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Tales of a Technician: The August that was

September 11, 2017

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The close of each month provides a time for reflection. I scour my trade journal in search of clues, lessons left by winning and losing trades. I’m convinced that there are only so many mistakes you can make. Savvy traders commit them once and modify their behavior. Dumb traders, masochists that they are, commit them again and again until they either blow up their account or quit. But perhaps I’m too pessimistic. After all, a dumb trader can become smart through course correction.

Now that I’m going on my eighth monthly retrospective, I’m coming to appreciate the genius of the exercise fully. My trading has improved dramatically this year, and a big part of that has been me taking the time to review my performance. I’ve religiously documented my trades via the Tackle Trading Journal and have an equity curve of every system that I implement. Because of that, I know EXACTLY where I am making money and where I’m not. Perhaps, more importantly, I know WHY I’m making money and WHY I’m not. And I can articulate it.

To prep for my monthly missives, I have to keep track of what I’m doing right (and wrong) throughout the month. I have a document that I use to jot down notes as I extract valuable lessons from specific trades over the month. I review that document as well as my journal when crafting these blog posts.

Here’s the bottom line. I’m a huge advocate of journaling trades and writing a retrospective each month (or week). I suspect many are already journaling, but few are taking the time to write out their lessons learned and errors committed. I guarantee you will become a better trader if you take the time to do it.

As a reminder my monthly look-back is split into four sections: the monthly theme, what I did right, what I did wrong, and my trade of the month.

Volatility Strikes Back

August ushered in the largest volatility spike seen so far this year. The VIX awoke from its mid-summer snooze and almost doubled on a surge to $17.28. This is the first major test that short premium trades have faced in many months. At the same time, U.S. equities took it on the chin. While the S&P 500 fell just shy of 3%, the small-cap-laden Russell 2000 dropped 7%. For those leaning bullish this was a gut check. I experienced an intra-month draw down but am happy to report I made it all back and then some by month’s end.

I’ve since adjusted my trading portfolio to be slightly bearish, so I’m better able to handle any further shocks. I’m curious to see if August was a one-off or if the seasonally weak period of September will deliver another volatility surge.

What I Did Right (aka why my mommy should be proud)

One of the hardest situations for me to handle is holding a bullish portfolio when the bottom drops out from under the market. I usually add bear plays to hedge, but whether it’s because I’m stubborn or simply don’t want to get duped, I almost always leave the portfolio leaning bullish even after adding the hedges. During the mid-August stock drop, I was quick to add bearish exposure and take profits into the VIX spike. Though I did lock-in losses on a few bullish positions, all in all, I think I weathered the tumult quite well. Admittedly, the fact that the S&P 500 rebounded after only falling 3% helped.

What I Did Wrong (aka my last vestiges of stupidity)

Since I lacked for last month’s section on my mistakes, I decided to commit more errors this month for, you know, educational purposes. And because, well, I’m an idiot.

First up: it’s important to monitor entry orders that don’t immediately trigger to see if you need to switch up the strikes to capture the appropriate credit. For example, I had an order to sell a strangle on XRT that I failed to watch close enough. By the time the order filled, XRT had dropped considerably, and though I received the 89 cent credit I was shooting for, the short put provided 71 cents and the short call only provided 18 cents. That’s a terrible combination! At the time I entered the trade, they were trading near 45 cents apiece. But, again, I wasn’t paying attention.

Lesson One: If you have an iron condor or short strangle order out and it hasn’t filled in awhile, re-check the value of both legs to make sure the selected strikes are still appropriate.

Here’s one more blunder. I had an iron condor position on NFLX that was going against me due to the pullback in its stock price. But because the pullback setup a nice dip-buy pattern I elected to sell another bull put spread, effectively doubling my bet size in the process. Well, the market gods took note of my hubris and decided to kick the stock to the curb. Naturally, I got stopped out of both positions losing 2x what I really needed to. To be fair, the net loss was still less than 1% of my acount, but I still probably shouldn’t have upped the ante.

Lesson Two: Don’t double up, ya dummy.

Trade of the Month

I’m going back to the Russell 2000 Index for this month’s chest thumping. One of the reasons I love the Condors for Cash Flow System is it gives me a core monthly position that I can trade around. If the market remains range-bound, then the Condor delivers the goods. If the market starts trending aggressively, then I often add credit spreads to profit. That’s what happened this month. With the RUT turning bearish I ended up adding some extra bear call spreads on August 10th. The Sep $1450/$1460 bear calls for 99 cents, to be specific. Seven days later on the 18th, I exited for 24 cents scoring a gain of 75 cents per contract. And the best thing about it? The Sep Iron Condor position is still well into the profit zone. There’s nothing like winning on the core position and picking up some extra dough along the way with tactical trades.

Check out the entire 2017 retrospective series:

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