| My Letters to Samech were
originally encouraged and published through the good graces of
Shaggy. Thank
you ! These letters are also archived at Traders Helping Traders E-zine Archives, as will be the next round of letters, with G-d's help.  =] ;-)> |
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Asher's Letters to Samech - Part 1
BS"D Dear Samech, Glad to hear you are once again ready to take up the gauntlet and go back to trading. Every time I tell the amazing story of your option trading success I'm blown away anew. Somehow, you instinctively followed most of the classical rules for success, without even knowing that there were any such rules! And you were SO successful, for SO long. I call it Samech's Optiontrading System (SOS for short. My joke. =] ;-)>) It is most interesting that after all this time you want to discuss some of the basics of options trading. Having been privileged to know and study under your late father at the university, I'm sure that you will "genetically" take to both the charting (IMNSHO your fathers publications are still the classic works on charting - When we gonna republish them?) and the basic math that expose the Wonderful World of Options. I can't wait for your feedback once youve glimpsed the statistics of options and see what the expression "getting an edge on the market" can mean. Please forgive me, but there are a few things I feel I have to say before we even touch on the subject of options. My plan (for whatever its worth we never do know where we'll wander in our discussion marathons!) is to write you in three stages:
I'm going to write using lots of trading expressions and slang 'cause familiarity with the jargon will open lots of avenues of study for you. Also, it's lots easier for me! And much more colorful to boot! Whenever I stumble onto something that isn't obvious from the context, or a term that really needs to be understood for our specific discussion, I shall try to explain. Anything else that's not clear, write ASAP. { TO THE READER: Samech is not just a stylistic literary device, she's a real live person. BTW, the invitation to write extends to you too. admin@TradingThingys.com} I'd really like to start by dissecting the disclaimer that brokers, vendors, and CTA's display so prominently (For example: Disclaimer), but I'm not at all certain that they are any more effective than the Surgeon General's warning on a cigarette pack, when read by a long term smoker. "That doesn't mean me!" Beware however, that the next letter or two will contain many such caveats, 'cause, "Yes it does mean you!" OK, let's do it! For our initial purposes, there seem to be three fundamental elements to trading:
For Example 1: A few days ago, a trader posted to a forum that he was having success mining the SPOOs. However, the part of his post that I found important was actually the second part, the "by-the-way". There, he mentioned that he had also traded corn with a 2 point loss. I don't know the technical details of this trade, why he entered, how he entered, nor where he placed his safety stop. That's the SCIENCE of the trade, what he calls his strategy. I am certain though, that he never placed his safety-stop 2 points under his entry, as that would have been too close (since he was daytrading, he might have relied on a mental stop). Placing the stop so close would not leave enough room for the trade to "work out" without the stop choking the trade (more SCIENCE). The question remains, so how did he only have a 2 point loss? Aha! That's the ART of the trade. Some traders are born with it, but most have to learn it, usually from arduously paper trading and studying live trades with a teacher/guru/mentor. (Actually, MOST aren't around long enough to learn it. More later regarding this ominous note.) For Example 2: Flashback: Tuesday afternoon, around 2:00, daytrading Treasury Bonds, gentle bull market The market is climbing slowly, behaving just like the indicators (SCIENCE) suggested it oughtta. Protective stop is tucked appropriately just below the nearby support. All is well. A flicker on the tick chart (a real-time chart that shows every trade). Anyhow, we're trading the 5 minute chart and our main focus is rightly on that time frame, the rest is commentary (ART - we're watching the 3 min. and tick as well. And of course the 13 min. gives us some perspective.) The 5 min. market hovers. Did the 3 min. just dip? Don't know what is going on. Probably a slight retracement ("breathing" after a series of fairly long bars - That's the famous trader Larry Williams' descriptive term for it). WHAM! The bottom just fell out of the market. It's too late to cancel the safety-stop and exit. Sort of like jumping in front of a fast moving train. (Gotta cancel the stop and get confirmed first. Otherwise, you could wind up with two sell orders - the quick-exit sell just to get out NOW, and the uncancelled safety-stop sell, in case the market continues to fall - ART. Don't have any SCIENTIFIC reason to swing around to take a bull position. In fact, gotta switch to a different time frame just to see the full length of that single bar spiking down and dropping off the bottom of the chart. Forget delayed statistics like momentum or any of the fancy stuff, which won't be available for consideration till the next bar finishes.) Oops, the safety-stop just got triggered, now we have an open market order to sell. Well, our loss is limited at least and we're out of the trade. WRONG! The market plummets another couple of big points, and all the trader's stops are triggered on the way down, including ours, to be nicely filled, AT THE BOTTOM, where trading resumes. (With no warning, and for no reason apparent to outsiders, Merrill Lynch just suddenly dumped all their TBond holdings in a matter of minutes. The market will be in chaos for days.) So what's wrong with this scenario? Plenty of SCIENCE. Not much room for ART. DISCIPLINE!!! The key words were, "Don't know what is going on." We broke a basic rule: Whenever you don't know what is going on - get out of the market!!! Truth is, that this all happened so fast that unless you had an audio hook-up to the floor and heard things go wild in the pit, the assumption that this was a simple small retracement and no cause for confusion would probably have left you stranded even with immaculate DISCIPLINE. Imagine if that had been Orange Juice instead of TBonds, and the move had been a limit move, and that the market had limited down for the next several days. WIPEOUT!!! Well, S., you have just met the silent killer of the underfunded, Drawdown. I'm sure we'll talk more about that subject later on. It's a biggie. I kinda think that's long enough for one letter. Chew on it while I work on the next installment. Regards to your holy family from mine, Asher P.S. Check out my new site! www.TradingThingys.com Asher's Letters to Samech, Part 2
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