While all of that is correct a call option limits your loss upfront, yes of course you can always sell that option if the stock moves against you or the setup becomes invalidated BUT it prevents you from getting prematurely stopped out when you jump in too early. If you buy a Call option for say $3.30 that means your MAXIMUM loss is $330 per contract you can lose NO MATTER WHAT HAPPENS.
Am I on the right track?
- Thread starter lost dilettante
- Start date
While all of that is correct a call option limits your loss upfront, yes of course you can always sell that option if the stock moves against you or the setup becomes invalidated BUT it prevents you from getting prematurely stopped out when you jump in too early. If you buy a Call option for say $3.30 that means your MAXIMUM loss is $330 per contract you can lose NO MATTER WHAT HAPPENS.
The main benefit of options is the numerous "plays" you can put on to make money in ALL sorts of ways, regardless of what the market is doing even if it is doing nothing. But that is way to much to detail out in a forum.
Yes if you just buy a Call option there it does mean the stock has to move a bit more to become profitable. For instance say XYZ closed today at $43.39 and you buy a Jan $45 Call option is selling for $3.30. That means the stock would actually have to get to $48.30 to break even not counting coms.
Using options as stock is not how most options traders trade them, although some do. If you find you are consistently right about direction, and right about the general time frame (2-3 months) but keep getting stopped out prematurely then this might work for you.
Thanks for the advice. Even more for me to think about
Quote from lost dilettante:
It is possible that I am overthinking, but it is hard to do much about this as this is my nature. There is about as much point telling a smart person to not think as there is to telling a dumb person to think
In regards the possibility of finding an original edge well that is the key question. Unless I can find an original edge I would not trade. The more I explore and read, the more I think it is possible to find an original edge, but that it will require a lot of hard work. I don't mind hard work and I don't mind taking a risk, but I don't like to gamble. I only get pleasure from taking a risk if I know the odds are stacked in my favour
From what you say , one half of the equasion is covered, the other half, your creativity, needs to be developed, clear thinking and vision outside the normal so called consensus. When we reflect on historys' great achievers whether it be Art, War, Sciences etc, this was the combination that brought them success. On the other hand if you wish to be dumbed down, you have probably come to the right place. Given enough time here, you won't even know the difference between your ears and your arsehole, as you repeat the mantra " I have found the light" with the passion and personal certainty based on faith that would leave a freshly minted Born Again Christian green with envy. Good luck on the journey, whichever course you choose.
Regards
Johno
Why do you believe you need to find an "original" edge?
Try sim trading this very common setup in your time frame and see what happens:
Watch a stock or index future approach its last major support or resistance level. If it pivots and leaves behind a lower high (LH) or a higher low (HL) compared to the last major S/R level, enter to the short (LH) or long (HL) side, place your stop just outside the pivot point, and set a target at least equal to the stop.
In this case the setup is your edge, and the equal R:R should prevent account erosion.
Try this with 2:1, 3:1 and 4:1 R:R's as well to determine which trade management plan works best for what you're trading.
Very commonly used "edge", and not very hard to use.
I respect what you're trying to do, to find your own way and devise a strategy that fits your personality.
If I could just clarify, I'm not advocating a gut feel approach, but rather a systematic one that's boiled down to essentials.
With regards to finding an original edge, I think you might be assuming something that isn't true. I think it's a fallacy that commonly known and used techniques cannot produce profits.
That would only be true if a substantial portion of traders were all trading the same strategy at the same time. But the reality is that only some small portion of traders are trading your strategy, on your timeframe. The bulk are doing something completely different.
If I could leave you with a thought, it's great that your left brain works so well... But your right brain can make a contribution too. With trading being as hard as it is, it doesn't make sense to go at it with only half a brain.
I don't want to start an argument; just wanted to clarify a bit. I'll drop it now.
Good luck with your trading
If I could just clarify, I'm not advocating a gut feel approach, but rather a systematic one that's boiled down to essentials.
With regards to finding an original edge, I think you might be assuming something that isn't true. I think it's a fallacy that commonly known and used techniques cannot produce profits.
That would only be true if a substantial portion of traders were all trading the same strategy at the same time. But the reality is that only some small portion of traders are trading your strategy, on your timeframe. The bulk are doing something completely different.
If I could leave you with a thought, it's great that your left brain works so well... But your right brain can make a contribution too. With trading being as hard as it is, it doesn't make sense to go at it with only half a brain.
I don't want to start an argument; just wanted to clarify a bit. I'll drop it now.
Good luck with your trading
Some further thoughts. I like to make models of systems to gain an understanding. Doing this it is possible make two simple models of the market.
1. A random-only model market. Imagine that the closing prices for every security is set by elves rolling dice. In this market the closing prices would be completely random and hence unpredictable (assuming the dice are unbiased). It would not be possible to gain an edge through any sort of fundamental analysis, but it would be possible to intraday trade against other traders. As long as you were able to outplay the other traders then you could make a profit. This is really a "poker" model where the fundamentals are random (ie like the order of the cards) and everyone is playing against each other. If the market is like this then most traders are really just playing a version of poker and I guess it is not surprising that so many successful traders like card games.
