The Art of Addressing

Address your goals.

Daily.

Make that part of your basics.

It’s easy to sit back, when a few fundamentals are sorted.

There could be bread and butter on the table.

Family could be in their groove.

Are you quite there yet?

No.

Don’t rest on the laurels of the few fundamentals you might have achieved.

An RJ might light a cigar and open a bottle of single in the evening, but only after his goals have been addressed for the day.

A WB might invite his poker buddies and kick off a game after a round of hamburgers… after his goals for the day have been addressed.

When does BG nip into his chocolates? At bedtime. After you know what. After addressing his goals for the day.

Yeah.

Now it’s your turn.

Have a few simple goals.

What?

Don’t have such goals?

Well, make them.

Then address them.

Break down your goals to their prime number form. For example :

– Research a stock

– Trade some forex.

– Write a piece.

– Learn something new.

See. As simple as possible.

It’s convenient to address simplicity.

Laziness and complacency are enemies, though.

Fight them.

🙂

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Options Strategy – Entry, Stop and Exit

What are we doing with options anyways?

We are trying to play a market without needing to be with the market the whole time. Also, we are defining our risk quite exactly. The option premium is the money that’s at risk. You don’t have to lose all of it if the trade goes against you. You can bail out anytime and save whatever option premium is left. The option premium is the total you can lose in the trade. With that, you’ve done one great thing. You’ve installed a stop which will stay with you during the entire trade. Is that possible in any other segment in India? Nope. If my info is correct, stops have to be installed everywhere on a day to day basis. Not so the case with options. You have your stop with you, always. 

That allows you to do other stuff. You can have an alternate profession, and still play options. 

You don’t need to be afraid of the time element in options. You can trade them in a manner where the time element is rendered useless. I’ll tell you how.

Though you try and go with the overall long-term trend, you try and pick up an option during a retracement. That’s when you’ll get it cheap. 

The idea is to buy cheap and sell expensive, right?

Secondly, give yourself breathing space. If the current month is well under way, pick up the corresponding option for the next series month. Give the trade 4-5 weeks to pan out in your favour.

A lot can happen over 4-5 weeks. 

Thirdly, you’re trying to pick up out-of-the-money options, which seem to have gotten out-of-the-money as an aberration. These will be even cheaper. Like what happened to Tata Motors the other day. For no apparent reason, the stock drifted towards what was formerly seeming to be an unlikely support to be hit, around the Rs. 430 level. On the previous day, it was nowhere near this level, and didn’t look like reaching it in a hurry at all. An event in the US occurred, and Asia opened down, with the scrip in question falling to the support and bouncing off. At the market price of Rs. 430 – Rs. 435, if you’d have picked up the out-of-the-money option of Tata Motors for the strike price of Rs. 450, which was going very cheap, that would have resulted in a good trade. 

Basically you are looking for such predefined setups – buying off a support / selling off a resistance, buying / selling at a defined retracement level, buying / selling upon piercing of a bar etc. etc. etc. 

Let’s say you’ve identified a setup. 

You’ve seen buying pressure, or selling pressure. Chances of repetition are high, you feel. You try and enter into the option at a time when the buying or selling pressure is off, and everyone thinks that this buying or selling pressure is not coming back. 

In this manner you’ll get some cheap entries. 

Now you have to wait, to see if your analysis is correct. If not, you’ll probably lose most or all of your option premium. Don’t be afraid of loss. It’s a chance you have to take. Without taking the risk, there is no chance of reward. You have to put yourself in line for the reward by going out there and entering into the option.

It’s possible that the scenario you imagined actually plays out. Let it play out even more.

You can exit in two ways. You could trail the market with a manual stop. This way you’ll be in the trade to perhaps see another day of even more profits. The downside is, that during lulls in the day, your stop could well be hit. The second exit possibility is to calculate an unusually high price, which is slightly unlikely to be reached. You feed in the limit order at this price. If this price is reached, you’re out after having made good money. Now, the scrip can go down for all you care. The downside is that the scrip can go deeper in your trade direction after you’ve exited, and that’s a little painful. The reason this latter scenario is often used is that the time-element keeps getting scraped off the selling price for the option as the series month approaches its end, and your exit on that very day at an unusually high price is more lucrative than you might think. You see, buying or selling pressure in your direction might or might not make itself felt again in the current month. If not, you’ve lost a prime opportunity to cash out at a high. Is it the high? You’ll never know. Therefore, you’ll need to try both exit scenarios and see which suits you more. Sooner or later, you’ll get a feel for both exit scenarios, and will be able to implement either, depending upon the situation. 

That’s it for today. 

Heavy?

It’s not. 

Options are easy. 

Playing options is like playing poker. it’s fun!

