Hey traders, welcome back for another edition of Notes from a Newbie. Sorry it has been a few weeks as I had to take a tactical pause to move from the beautiful mountains of Colorado to the not so beautiful desert of El Paso, Tx. The Army life much like the life of a trader is full of new adventures and the next one has started for me. Hopefully everyone has been finding success in these often-unpredictable market conditions. For me, there have definitely been some lessons learned, so as always, allow me to share with you some of my experiences.
Trying to predict what this market is going to do day-to-day has become a daunting task. It is like jumping in a taxi driven by a blind man. The ride will be exciting, but the outcome might not be what you hoped for. For some the risk might be worth the reward but most might just prefer to walk instead. That has kind of been my approach to these markets. It has really shown me how much I have grown as a trader in the last five months. The YOLO mentality I used to have would have jumped in that cab, tossed the driver a beer and told him to hit the gas. But not this guy, not now. This guy’s wounds have finally healed, and the scars left behind are a friendly reminder that that is not a path I want to go down again. See, we have been here before and not that long ago. Volatility and uncertainty are on the rise, a trade war looming and the market is only a tweet away from changing directions. This is what 2018 has become in the financial markets, and that’s ok because it is building an invaluable experience. And experience breeds wisdom in this game.
So, over the course of the last month or so I decided to employ multiple strategies both on paper and live in an attempt to learn what is profitable in these conditions. What I have learned is probably no surprise to the experienced traders amongst us, but if you are a new trader trying to trade in these markets this is what has worked for me:
Credit spreads have been my go to strategy and have provided the most success in these market conditions. I am 4 for 4 on Bull/Put spreads over the last month (some would call that a winning streak!). Once I learned to use support and resistance as my entry signal I have been very successful. (Imagine that!) Trading the trend and giving myself some directional space has really helped to offset the day-to-day volatility. Bear/Call spreads and Iron Condors have been just as effective as I currently have both in play as well. I have placed an example of my Bull Put on Macys below and how using support to enter is crucial to a successful trade.
I have paper traded a few naked puts over the last month. Both have been profitable in my paper account. I don’t trade naked puts in my live account purely due to the amount of capital it ties up and I have a small account. But all the naked puts I have paper traded in my paper account have been profitable. I will add this strategy to my live account as my portfolio grows.
I have learned to love credit spreads, especially during these conditions. It has helped take a lot of the guess work out of the equation and gives some flexibility in price movement (and emotion).
Long Calls, Puts/Debit Spreads:
What I have also learned is that directional trading has not been as rewarding. I have traded Long Calls/Puts as well as Bull Call Debit Spreads. I have found that directional trades require a little more attention/management especially when conditions change so suddenly. It is also imperative to have strict rules for targets and stops as profits can erase very quickly. I have found when directional trading in these conditions it is much better to tighten targets/stops and don’t hesitate to take profits when you can. While directional plays are very appealing to me they also challenge my ability to follow my rules. Credit Spreads seem to be a little easier for me to manage, I think I am slowly becoming more and more of an options seller. Something about that Theta just does it for me.
I have also started practicing straddles and strangles as earnings season is fast approaching. More to follow on those results. If you have not or do not practice in your paper account than I highly recommend it. I have a rule for myself that I will always paper trade a strategy before I ever employ it in my live account. And will only employ it if the conditions for the strategy are met and I am confident I understand and can manage the trade. This has done wonders for my confidence and kept me from making unnecessary mistakes.
So here is the take away this week:
1. Don’t be afraid to trade in this market. There is money to be made, use strategies that give you flexibility in price movement.
2. Use volatility to your advantage, selling options gets more appealing as volatility rises. Don’t buy overpriced options if you don’t have to, sell them.
3. Practice new strategies so that you can confidently employ them when the conditions are right. Take every available weapon to the fight. As a Cavalry Scout in the Army, one of our fundamentals is “never leave reconnaissance assets in reserve”, same goes for trading.
4. Learn from previous success/failure, never make the same mistake twice.
5. Keep trading and have fun!
Well that is going to do it for this week. Hopefully I was able to catch share a few things that have worked for me over the last month or so. Good luck and see you next week!