) 3 strikes and you are out!

Early on in my journey, I met Daniel Fernandez from through is blog Mechanical Forex. Immediately I was intrigued by the science, the hard work and the degree of rigor Daniel put into his work. And it seemed entirely logical and responsible to believe that a trading strategy that worked with a good degree of consistency for the past 10 years would continue to work into the future.  After all, the proof was in the back-tester report, how can you argue with 10+ years of back test history?

So I went forward with a full degree of energy and enthusiasm and even created a 5-year plan for my Automated Trading career as found in my post Forex Trading - My 5 year plan.

So how did it go?

After a year a planning and preparation in 2010, I really went full guns in January of 2011.  Immediately things went well and I came out of the gate strong in January 2011.  In my Atinalla No1 account,  I gained a stunning 18% for the month of January and ended 2011 with a solid gain of about 16.78% for the year as reported in my post Meta-Trader - 2011 Wrap-up.

2012 was a rough year with my results chronicled in my post Forex Trading - 2012 Wrap-up.  As per my plan, I doubled my investment from 10K to 20K at the start of 2012, and ended up losing 26% for the year. This was a setback and I ended up closing 2 of my 6 accounts with about -$2000 of realized losses.  I went forward into 2013 with the 4 accounts and about 11K under management you see in the graph above.

2013 has been another rough year so far and I am down another 20% taking my total assets under management to just under $9000.  Most depressing is that my Atinalla No 1 account, one which still had a solid profit from the start ended up giving back its profits and grinding down to just about break even from the start as shown in the above graph.

Strictly financially speaking, it wasn't that much of a disaster since I kept my accounts to a small percentage of my total assets.  All told, I lost about -$5600 or about 25% of the total of 20K which I had invested at one time.  That includes the money I made in 2011 minus losses in 2012 and year-to-date losses in 2013.

To be completely fair to Daniel, he never promised riches in the area of Automated Trading.  The supposition of profit was something that I brought to the table.  He instead promised an education and understanding in the area of Automated Trading.

But Daniel himself seems to changed his opinion of Automated Trading in his recent post Long term profitable back-testing: No guarantee of future profitability. This post seems antithetical to the very point of Asirikuy.  Automated Forex Trading may be fun, but if it doesn't make any money, we can think of better things to do with our free time.

As for the fundamental reasons the systems failed, evidence seems to show period of bad performance for automated trading as shown by the Barclays Systematic Traders Index.  Perhaps is because of the distortions created by the extraordinary period of monetary easing being done by the US Central Bank as well as other Central banks around the globe.

As for Asirikuy I have canceled by membership.  I don't have any I'll feeling toward Daniel and on the contrary, I hold in him high regard and consider him to be a friend.  But as for trading, he doesn't seem to have found profitability and all traders struggle on the path to profitability.  Its as much a matter of finding out what doesn't work as what does. And (for me anyway) Automated Forex Trading hasn't only lost me money.

My plan going forward is to shut down the Atipaq Full Portfolio and Atinalla No 3 accounts and fund a new account with the Think or Swim platform.  More to come on that and enjoy your weekend.

Sunday, September 22, 2013

Active-Trader - In Fed We Trust - Part 2

Welcome back Active Traders and Wealth Builders.

Back in my prior post In Fed We Trust , the US Federal Reserve had just announced its plan to create billions in reserves (out of thin air of course) to buy financial assets in an attempt to stimulate the economy.  That was back in November of 2010.  Now fast forward to nearly 3 years later and the Fed has added many billions to their balance sheet and US Stocks have added 40% to their value since then!

Expectations were high this past Wednesday that the Fed would "taper" or finally ease back on its ultra-aggressive monetary stimulus plan.  Bernanke himself signaled such a move earlier this year and the market widely expect a taper of between 10 and 15 billion per month dropping its purchase of financial assets to a mere 65-70 Billion per month.