In this model issues like understanding the psychology of the market and "gut feel" become important. Success in this market is all about outplaying the other market participants. Thinking too much would be a major disadvantage because what is needed to succeed is to get inside the mind of the other traders. This is very hard to do if you don't think like the other players in the market - if the majority of players are average thinkers, then being a high level thinker will be a real handicap. The best players in this model would think just like the other players, but be slight faster or brighter. If this model accurately reflect the real market then it is not surprising that smart people come unstuck so often.
2. The predetermined market model. Imagine that the closing price is set by the number of degrees above or below the daily average the actual temperature was in Bismark, ND 3 days ago. In this market the closing price is totally predictable if you happen to know the average and actual temperatures in Bismark and you would have a perfect money machine. The problem faced here is not that the market is not 100% predictable, but in finding the cause. You could go data mining through all the past market data, find 100 or 1000 of rules that model the closing prices, yet when you go to use them they will all be wrong. If we assume this market is a zero sum game then most traders will fail, some will break even, and some will succeed fantastically, all of this by chance alone. The successful traders will fool themselves into think they have found an edge, when all they have done is be lucky. The key to success in this market is finding the cause, but when you are faced with the fact that data mining will find hundreds of false causes that pass back testing.
The actual market is obviously not an extreme like either of these models, but has some aspects of both. Over the long term prices are driven by fundamentals like earnings, but in the short term prices are driven by the "poker" traders. Given this is should be possible to play the market in one of two ways. 1) With a short term "poker" strategy focused on the other traders in the market, or 2) With a longer term strategy focused on identify the fundamental causes of price movement. The first strategy is better suited to an average player, while the second is better suited to a higher level thinking player.
1. A random-only model market. Imagine that the closing prices for every security is set by elves rolling dice. In this market the closing prices would be completely random and hence unpredictable (assuming the dice are unbiased). It would not be possible to gain an edge through any sort of fundamental analysis, but it would be possible to intraday trade against other traders. As long as you were able to outplay the other traders then you could make a profit. This is really a "poker" model where the fundamentals are random (ie like the order of the cards) and everyone is playing against each other. If the market is like this then most traders are really just playing a version of poker and I guess it is not surprising that so many successful traders like card games.
In this model issues like understanding the psychology of the market and "gut feel" become important. Success in this market is all about outplaying the other market participants. Thinking too much would be a major disadvantage because what is needed to succeed is to get inside the mind of the other traders. This is very hard to do if you don't think like the other players in the market - if the majority of players are average thinkers, then being a high level thinker will be a real handicap. The best players in this model would think just like the other players, but be slight faster or brighter. If this model accurately reflect the real market then it is not surprising that smart people come unstuck so often.
2. The predetermined market model. Imagine that the closing price is set by the number of degrees above or below the daily average the actual temperature was in Bismark, ND 3 days ago. In this market the closing price is totally predictable if you happen to know the average and actual temperatures in Bismark and you would have a perfect money machine. The problem faced here is not that the market is not 100% predictable, but in finding the cause. You could go data mining through all the past market data, find 100 or 1000 of rules that model the closing prices, yet when you go to use them they will all be wrong. If we assume this market is a zero sum game then most traders will fail, some will break even, and some will succeed fantastically, all of this by chance alone. The successful traders will fool themselves into think they have found an edge, when all they have done is be lucky. The key to success in this market is finding the cause, but when you are faced with the fact that data mining will find hundreds of false causes that pass back testing.
The actual market is obviously not an extreme like either of these models, but has some aspects of both. Over the long term prices are driven by fundamentals like earnings, but in the short term prices are driven by the "poker" traders. Given this is should be possible to play the market in one of two ways. 1) With a short term "poker" strategy focused on the other traders in the market, or 2) With a longer term strategy focused on identify the fundamental causes of price movement. The first strategy is better suited to an average player, while the second is better suited to a higher level thinking player.
Quote from lynx:
I respect what you're trying to do, to find your own way and devise a strategy that fits your personality.
If I could just clarify, I'm not advocating a gut feel approach, but rather a systematic one that's boiled down to essentials.
With regards to finding an original edge, I think you might be assuming something that isn't true. I think it's a fallacy that commonly known and used techniques cannot produce profits.
That would only be true if a substantial portion of traders were all trading the same strategy at the same time. But the reality is that only some small portion of traders are trading your strategy, on your timeframe. The bulk are doing something completely different.
If I could leave you with a thought, it's great that your left brain works so well... But your right brain can make a contribution too. With trading being as hard as it is, it doesn't make sense to go at it with only half a brain.
I don't want to start an argument; just wanted to clarify a bit. I'll drop it now.
Good luck with your trading
No argument, just lots of interesting discussion
Yes it is an assumption that all exploitable edges that can be constructed from publicly available data are being fully exploited. It is quite likely that some have not yet been discovered, or are only being partial exploited. The real problem is identifying them amongst all the false edges. This is something that I want to think about a lot more, because it certainly would involves much less work to use publicly available data to build trading rules than have to go off and collect unique data. The question I need to answer is am I more likely to avoid false edges by using unique data. I suspect that this is true, but I have no proof of this.