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More comments on Synthetics and escaping "Sudden drop" losses …
I have not had too many huge sudden drop losses .. but I remember
every one of them! Happens when I am trading smaller $ amounts,
smaller stocks without protection.. I hate those events. They make
me feel helpless and give up trading. Then I rationalize out of it to
overcome it. Folks that had big chunks of MRK experienced it also –
ask how they felt .. all stocks do that on a cyclical basis and it
can take months to recover out of it.
One of the reasons that I like Synthetics is that it allows me to
play up and downside action very efficiently. When you are holding a
Synthetic call on a downward signal, or extended overbought
situation, you can dump your stock and immediately go to the downward
side. After selling the stock .. one trade, you are automatically
left holding a put – and ready for downside action. Stocks are far
more liquid then the options and can be sold with a small delta
between bid and ask, unlike options. I have validated this approach
by manually backtesting with actual past Stock and Options data..
hours and hours and hours of grunt work - and that is humbly
suggested before anyone actually takes me on my word and starts
trading real money with it. My holding periods vary based on the
system I am trading. Sometimes it can be weeks, other times a couple
of days.
I looked at pure options plays – but when you change direction from
long to short, you have two trades, sell the Call, and buy a Put..
with a Synthetic its one trade – sell the stock. You choose what is
easier.. Again, if I am doing a lot of trades with a system, I tend
to dislike it and eventually abandon it.. With pure options, I have a
lot more trades –
You asked how much do the Puts cost me on the upside action? Well,
it depends on the direction and how long the direction is sustained.
If it were sustained for a long time upward, I would estimate giving
up no more than 30-50% of your profits. That is not the case often,
and in fact you can go in and out of your stock while you hold on to
the put, re-adjusting levels to keep up the protection.. Since I am
looking for steady profits, I am willing to give up a chunk of gain
but as I trade the downside actively, that is returned back
quickly. Again, when you have a winning strategy on 2 (Up and down)
out of 3 counts (excluding making gains on sideways) you have a
better chance to make larger steady gains – and you are reducing
your "sudden drop" losses to very low numbers.. Sept 11th would not
have been fatal to your portfolio and would have netted some nice
gains. I sincerely apologize for how insensitive that may sound to
someone that actually lost a loved one..
Rvalue
--- In equismetastock@xxxxxxxxxxxxxxx, "metastkuser"
<andysmith_999@xxxx> wrote:
> Rvalue,
>
> Your reply was very interesting. For the last year I have been
trying
> to find a way around the "sudden drop" catastrophe that you speak of
> -- and have been using options (straight calls or puts, not
synthetic
> stock/option combinations) for directional trading. I've found that
> buying deep ITM calls/puts are the way to go. Buying OTM options for
> directional trading have proved (for me anyway) to be a great way to
> lose money. Couple of questions for you:
>
> 1) I generally don't hear traders talk about the "sudden drop"
> catastrophe. Has this happened to you often? It should be very rare
if
> you don't hold the stock at earnings time, and if you don't trade
> microcap stocks.
>
> 2) The synthetic appoach you use -- how long is your typical holding
> period? I know folks who use this strategy for downside protection
but
> they are buy and hold investors. I don't know of any traders who
use this.
>
> 3) How much of a hit does your bottom line take because of the puts?
>
>
>
> --- In equismetastock@xxxxxxxxxxxxxxx, "rvalue1" <rvalue1@xxxx>
wrote:
> > This was really a great question you asked... Why do Traders
Fail?
> >
> > 1. Dusant cites "fear" as a principal reason - Fear of losing
money,
> > and "fear" of the signals being wrong, and not pulling the
trigger..
> > agreed wholehaertedly with Dusant. I have noticed that in my
earlier
> > days I would miss out on a real winner, then try jumping in on
> > signals and finding two three bad trades and then walk away
humbled
> > and miserable.. the past did not repeat itself immediately anyway.
> > 2. This leads to my second point. Most of the lagging systems
> > generate 30-50% bad trades unless you qualify them carefully. 40%
> > good trades with a 2:1 winnings to loss ratio is a good startegy.
> > Interestingly, 30-50% good trades can easily give 4-5 bad trades
in a
> > row out of 50 trades or more trades, and yet provide a 40% win
> > status. I hate repeated failures. Now I realize that too is
> > inevitable and part of the probability and statistics of trading.
> > 3. Sudden drops have a strong tendency to make your positive
energy
> > disappear.. - and you lose confidence. Yet if you persisted,
often
> > the systems continue to apply and make up the return. Many of us
do
> > not have the nerves left after such a drop and we abandon our
system
> > on a stock - this is where "Money management" plays a key role in
> > making that loss feel less.
> > 4. As the market goes, so does many sectors and stocks. I think
many
> > disregard this truism, and continue to trade when the market is
> > turned down or going sideways. They fail.
> > 5. Can we really make lots of money constantly searching new
> > opportunities, when each stock is new and has unknowns behind
them? I
> > am migrating to a "synthetic" approach with stocks and options
that
> > permit me to cautiously make money in an "up" or "down" market,
> > focusing on just a few stocks, with somewhat diverse sytems on
them.
> > I am biased towards mostly lagging systems. In this approach,
every
> > time I buy a stock, seeing a long direction, I buy put
protection.