So all eyes were on CNBC this past Wednesday Sept 18, 2013 at 2PM.  We all expected a generational low in easy money policy and a signal that the economy had improved enough to stand on its own and without further extraordinary monetary stimulus.   And what did we get?  No Taper, or continued easy money policy!

The markets loved it of course and immediately took off like a shot sending stocks and my net worth up to new all time highs once again for the 3rd separate time this year.

As for individual stocks,  I added shares to my existing position of call contracts in social media company Facebook (FB) which is now my largest single position.  I also started a new position in social media company Yelp (YELP) and I'm also looking to start a new position in real-estate media company Zillow (Z).  Aside from that, I am trying to keep my power dry since we still are in a period of negative seasonality.

As for my TradeStation account, I continue to struggle.  I'm still up for the month, but lost some equity this past week and still have not eclipsed my equity high achieved 3 weeks back.  In last week's post My Trading Plan I laid out my ground rules for entering and exiting positions.  So let's briefly go through my trades for the week and see if I followed my plan.

CMG- 9/21/2013 - 905/910 Put Credit Spread

Put on this trade for a credit of 1.90 back on 9/9 and closed it out for a debit of 0.40.  So took a profit of $150 on this trade but left $40 on the table and did not follow my trading plan.

BIDU - 9/21/2013 - 41/43 Put Credit Spread

Put this trade on for a credit of 0.70 on 9/17 and it expired worthless so I collected the entire $70 with no closing transaction.  Plan was followed, good job Chris.

MW - 9/21/2013 - 35/36 Put Credit Spread

This was part of an Iron Condor I put on for an earnings play back on 9/11 for a credit of 0.25.  I closed it out for a debit of 0.99 and therefore lost about 0.74 times 2 or about $140 on this trade.  This only positive is that I took nearly a complete profit on the opposite leg (40/41 CCS) which I sold for 0.30 and bought back for a debit of 0.04, total profit of $56.  I followed my plan on the PCS since it was clearly in the money, but did not follow my plan on the CCS which I should have let expire worthless since it was way out of the money.

TSLA - 9/21/2013 - 165/170 Call Credit Spread

I put on this trade on last Friday 9/13 for a credit of 1.80.  This was a bearish position and all the stock had to do was close the week below 165 for me to take the entire credit.  Unfortunately, the stock shot out above the short strike at 170 on an analyst upgrade.  I closed it out for a debit of 4.58 (somewhat short of the max loss of $500) on Thursday

I followed my plan on the exit, cutting my loss once it was obviously a loser.  But I did not follow the plan on the entry and I look the trade because the chart was in a bearish distribution pattern.  However there was not a clear setup on the daily chart.

NFLX - 9/21/2013 - 300/305 Put Credit Spread

Put this trade on for a credit of 2.10 back on 9/13.  This trade gave me a lot of grief and at one point went completely against me and in the money trading down to as low as $298.  I stuck with it through that process but closed it out on Thursday 9/19 for a debit of $1.89 which was a small profit.

My thinking at the time was that I was in the hole for so long on this trade, that I was relieved to get out of it at a slight profit.  However I did not follow my plan, and had I done so, I would have collected the entire $210 since the stock closed the week at almost $314, nowhere close to my short strike.

CBOE - 9/21/2013 - 45/46 Put Credit Spread

Put this trade on for a credit of 0.40 back on 9/9. For a good part of the time, the stock was above the short strike and looked like it would go out at max profit.  But I could not realize the full profit until expiration due to time decay and instead the stock came back against me.  I close this out on on 9/19 for a credit of 0.50 so took a 0.10 loss times 2 ($20).  Plan more or less followed on this trade.

FB - 9/21/2013 - 44/44.5 Put Credit Spread

Put this trade on for a credit of 0.25 back on 9/14 x 4 (4 contracts).  Since it was a 50 cent spread, it would be either a loss of $100 or a gain of $100, a nice easy 1 to 1 risk to reward ratio.  I closed this trade for a debit of 0.05 so I took an $20 profit per contract for a total gain of $80.  However, I did not follow my plan since the trade was no where close to being in the money.