🙂

Betting Your Monsters and Checking Ace-High

Blah, blah, blah, I know, poker terminology yet again…

Can’t help it, people, it’s just so valid…

When you’re holding a monster hand, you bet out on the next street to build up the pot. Similarly, when a trade starts to run, you’re looking to load up some more on the scrip at the appropriate point.

When you’re holding air, or a mere bluff-catching hand like ace-high, you check it down through the river. Likewise, if the scrip you’ve just bought into stagnates, or moves a bit down, you do not double up on your trade. Instead, you just wait for your stop to be hit, or if before that your time-stop has run out, you square-off the trade.

An aggressive-passive style?

Who cares?

Recipe for winning in the long run?

Yes.

Right, then we’re taking it.

Two out of ten trades may start to run big. It’s taken you time, money and effort to identify those two. You are in the trade. You can feel the adrenaline pumping. Now’s not the time to sit passively. Spade-work’s all done. Right, put some more money on the winning scrip. Point is, when?

Additional points of entry are tricky.

I prefer a little margin of safety here. I like to double up at a point where there’s been some correction, and possibly when a Fibonacci level has been hit. After that, I want to see the scrip going up back through the level, and I’d like to see volume go up simultaneously. That’s my point of second entry.

You can be more aggressive, no one’s stopping you.

You can even choose to enter the second time above some kind of a previous high or above the breaking of a resistance with volume.

Risky?

Yes.

You do, however, stand a good chance of catching a big move in a very short time.

You see, at this particular point, where you’re choosing to enter, the scrip is pretty hot. People are plunging in. There is no resistance from above. Upward movement is smooth.

Downside is, that those who’ve been sitting on notional profits might start to book these anytime. When that happens, the scrip might plunge well below your high entry and hit your stop. That’s a risk you have to take, since you have decided to enter above a high.

No risk, no gain.

At my more conservative second entry point, the scrip is not as hot. It is meeting with overhead resistance from recent entrants who entered high to then find the scrip correcting, and who are now happy to exit at their entry points as the scrip retraces its upward move. So, I will have to wait longer for a possible second run of the scrip to develop, and this might or might not develop. That’s a chance I have to take. That’s the price of being conservative during second entry. I’m comfortable.

Staying in your comfort-zone at all times adds a lot of value to the rest of your life, even after you shut down your computer. One does carry over one’s emotions, and it’s best if these are under control when you reach home. By trading in your comfort-zone at all times, you make sure that you come home in an emotionally balanced state.

If you can take the second entry above a high or above a resistance while still remaining in your comfort-zone, by all means, please do so. It’s an exciting play, capable of yielding large and quick rewards. I’ve tried it at times, but cannot get a grip on the excitement levels. Thus, I normally choose the more conservative play mentioned above. It’s just a personal choice.

Similarly, I’m very comfortable checking my ace-high trades down through the river. If I’m in a trade and it’s not running, I don’t jump about trying to pull stuff out of a hat in an effort to make the trade run.

If it’s not running, it’s not running. Feed in a trigger stop and shut the computer.

Once you are alerted that the stop’s been hit, look for a new trade.

Keep it simple. That’s another recipe for winning.

Moving on to a Higher Table

You’ve started to rake in regular profits on your poker table, or, if you will, on your regular trade-size.

Common-sense now tells you, that you need to scale it up a bit. After all, you’d still be risking the same percentage of your stack-size per trade. Simultaneously, if your win-ratio remains constant, you’d be allowing your stack to grow at a faster pace.

You move on to a higher table.

Welcome to the concept of position-sizing.

Those who position-size can evolve into huge winners in minimum time. Even though the idea of position-sizing is so central to trading, it is still one of the most under-discussed of topics. We need to thank Dr. Van Tharp for teaching this concept properly.

Think about it. When you win, your principal increases. On the next trade, you then put the same principal percentage at risk like you’ve always done. Because your new principal was more, it allowed you to buy more. Thus, you put yourself on the line to win more.

What’s essential here is also to down-size your position when you are losing. Taken a few bad beats in a row? Move down to a lower table for a bit, man. Allow your stack to recuperate at this lower level and then some before moving back higher. With that, when you’re losing, you start to risk less. Crucial point.

Of the different methods available to you to position-size, here, we speak about increasing trade-size when a new trade starts.

The advantage you enjoy when you’re doing pure equity is that on each new trade, your position-size can pinpointedly be adjusted according to your stack-size. Scale-up, scale down, trade upon trade, as the situation demands. Beautiful.

Why does this work out so beautifully for you?

