To our little option trading community,

I, like many of you, have been working incredibly hard to become what I've always wanted to be: A professional trader. It has been a rocky road, and to be honest, there have been a few times where I almost quit. But I never did, because I am determined to be among the 10% of the trading community that is successful. In doing so, I have kept a trading journal, where I detail each trade: What the prices were, why I entered the trade, what my target is, what my negative exit is, etc. After I close the trade, I enter the result and try and sum up the trade in a few words. What I've found from this journal is that some comments appear frequently. I've taken these comments and put each of them into a list called "Trading Rules Learned the Hard Way." I'm not going to list them all here, because many of them you've all heard before like "position sizing is key" and "make sure you take a loss quickly when you're wrong."

But of the many lessons I've learned about trading in the last year, the one I've made the most consistently, and the most costly has been failing to wait until the end of the trading day to make decisions. Whether buying or selling my options, especially lately, I have made several mistakes that could have easily been prevented just by waiting until the end of the day. Which brings me to another point: If you're going to take the time to keep a journal, analyze your trades, and create rules to follow, make sure you follow them! I wrote this rule down 3 months ago and let me show you how not following this rule has cost me recently (I apologize for not having charts to insert here):

1) CTSH. On 9/14 I bought calls on CTSH after the ascending triangle breakout the prior day. In my journal, I entered "Exit on close below $71.50." The next day, the stock traded down intraday to $70.65 and I sold the calls. Where did the stock close? $71.50. It never closed below that point. Thankfully I realized my mistake and reentered a trade, but not without taking an unnecessary loss. Journal entry: "Never trade before end of day."

2) NGPS. On 9/21 I bought calls on NGPS on a flag pattern breakout. The problem? I bought the calls at the high of the day mid-morning and by day's end the breakout was hardly there. The stock returned to my purchase price and then sold off well below. I wound up taking a decent loss, when it should have been minimal. Journal entry: "Wait for end of day to enter orders!"

3) BNI. On 9/27 I bought OTM BNI calls when the stock was at $72.99. The stock went on a huge run up to my target of $80, then retraced slightly. I had a decent short-term trendline drawn in with multiple touchpoints. My exit was the earnings announcement or a close below this trendline. On 10/19, the stock sold off mid-day, and at $77.75 I closed my position for an 81% gain. Pretty good gain right? The stock rebounded to close above the trendline and continue higher. Today it closed at $79.49. Had I waited, I would have had a MUCH larger gain. Journal entry: "Do not sell before afternoon!"

4) SIGM. On 10/18, I saw what looked like a flag breakout so I bought calls when the stock was $18.94 mid-morning and volume looked big. It turns out that it was only a rectangle and I had bought at the top (resistance). Brilliant. Yes, the stock is over $19 now, but not before retracing to under $18 first. Had I waited until the close, I would have seen clearly that the stock was at resistance. I'm still in this trade, but my journal entry says, "Midmorning breakouts don't matter!"

5) BLUD. On 10/18, I saw a big spike breakout mid-morning and jumped all over it. Look at the huge burst before the consolidation. I wasn't going to miss the follow up move! What happened? 6 more down days before today's fortunate (for me) spike upward. Had I waited until the close, I would not have taken the trade. Journal entry: "breakout failed today. Wait until the close to make trades!!"

6) I saved the best for last. This is the stock that caused me to write this article. SEIC. On 10/19 I caught SEIC bouncing off 2 levels of support and bought calls on it. Yesterday (10/25), The stock closed below my diagonal trendline, but still slightly above my exit support level, so I didn't exit the trade. However, last night (10/25) I examined the stock and saw what looked like a clear head and shoulders top. The only thing missing was the volume, but the stock was sitting on the neckline. I was ready in the morning and the stock gapped down hard on huge volume and I quickly exited the trade for a decent, but manageable loss when the stock was $55.50.

But that's not all. I executed my FAVORITE move and bought OTM puts when the stock dropped to $54.60. I figured I'd hit my $52 target in a couple of days maybe on this volume! Lo and behold, the stock rocketed back up and actually closed at $56.38. Since it's still below the neckline, I'm still in the bearish trade, but had I waited until the end of the day, 1) I could have exited my calls with a smaller loss and 2) I could have entered my bearish trade with a much greater chance of success rather than a big hole to climb out of. Journal entry is too explicit to repeat here but suffice it to say I was pretty hard on myself.

You should notice that for over a month I've written the same rule over and over and continued to break it even as recently as this morning. True failure is not making mistakes trading, but not preventing them from happening again. It's like walking into the same wall and bumping your head again and again.

In summary, and I cannot stress this enough to new traders: You MUST have the patience to let most of a day's trading pass by before making decisions. Breakouts often fail, selloffs often reverse, and you will lose if you don't let it sort itself out. Yes, you will occasionally be right. You will get out of a trade that continues moving against you or get into a trade that continues moving with you. However, I have found (call it painful backtesting) that over the long haul, you will still be far better off waiting out the storm.

Hope you get something out of this! Thanks again!

Brett Atlas

Posted by Option Addict on 10/27/2006 at 9:07 AM | Permalink