PCLN - 9/21/2013 - 995/1000 Put Credit Spread

Put this trade on for a credit of 1.80 in part as a revenge trade on 9/19 for having close the NFLX trade to early.  My thinking was that if the stock closed above $1000, I would keep the entire $180 credit as profit. I closed the trade at about mid-day on Friday for a debit of 0.8 so I took about a $100 profit on this trade. So I did not follow my plan on this trade.

AAPL - 9/21/2013 - 460/465 Put Credit Spread

Put on this trade on 9/11/2013 for a credit of 1.80.  This trade took me on a wild ride trading down as low as $447 during the week which was completely in the money against me.  But I held on and closed it out on Friday for a debit of 0.03 with just minutes before expiration.  I mostly followed my plan on this trade, but left about 5 bucks on the table due to my own nervousness.

So I added it all up, and had I followed my plan, would have made an extra $331 which was the total amount I left on the table due to closing winning trades out at a small debit rather than letting them expire worthless.

Lessons Learned

1) Wait until Tuesday to put on Weekly Credit spreads.  Much of anguish I experienced this past week could have been avoided had I waited for better entry points.  Plus less time until expiration means faster time decay and left time to sweat out positions going against me.

2) Don't take a trade unless you get a solid signal on the daily chart.  I could have avoided badly timed entries in AAPL and TSLA instead of simply trading because the stock is "close to support" or "in a distribution pattern".

3) Give your credit spreads a healthy chance to expire worthless before closing them out at a profit.

Regarding this last one, the psychology of spread trading makes this difficult because you have to hold on for a smaller profit while leaving the table a chance for a much larger loss.  Consider PCLN - if you could take a $100 profit and avoid the chance of a $320 loss would you do so?  My risk-averse personality says reduce risk and take profits.  But doing so is the opposite of what you need to do to maximize profits.

Overall, I think I am on the right track but I still have a lot of work do to before I achieve consistent profitability.  I also have to work on my ability to "take heat" as positions go against me and still remain objective.

Enjoy your weekend and have a great trading week ahead.

Sunday, September 15, 2013

Active-Trader - My Trading Plan

Welcome back Active Traders and Wealth Builders.

After my breakout week 2 weeks back, I didn't do quite as well this past week.  In an attempt to analyze why, it occurred to me that I can't tell if I am executing according to plan, because I don't have one!  Specifically, I don't have a written trade plan which has been fully thought out and committed to paper.

Before I get to that, let me digress briefly on what trading is not.  Due to my training as an engineer, I used to think that trading could be automated.  Trading was a puzzle to be solved, and technology could help me solve that puzzle, and when I was done, all I would have to do is sit back and put up my feet and watch the money roll in.  Right?  Wrong!

Sure trading is being automated by high-speed algorithmic trading on Wall Street.  But I can't compete with those guys and there's no point in trying due to their built-in advantages.  So instead let's define what successful trading is for me:

Trading is a set of habits and behaviors, developed over time, which allow you to extract profits from the markets.

And good behaviors, when repeated faithfully over time, tend to become automatic.   So my job going forward is to develop those skills and work on my inner game.  And this trading plan should be a good step forward so let's get started.

1) Why am I still trading?

I trade mostly because I enjoy it, but also because of the chance to earn extra cash and improve the quality of my life.  Eventually, I will leave my full-time job and I plan to rely on trading to create and income to enjoy what life has to offer without having to worry about the money aspects.

2) When do I trade?

I trade between 9:30 and 10 AM and between 3 and 4PM on market days.  These times are when the best opportunities are found.  I also look at the market between those hours also and fortunately my full time job allows me to do so.

3) What do I trade?

I trade Weekly and Monthly options on stocks.  Fast moving, high priced stocks provide the best opportunity since they move around a lot and can easily move between strike prices in a single day.

My preferred strategy are options spreads where if I am bullish, I will sell a put credit spread and if I am bearish, will sell a call credit spread.

I will also occasionally buy directional puts and calls but limit losses to my risk limits described below.

