Starting tomorrow (June 6, 2024) I will begin making paper trades daily and updating them on Today’s Trades. My trading plan for tomorrow has been posted on Tomorrow’s Trade Ideas. Today’s Trades page will be updated as close to real time from when I make each paper trade as I can, and Tomorrow’s Trade Ideas page will be updated every night with my trading plan for the following day.

This paper trading is temporary and I will be looking to fund my brokerage account for June 24, 2024 with $15,000 CAD. The reason I am paper trading for this 3 week period is 2-fold:

1. I want to get myself back into the daily routine that is needed to trade successfully
2. I want to engrave the rules from My Trading Strategy in my brain before I fund my brokerage account again.

If you go to my Daily PNL page, you’ll see that I was a very consistent and profitable trader from January until March, and then I had a bad day in March and things went downhill quickly. You can read my journal entries from those days if you want to read my lengthy reflections on what I think caused this downturn, but in short I began to break almost all of my rules after that bad day in March. I learnt from this mistake and have done a lot of data analysis on my trade log and tightened up my trading rules and made my investment strategy even clearer then what it was when I was trading successfully from January to March of this year. Now I want to use this 3 week period to engrave the rules and strategy in to my brain before I fund my brokerage account again and begin trading with real money.

Evolution of My Approach to Trading:

My trading philosophy has been continuously changing and adapting throughout my 12 years of trading. The very first book on investing/trading that I ever read was Benjamin Graham’s “Security Analysis”. This book is considered the bible of fundamental analysis and value investing. From day 1 though, I knew I wanted to learn about more than 1 investment philosophy, so the second book I read was “Technical Analysis of the Financial Markets”. After reading both books, I found merit in both fundamental analysis and technical analysis.

At first I was solely a value investor and had success investing in this manner, but the long waiting periods before investment theses panned out, didn’t align with my personality. During these waiting periods I would end up making low quality high risk trades out of boredom, and these trades would eat away at my hard earned value investing profits. This caused me to slowly drift more and more into technical analysis and short term trading as opposed to long term value investing. I began to detect price patterns that would lead to large price movements in certain stocks, as well as the specific news items or narratives in specific stocks that drove most of the movement for a given stock. With this in hand I began trading options. Throughout the years I was right most of the time as to what the stock was going to do, but I continuously got the timing wrong and my options would expire worthless just before the stock made the move I predicted. I then read a few papers that performed historical analysis on options and their conclusion was that the only winners in options were the option sellers, as traders consistently over paid for options. This led me to the conclusion that I needed to start selling options. But then I read “Black Swan” by Nassim Taleb.

In Black Swan, Nassim Taleb outlines his trading strategy which in some degree is based on a premise opposite to the papers I read. He argues that far out of the money options are often underpriced as traders believe that events that cause extreme price movements (black swans) occur less often than they actually do therefore creating less demand for these options. He essentially looks for far out of the money options that are very cheap and where he determines that the chance of a large move is more likely than what’s priced into the option. A big part of his strategy revolves around his risk management. This is because most of his trades lose money as the far out the money options he buys often expire worthless, but his rare winners are so large that he is a multi-millionaire even though most of his trades lose money. Because of the frequency of his losing trades, he always ensures to size trades to a very small percentage of his total portfolio. After reading his book I knew his strategy was again too much waiting for my personality type, but I determined that selling options was high risk given that the “rare” events that cause large movements in stocks aren’t that rare, and even if I made profits most of the times from selling options, all it would take is for 1 black swan that swung the price against the option I’d sold and I could lose everything. The combination of my conclusions from the books mentioned here plus my personal trading experiences lead to the philosophy of my current strategy that I will outline below.

My Trading Philosophy:

1. Make time work for you and not against you (Sell the time value of options, don’t buy it)
2. Limit your maximum loss in every trade you make (Focus on winning the war, don’t let 1 lost battle cost you the war)
3. Don’t predict where prices will go, profit from identifying where they are unlikely to go (I am not an oracle)
4. Don’t try to predict the outcome of events i.e earnings releases, economic reports, interest rate changes, etc (I am not an oracle)
5. Cut emotions out (Trade based on rules not fear or greed)
6. Use technical analysis as your primary tool (Levels and patterns over news)
7. Use your deep understanding of economics and fundamentals to provide confirmation of technical patterns you identify, or as a warning of times when technicals might be overpowered by changing fundamentals. (My secret sauce)
8. Only trade options on market index futures – this helps avoid the unpredictable news releases (mergers, cyber security issues, production issues, legal disputes) that often cause large instant price movements in stocks (Avoid black swans)
9. The market doesn’t go straight up or straight down (Use technical analysis to identify pivot levels in the market)
10. Use statistical analysis and data science to continually improve my trading strategy (Always reflect and improve)