You see, your system gives you an edge. You are opening your positions on high-percentage winners only. Period. Simultaneously, you are cutting your losses at your pre-defined maximum. You are also allowing your winners to win more. And, you are taking your stops. Even if your system then gives you a 55:45 edge over Mrs. Market, you’re doing great. Over a large sample-size (many, many trades, or for that matter many, many poker hands), your stack will increase with a high level of probability. As it goes on increasing, you keep turning on the heat by increasing your position-size further and further.

What happens then? What do you see?

Something beautiful happens.

Your trading principal (what we’ve been calling stack-size all the time) starts to increase exponentially. Have you seen the progress of an exponential function as one travels from zero to the right on the x-axis (the x-axis here would stand for sample-size or the number of trades taken)? If not, check it out on the net.

A good system should give you a 60:40 market-edge. In the Zone, you’d probably trade at 70:30 or beyond. That’s 70 winning trades out of every 100 taken, and 30 losing ones. Imagine what that does to your trading principal over 1000 trades, if you adhere to position-sizing, let your winners ride and take your stop-losses.

The numbers will boggle your mind.

Go for it.

Going All-in Against Mrs. Market

Yeah, yeah, I’ve been there.

And it backfired.

Luckily, my stack-size in those days was small. That’s the good part. The shocking bit was, that back then, I had defined my stack-size as my networth. Biggest mistake I’ve made till date in my market-career, and I was very lucky to escape relatively unhurt.

Wait a minute, why is all this poker terminology being used here, to describe action in the world of applied finance?

Well, poker and market action have so much in common. Specifically, No-Limit Hold-’em is deeply related to Mrs. Market. We’re talking about the cash-game, not tournament poker. It’s as if Hold-’em is telling Mrs. Market (with due respect to Madonna):

i’ve got the moves baby
u got the motion
if we got together
we’d be causing a commotion

A no-limit hold-’em hand is like one trade. Playing 20-50 hands a day is excellent market practice. You’ve got thousands of games available to you online, round the clock, and most of these are with play money. Even though the “line” is missing here because of no money on the line, this is a no-cost avenue for trade practice, and it’s entertaining to boot.

Back to stack-size? What is stack-size, exactly?

Well, your stack size is the sum of all your chips on the table. You play the game with your stack, and on the basis of your stack-size. The first thing you need to do before there’s any market action is to define your stack-size.

A healthy stack-size is one that allows you to play your game in a tension-free manner. My definition, you ask? Well, I’d start the game with a stack-size that’s no more than 5% of my networth. Segregate this amount in an account which is separate from the rest of your networth, and trade from this segregated account. That’s the wiser version of me speaking. Don’t be like the stupid version of yours truly by defining your entire networth as your stack-size.

In this 5% scenario, you have 20 opportunities to reload. It’s not going to come to that, because even if a couple of your all-in bets go bust, you will eventually catch some big market moves if your technical research is sound and if you move all-in when chances of winning are high.

Wait patiently for a good hand. Then move. One doesn’t just move all-in upon seeing one’s hole-cards. If these are strong, like pocket aces, or picture pocket pairs, one bets out a decent amount to build up the pot. Similarly, if a promising trade appears, and the underlying scrip breaks past a crucial resistance, pick up a decent portion of the scrip. Next, wait for the flop (further market action) to give you more information. Have you made a set on the flop? Right, then bet more, another decent amount, but not enough to commit you fully to the pot. Then comes the turn. The scrip continues to move in your direction. You’ve made quads, and you’re holding the nuts. Now you can commit yourself fully to the pot and move all-in. Or, you can do so on the river, checking on the turn to disguise your hand and to allow others to catch up with your nuts somewhat, so that they are able to fire some more bets into the pot on the river. Your quads win you a big pot. You fired all-in when the scrip had shown its true colours, when winning percentages were high. You exhibited patience before pot-commitment. You allowed others to fire up the pot (scrip) further, and you deservedly caught a big market move. Just get the exit right, i.e. somewhere around the peak, and you’re looking at an ideal trade strategy already, from entry to trade management to exit.

Fold your weak hands. If something’s not working out, give it up cheaply. Ten small losses against a mega-win is enough to cover you and then some.

Often, a promising trade just doesn’t take off after you enter. The underlying might even start to move below your entry price after having been up substantially. You had great hole cards, but didn’t catch a piece of the flop, and now there are two over-cards staring at you from the flop. Give up your trade. Muck your hand.

At other times, you move all-in and the underlying scrip tanks big against you in a matter of hours. Before you can let your trade go, you’re already down big. You’ve suffered a bad beat, where the percentages to win were in your favour, but the turn-out of events still caused the trade to go against you. Happens. That’s poker.

Welcome to the world of trading. Pick yourself up. Dig out another stack from your networth. Don’t allow the bad beat to affect your future trades. If you are thinking about your bad beat, leave the table till you are fresh and can focus on the current trade at hand.

And then, give the current trade at hand the best you’ve got.