I will also occasionally scalp stock and options for short, intra-day movements with very tight loss control.

4) What is my trading methodology

a)  Determine the overall market context.  Do this by first looking at the Daily, Weekly and Monthly charts of the major indices.   This will provide a backdrop for expectations for price movement

b) Determine the daily market context.  Are the Futures heading higher or lower in the Pre-Market?  Are their any important news announcements for today and when are they expected?  Are their any other calendar effects to be considered?  For example, Fed Day, End of Month, Triple Witching etc.

c) Determine the context for the tradable.  Review the charts and determine whether the tradable is expected to move higher or lower.  Extra consideration should be given to stocks with movements expected which are in confluence with the general market.

5) What are my entry signals?

I will focus primarily on the Daily charts for signals.  Entry will be daily patterns such as Key Reversal, Elephant Bars, Bounce off Support or Resistance, Close above the low of the High Bar, etc.  This mean don't just take a trade because it makes a new high or I think price is close to support or resistance.  Have an opinion on support or resistance, but don't take action until confirmed by the Daily Price action

6) What are my Risk/Reward parameters?

I will take spread trades when the credit is approximately 30% or greater the width of the spread.  Here are these values for various spread widths:

$5 - $1.80 max gain $320 max loss
$2.5 - $85 max gain, $165 max loss
$0.5 - $25 max gain, $25 max loss

Generally the higher the credit received the better, minus any amount the spread is already in the money.

7) When will I cut my losses?

I will cut losses when it become abundantly clear that my short options will expire in the money.  I will wait until the day of expiration for this to happen to give the tradable the greatest chance of recovery.  I will attempt to close the trade before noon of the day of expiry for something less than the maximum loss.  If the tradable is close to the short strike give it time to recover.

8) When will I take profits?

For scalps, I will only take the trade if there is a high probability of price movement, and I will move the stop up immediately when the trade is in the money.

For long options, I will take profits when the price of the underlying reaches its target price.

For spreads, I will take profits once the spread reaches 80% of its max profit or if the short strike is in danger of going in the money.   Generally, I will try to hang on until expiration and let each trade go to maximum profit   This sometimes leads to a situation where a profit turns into a loss (AAPL this week) but avoids taking profits too early which can result in under-performance.

9) How much will I risk on a trade

For this year, I will stick with a Max loss of about 1% of my account on any given trade.  Since my account is about 33K, that means that I will risk a maximum of about $300 on a given trade which (conveniently) is very close the Max Loss on a $5 spread trade.  As I gain additional confidence, I will increase my risk profile in double increments (2%, 4%) until I reach a maximum of 10% for trades in which I have a high degree of confidence.

10) How many trades will I put once at once?

I will keep the number of trades to a manageable level, typically in the neighborhood of 5 trades, with an upper limit of about 7 or 8 open trades for any given expiration.   Given a rule of thumb of 5 trades, that means my max loss for any given option expiration would be about 5% of the account, and maximum gain would be one third of that or about 1.8% for that week.

Clearly, I have room to increase my trades size since I'm only using about 10% of the buying power in the account.  However, as I stated previously, my primary goal in 2013 is to end the year with a solid profit and build this account.  Longer term, if I can build this 30K account up to 100K, I will be in a solid position to use that as my trading stake for full-time trading.   I am clearly taking the slow road to financial success, but slow and steady wins the race.

That's a good start for my trading plan.  Think about your plan in your time off this weekend and have a great week ahead.

Saturday, September 7, 2013

Active-Trader - Amer Weekly 3d 0h 6m left

Welcome back Active Traders and Wealth Builders.

It was a breakthrough week for my trading career with my TradeStation account rocketing out to a new all-time equity high.  Overall the year to date performance is not that impressive at 6%, but I tacked on about 3% for the week which is pretty solid.

Its ironic because in last week's post The Mind of the Trader, I was bemoaning my lack of performance in this account.  Based on that I should blog about my limitations more often!

