Profits Only, Please!!!

I have spent the last 2 years trying to figure this day trading with options thing out. I hit an ultimate low this past Tuesday and felt lost. With options, there are opportunities to make money on upward and downward movement. The 2 biggest problems is timing and expectation. You can be a little off with timing and may still be alright if your anticipation of the movement is correct.

Timing

How long will a move last? When will there be a change in direction? The key is going in direction of strength. There are upward and downward movements all day everyday. The overall market is inclined to move upward, but not every stock is going to move in that direction at the same time. Therefore it is best to look for the right times to buy calls and do not buy puts until there is a fundamental change. Many stocks look like they are changing direction when they are just gearing up to make a stronger move in the same direction. JP Morgan is a perfect example of this over the past month.

There are times of a bear market or recession. During that time, call options will not make sense and you should only buy put options. This occurs when there is a fundamental change in the market such as bank failure, rise in interest rates, decline in earnings, disaster, war...

Expectations

Most of the time, it is not realistic to expect a higher high. Many times a new high is not that much higher than the previous high. Many times a stock is approaching a new high but fails to reach it. I could keep going because there are so many reasons why a stock might change direction. There are times when a new trading range is established and that is when the new high is not only past, but blown away. This happened this year with Disney, Microsoft, Walmart and Home Depot.

How do you get timing and expectation right?

As I have mentioned many times, you do not want to buy options in the morning when the market opens. It is important to wait and recognize what direction the market is going and what direction the stocks you are watching are going. There are really 2 types of movement: Bounce and Breakout.

Bounce

Stocks will bounce off of a resistance level either on the upside to signal a move downward or on the downside to signal a move upward. Some days, mainly on Tuesday's, there is a V movement. It might happen early or midday, but either way is the harder one to trade because it doesn't double test the spot it moved off like a typical day. Sometimes this bounce doesn't happen until late in the day and sets you up for the remainder of the week. Boeing is great for having limited downward movement and making a clear bottom before moving upwards for most of the day.

Breakout

A stock breaks out when it has a sharp movement followed by additional green candles in the same direction. When there is a breakout, it is important to wait for a movement in the opposite direction before trading in the direction the stock wants to go. You should expect 2 more sharp upward movement with minor pullbacks after you enter.

Whether you are trading calls or puts, on stocks or ETFs, it is important to get the direction correct. One stock is independent of others and just because one goes up in a sector, doesn't mean they all will. The opposite is true about downward movement.

Do not get greedy!!!

Take your profits, but don't be alarmed if there is a retest when you see your option prices go back to where you bought it. If you picked the wrong direction, get out quickly to trade another day. Do not trade too many different contracts that make it difficult to keep tabs on and end of losing more money. Practice the KISS method. Keep It Super Simple. It's OK to go small until you are comfortable with your decisions. Small wins are always better than a loss. Huge losses will have you finding another career quickly.

Let Do This!!!

Day Trading Focus

I would like to own the job title of day trader. To be a successful day trader, you must focus on keeping your losses small and letting your winners run. Unfortunately I have failed to accomplish this. I have allowed myself to be impulsive in a number of ways including:

1. Buying options too close to open when the direction is not clear.
2. Buying call options on green candles and puts on red candles. 
3. Buying in the opposite direction with the first inclination of change.
4. Being greedy and expecting to sell where I can get ahead for the day.
5. Expecting continuation of a sharp movement when the there are signs of a reversal.

Buy low and sell high is the goal when investing in the market. It is near impossible to do that when you buy calls at the top of an upward movement just as it is near impossible to be profitable when buying puts at the bottom of red candles. Most large green candles are followed by red candles and vice versa. It is important to wait for confirmation when buying options. When there is a sharp upward movement after a large movement downward, you must wait to make sure it is not done going down. That might have been your opportunity to buy put options expecting more downward movement. The opposite is true when there is a large upward movement that there might be some downward movement on the way up to a higher point which might present an opportunity to buy calls instead of hoping a put option makes sense.

FACT: If is it the right opportunity, you will be given the opportunity to take advantage of it or it was not the right opportunity. Break even is always better than a loss.

This fact is especially important when buying options near open. At open, there is the most uncertainty for the day and therefore the price of options are the highest. Fear of missing out is very high when trading options but patience is what makes profits by finding the right entry point. Without the right entry point, you are setting yourself up for a loss or break even at best.

Change of direction of a stock might happen once a day or not at all. If a stock opens low, it most likely will not go lower without a test higher. And if a stock opens up, it most likely will go down some before going back up. That first movement might be sharp or it might happen over an hour. Just because a stock acted a certain way, does not imply that another stock will react the same way with similar movement. 

Taking Profits

Being profitable is the key when doing anything. With the stock market and trading options that go to zero, profitability is a must. Many times we set a limit order after entering a position and that limit may be too low or too high. When you have incurred losses, you have a tendency of setting the limit higher than the stock will move in the day. The top of a movement in a day is typically very clear as is the bottom. The top or the bottom of the movement rounds out and the indicators look like it is changing direction. Don't rely only on the indicators only as many times the MACD may show a change before the rounding out occurs.

I believe I covered all of my points. This might not be a good read for someone who is not an stock option trader. I have been depressed and frustrated for so long trading incorrectly. Discipline is the key to being profitable. Typically there is a trade a day that will double or even triple your money. You just must be patient and allow it to present itself. It may not be in the movement that the day starts, but don't expect to see a change of direction because some days it doesn't change for the whole day. 

This might be more of a message for myself, but I am done being depressed and working out of fear. I am angry at myself and determined to do what is right before it is too late. Focus is key along with patience. If it is to be, it will present itself. 

CARPE DIEM!!!