My Strategy:

In order to adhere to the philosophy I identified above, I created a trading strategy where I solely sell either out of the money bear call spreads or out of the money bull put spreads on the Nasdaq futures. These spreads are always composed of options that expire on the same day. Through this trading vehicle, I am the one collecting the premium on the options every time I open a trade, thereby putting the passage of time in my favor. If the market doesn’t move for an hour, the value of the spread I sold decreases and I can buy it back at a lower price than what I sold it for, thereby making a profit. If the market goes in my favor then my spreads move closer towards being worthless and I am able to keep most if not all of the premium I collected when I opened my trade. If the market goes against me, I limit my max loss with the options that I buy as part of the spread.

The specific mechanics of my trading strategy are outlined below.

Acceptable Products and Trading Vehicles:

1. Only trade Nasdaq Futures (NQ) option spreads
2. Only sell bear call spreads or bull put spreads
3. Always sell spreads where the strike of the short option is $40 away from the strike of the long option
4. I must collect a minimum premium of $10 per spread sold

Identifying levels of interest:

This is my secret sauce, I might eventually share this publicly. Generally speaking, I identify important levels using various forms of technical analysis.

Entering Trades:

General entry rules:

1. I only enter trades between 9:30 AM to 10:30 AM
2. No trading on days when the FOMC makes rate decisions
3. No trading on days when FOMC meeting notes are released
4. No trading before any important economic report
5. Be weary trading on days when the 3 day MA of volatility has crossed above the 5 day MA
6. Be weary of trading on days when both the 3 day MA amd 5 day MA of volatility are rising
7. Be weary of trading on days when the 3 day MA of volatility is rising

Reasons For Entering a Trade: 

1. When a level is reached and rejected or when a level is reached and breached
2. When certain specific reversal or continuation patterns are formed

Exiting Trades:

General exit rule:

1. Every trade must be closed within 1 hour of when it was opened

Exiting at a profit

1. If I sold bear call spreads, then when the next support is reached I close my trade
2. If I sold bull put spreads, then when the next resistance is reached I close my trade
3. If a technical pattern develops that suggests a move against my trade, then I close the trade
4. If a news item is released that is likely to move the market against my trade, then I close the trade 
5. If the market structure has an intense shift against my trade, then I close the trade 

Exiting at a loss:

1. If the pattern or level rejection/breach that caused me to enter the trade is negated then I close my trade at a loss

Risk Management:

1. All trades must have a maximum “max loss” of $3,000 USD
2. Once I have lost $3,000 USD on a given day I must stop trading for that day and can not trade on the following 2 trading days either

Daily Activities:

Night time activities:

1. Scan of bloomberg news, and WSJ
2. Analysis of NQ and NDX’s chart
3. Analysis of the stocks of the main stocks driving Nasdaq’s performance. Normally that includes NVDA, AAPL, MSFT, GOOG, TSLA, META and AMZN
4. Scan of treasury yields, gold and oil
5. Check the economic reports calendar for the next day
6. Check the earnings release calendar for the next day
7. Update my Market volatility monitoring tool
8. Journal entry regarding how the trading day went
9. “Tomorrow’s Trade Ideas” journal entry about the trading plan for the next day
10. Updating my historic trade log with all of the trades from the prior day

Morning activities:

1. Analysis of NQ and NDX’s chart
2. Scan of bloomberg news, WSJ
3. Scan of treasury yields, gold, oil and the stock charts of the important Nasdaq stocks
4. Closely monitor NQ chart from 8 am until 9:30 AM
5. Confirm or adjust trading plan established the prior night

Trading Times: 

Trades can only be entered between 9:30 AM and 10:30 AM and can be held for a maximum of 1 hour

Mental State During Trading Hours:

1. Yesterday’s Profits or losses have to be completely out of mind
2. I am looking to profit from identifying unlikely market movements not from predicting what the market will do
3. The rules are the rules everyday
4. Today is one tiny battle in a very long war (whether its a profitable day or a losing day it will not change my life – consistently applying my strategy everyday will)
5. Emotions should never be too high or too low

My Edge:

1. Ability to identify important price levels well
2. Good understanding of the main drivers of the market
3. Ability to see shapes, trends and patterns in the market’s price movements
4. After a pattern around a pre-identified level is formed, I am good at identifying the direction of the next price movement
5. Having the time value of options work for me instead of against me

Rules to reduce temptations of placing trades outside of my trading hours:

1. No checking StockTwits between 11:30 AM – 5:00 PM
2. No checking charts between 11:30 AM – 5:00 PM, with the exception of 1 check at 2 PM and 1 check at 4 PM