So along those lines, I still have some heavy lifting to do regarding my trading.  Specifically, I am not position sizing properly and taking profits too soon.  And a trade this week in YELP was a perfect case in point as follows.  John Carter was back from his European vacation this week and live and in person in the Simpler Options Trading room on Wednesday for the market close.  He saw a beautiful setup in YELP with the stock close to $56 per share and he put a short term target on at about $62.5 per share which was a Fibonacci extension of the recent pullback.

His response was typical and almost automatic: 1) Sell the at the money put credit spread, and 2) Buy delta 7 calls.  I followed along and sold 2 of the Sept 21 52.5/55 PCS in my TradeStation account and bought 1 YELP Sept 21 48 calls at about $8 in each of E*Trade accounts.  At the same time, Carter bought 200 of the same contracts in his account!

Based on my account size, 1 contract was 0.0029% of my E*Trade accounts or about 2 tenths of 1%. Based on JC's account size, his trade was about 10% of his account size which is about double the normal 5-6% of his account that he risks on a solid trade setup.

What happened next is even more interesting.  YELP gapped up on Thursday  to just below the prior all-time high at $59.  I sold 2 my contracts for about $10 and make $200 each.  Carter instead held on to his 200 contracts until Friday and sold them at $14.  So based on that trade alone, I made $400 and John Carter made $120,000!  How interesting is that - 2 traders presented with the exact same stock and exact same setup and 2 completely different outcomes!

So let's examine my actions here:

1) Why did I sell the YELP contracts at $10 when the stock was clearly short of its target at $62.50?

2) Why did I buy only 1 contract when (based on the 5% position size guideline) I should have bought about 20 contracts?

The answer is the same in both cases: Fear of losing money.

In the first case, I was afraid of losing my $200 gain and since it was only a $800 investment, a $200 gain is 20% in 1 day which is pretty good, right?

In the second case, I was afraid of losing the $800 since I have the mentality that when you buy an option contract, you have to be able to accept the complete loss of the premium paid.  For me $800 seems like a lot of money, but I can deal with losing $800.  But I can't deal with losing $16,800 which would be the amount at risk had I taken a position of about 5% of the size of my E*Trade Account.

I don't want to be too hard on myself because the future is unknowable.  And I have been trading long enough to know that you always have to be prepared for the worst case scenario.  But its clear that I am trading with the mentality of someone with a $20,000 account when in reality my account is many times larger.  How ironic is it that fear of losing money prevents you from making it?

Another thing I learned this week is the power of selling weekly options.  Consider these facts:

1) 80% of Options Expire worthless and Weekly Options expire every Friday.

2) Based on the pricing patterns, it makes the most sense to wait until Tuesday, then sell weekly option spreads based on where you think the price will not go.

In my case, I sold AAPL 485/490 PCS, the AMZN 285/290 PCS and the NFLX 285/290 PCS.   I all these case, all the stock had to do is close above the short strike (higher of the 2 values) for the trades to go out at max profit.   I took max profit in AAPL, but closed out AMZN and NFLX about 50 cents short of the full credit of 1.80 - more trading based on fear.

3) Once it the trade, all you have to do is wait until Friday expiration.  The passage of time works in your favor as you can see from the graph above.  The option premium decays faster the closer you get to expiration.  Keeping a cool head in these situations is something I need to continue to work on.  In many cases, I close the trade out early in an effort to lock in gains and minimize the chance of loss.

Enjoy your weekend and good trading in the week ahead.

Sunday, September 1, 2013

Active-Trader - The Mind of the Trader

Welcome back Active Traders.

Back on 5/22/2013 John Carter did a video on the Simpler Options web site on Trader Psychology. This video lasted only 16 minutes and 34 seconds, but it spoke to me more than anything else about what limits me as a trader.

Talking about your own limitations in a painful topic and I typically avoid it like the plague, particularly on my own blog where I always want to appear smart, in control and always making money. But that's the only way I'm going to advance, so let's get started.