> > That reduces my risk of losing a lot of money should it turn on
me
> > and also gives me confidence to stick to the process. By
following
> > only a few liquid stocks, and trading stocks/options for "up"
> > and "down" markets - 2 out of 3 , third being sideways, , I see a
> > smoother equity curve. Sideways drwas down some money; but the
> > drawdowns are limited. Sharp drops are a thing of the past.. and
I
> > think I can reach my goal of making steady money and not failing
due
> > to the earlier reasons.
> >
> > We each have to understand the failure modes and consider evasive
> > actions suitable to our personality in order for us to succeed.
This
> > is not easy to do by any accounts. We say the enemy.. and it was
us.
> >
> > Rvalue1
> > --- In equismetastock@xxxxxxxxxxxxxxx, "metastkuser"
> > <andysmith_999@xxxx> wrote:
> > > Thanks to the folks who replied.
> > > This is a really good forum.
> > >
> > >
> > >
> > > --- In equismetastock@xxxxxxxxxxxxxxx, "TecloGeo"
<teclogeo@xxxx>
> > wrote:
> > > > 1) A lack of professionalism, self-confidence, self-
esteem
> > and
> > > > discipline. At the opposite end, arrogance that because they
read
> > a few
> > > > books they know everything. Laziness - a feeling that they
are
> > somehow
> > > > "owed" success. Also, over-complication, a lack of
perspective,
> > too much
> > > > back-testing, not enough walk-forward testing/real-time
practise.
> > The
> > > > pitfalls are many.!
> > > >
> > > > 2) More theory, less time actually doing. Sounds like
you've
> > read
> > > > enough books to be able to put together a workeable strategy
by
> > now!
> > > >
> > > > 3) Over-theorising. Lack of dedicated action.
> > > >
> > > > 4) There are plenty of experienced traders around here
that
> > can
> > > help
> > > > you out with just about any question.
> > > >
> > > >
> > > >
> > > > _____
> > > >
> > > > From: equismetastock@xxxxxxxxxxxxxxx
> > > [mailto:equismetastock@xxxxxxxxxxxxxxx]
> > > > On Behalf Of metastkuser
> > > > Sent: Tuesday, June 14, 2005 5:24 PM
> > > > To: equismetastock@xxxxxxxxxxxxxxx
> > > > Subject: [EquisMetaStock Group] Why do traders FAIL?
> > > >
> > > >
> > > >
> > > > I have a question (unrelated to Metastock) for the
experienced
> > traders
> > > > on this forum.
> > > >
> > > > I have now read a dozen books on trading -- not the foo-foo
books
> > that
> > > > promise $10M in the next trade, but ones by Tharp (my
favorite),
> > > > Chande, Le Beau, Stridsman, Elder, Covel, Schwager (and
O'Neil,
> > > > Link,...) and a couple of Tharp's IITM publications on money
> > > > management etc. Will get to Kaufman next. And of course every
> > issue of
> > > > Roy's MSTT which are simply marvellous.
> > > >
> > > > I've put a couple of hopefully positive expectancy systems
> > together
> > > > (discretionary at this point so it's not easy to use the
system
> > > > tester). The systems have four stages: 1) setup (to identify
> > market
> > > > trend and stock trend but not entry), 2) entry (looks at
timing),
> > 3)
> > > > exit and 4) money management. I have spent quite a bit of
time on
> > 3)
> > > > and 4) because I believe they hold the key to being a
successful
> > > > trader. I use volatility as a significant determinant in all
4
> > stages.
> > > >
> > > > So I've done my homework. The odd thing is that none of this
has
> > been
> > > > difficult to understand -- not just for me but I'm sure for
> > anyone who
> > > > takes the time and has some patience.... and now I am
confused.
> > > >
> > > > 1) Why do so many traders fail? Have they not read these
books?
> > > > (Please don't reply that they are undercapitalized and/or
they
> > have
> > > > the wrong psychology for trading).
> > > >
> > > > 2) What do reading the next 50 books buy me (besides the
> > enjoyment of
> > > > reading them)? Surely the law of diminshing returns kicks in
right
> > > > about now.
> > > >
> > > > 3) At this point, what would the typical causes of failure be?
> > > >
> > > > 4) This is a Metastock forum. Can someone point me to a more
> > > > appropriate forum for this type of discussion (I have not
found
> > one).
> > > >
> > > > Thanks!!!
> > > >
> > > >
> > > >
> > > >
> > > >
> > > >
> > > >
> > > >
> > > >
> > > >
> > > >
> > > >
> > > > _____
> > > >
> > > > Yahoo! Groups Links
> > > >
> > > > * To visit your group on the web, go to:
> > > > http://groups.yahoo.com/group/equismetastock/
> > > >
> > > > * To unsubscribe from this group, send an email to:
> > > > equismetastock-unsubscribe@xxxxxxxxxxxxxxx
> > > > <mailto:equismetastock-unsubscribe@xxxxxxxxxxxxxxx?
> > subject=Unsubscribe>
> > > >
> > > > * Your use of Yahoo! Groups is subject to the Yahoo!
> > > > <http://docs.yahoo.com/info/terms/> Terms of Service.
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