First a little about me, I'm a 50-something male with a house, wife, mortgage and 2 kids, one of which just went off to college.  I have been working steadily as a technology specialist for large corporations for the past 25 years or so.  I am the epitome of financial responsibility with no debt (except for the mortgage on my house) and a respectable net worth for someone my age.  About 60% of my net worth is retirement assets put away diligently through payroll deductions. So far so good, so what's the problem?

The problem is my trading performance.  Almost regularly I under-perform the SP-500.  This year is a case in point where I am up about 6.6% in my taxable account and about 7.7% in my retirement accounts versus 14% in the SP-500, and that's on the E*Trade side.   On the TradeStation side, I am up about 3%. At my equity high, I was close to 5%, but I seem to be having a very difficult time getting out to a new all-time high.

I am never going to make it as a full-time trader with performance like that, and I'm not even sure that being a full-time trader is what I want.  But I have told myself I'm not going to leave my full-time job until I am making more money trading then through my regular job and I am clearly miles away from achieving that goal.

I have tried plenty of methods to make money, all of which were based on what worked for me in the professional world. Here's a quick recap:
  • Automated Forex Trading on Zulutrade with the results chronicled here.
  • Automated Forex Trading on MT4 with results chronicled on the accounts on the right side pane of this blog.
  • Various methods of system trading none of which produced anything worth risking my hard-earned assets.
Bottom line is none of those methods produced returns worth the effort it takes to carry them out. Algorithmic trading may work in the land of high-speed trading, but it doesn't work for me.

So now that we know what doesn't work, what does?

First regarding my performance, I shouldn't be so hard on myself.  After all, the world of money management is littered with those who can not out-perform the market and since trading isn't even my full-time job, why should I be any different?

Well all expectations changed with the arrival of John F Carter.  I always told myself I couldn't venture out on my own as a trader as long as I have a financial responsibilities of a wife kids mortgage, etc.  But here's a guy who is younger than me, certainly less technical and probably less educated than me but who regularly withdraws about 2% a week from his accounts.  Last week, (when he was on vacation in Italy) he wired out about $35,000 which is about 2% of his low 7-figure trading account.   Based on that, he can earn about 1.75 Million a year and still keep his account hitting new equity highs. In his own words, he treats his trading account like an ATM machine.

Before the arrival of Mr Carter, I would have told myself that this type of performance was not possible,  but he regularly provides undeniable evidence that it is possible. And the video above speaks to what limits me as a trader.  What's even more amazing is that JC seems to go about his life in an almost entirely stress-free manner.  He cares about the money, but it doesn't seem to cloud his thinking in the least.

So let's get right to my limitations:

- I am analytical by nature and I consider life's problems to be a puzzle.  The presence of the puzzle leads me to a state of higher stress and uncertainty,  and resolution of the puzzle leads me to a state of lower stress and uncertainty.

- I am extremely financially conservative and would rather work hard to earn $1 with a 100% degree of certainty than to work 20 minutes for 60% chance of either making $1 versus a 40% chance of  losing $1.

- I am attached to the security that having money in the bank brings, and therefore losing money is more painful to me than making money is pleasurable, particularly if I have to risk money to make money.

As JC put it in the video above, Trader Psychology is the final frontier in trading and you are not going to advance as a trader unless you address the self-limiting beliefs that hold you back.  In my case, I have a strong need to "be right" and for me being right means making money and not losing money.  

I want to end 2013 with a positive balance in my TradeStation account to prove that I am "right" and can make money trading.  Unfortunately, this need is so strong that I am always trading like I am just one trade away from poverty, when in reality, nothing could be further from the truth.  

To make money, you need to stay impartial.  If fear of loss dominates your state of mind, then your mind will manufacture fearful solutions.  Fear of loss clearly dominates my state of mind (at least in my TradeStation account) and as a result, I have a lot of work to do before I can become consistently profitable as a trader.

Sure, having the right indicators and setups and execution is important.  But most important is your state of mind when you are trading. Unless I overcome that, I am never going to advance as a trader.

Enjoy your weekend while I address my inner daemons.