Alesco Trade Journal

Many of you may have wondered why there haven't been any recent posts on my blog. The reason is because I have taken time off of trading to develop a Mac application. As with all projects it has taken much longer than I ever imagined, but I think the time has been well spent!

Alesco Trade Journal is a Mac application for traders. It allows traders to record thoughts and notes before, during, and after a trading day. It also will track trades along with chart snapshots, giving traders a visual history of trading decisions. Combine these features and traders can more readily identify strengths and weaknesses in their trading habits and strategies.

Please see our website at: http://www.alescotradejournal.com

I hope to get back into my trading/blogging later this year once Alesco is off and running.

What are the disadvantages of virtual trading?

Welcome back to the third and final part of my series on virtual trading! If you haven't done so already, be sure and read through part 1 "Why everyone should be virtual trading" and part 2 "How should I virtual trade?". In this part I am going to cover some potential pitfalls that can hinder the effectiveness of your virtual trading experience.

Part 3 of 3 - What are the disadvantages of virtual trading?
As with anything, virtual trading is not perfect. Being diligent and using the right tools can give you a very realistic virtual trading experience, but there are a few things you should be aware of. First of all no virtual trading system will be able to replicate order fills perfectly. In the real world buyers and sellers have to be matched up for a trade to take place. And that can not be perfectly simulated. Following are several aspects of this to keep in mind:

• Virtual trading may not account for trade size. For example, if you are trying to trade 100 contracts of an option with an open interest of only 50, you will never get filled. However, most virtual trading platforms will fill the order if the price matches your conditions.


• It can also take longer to receive a fill in the real markets. From what I've seen paperMoney does a decent job at that by only filling an order when a live order has executed at the same price or better. I have not however checked to see if they track order size.


• Virtual trading doesn't simulate negotiating the bid/ask spread. In real live trades you can often negotiate up to 1/3 of the spread using limit orders. For the specific strategies I use I don't count on that, but some do so keep that in mind. Negotiating the spread can also affect fill times.

Also, regardless of how much you try and convince yourself, the reality is that it's still not real money at stake. Psychologically you will take slightly bigger risks, or play out trades a little different. After time and practice this can be kept to a minimum, but it's something else to be aware of (or not aware of). On the flip side though, I have found that taking those greater risks has helped prove to me that sticking to a game plan is important. It helped me see during un-emotional trades how well things worked when I traded very logically. If you're doing funded and unfunded trades side-by-side this becomes even more obvious, which has helped me to keep emotions out of my trades. I have gotten emotional about an identical real trade and lost, while my virtual trade that stuck to the game plan turned a good profit.

Finally, you can see all kinds of virtual profits that are "good for nothing". Some people ask why I would waste perfectly good profit opportunities trading virtually when I could just use real money and have something to show for it. The problem is that those opportunities also bring risk. When I'm virtual trading it's either because I'm out of real cash available to trade, or I'm not 100% confident in the trade. Now I understand that trading is all about risk management, but I'd rather practice my risk management with play money until I reach an acceptable risk/reward track record. That level will be different for everybody so go with what makes you comfortable. If something falls below my comfort level, I virtual trade it that way I still get the learning value from it, but without the financial risks.

Have you learned any lessons on virtual trading lately? If so, leave a comment and share it!

How should I virtual trade?

Welcome back to the second part of my 3-part series on virtual trading! If you haven't done so already, be sure and ready through part 1 "Why everyone should be virtual trading". In this part I am going to cover some good practical advice on how to ensure that you get the most out of your virtual trading experience. I will also give some ideas on what tools you can use to make virtual trading as accurate and efficient as possible.


Part 2 of 3 - How should I virtual trade?
This can be as simple or as complicated as you want it to be! I have used various methods of tracking my virtual trades and the tools available now are much more advanced than what I started out with. The methods you use to track trades are not vitally important. Find a method that works well for you and stick with it.

What is more important is to make very sure that you are closely simulating a real-life trading environment. In order for virtual trading to work effectively you must make it as realistic as possible! The following list covers the essential items to ensure that you will get the biggest benefit from your virtual trading experience:

• "Fund" your virtual trading account with a realistic amount of money. If you have $10,000 of real cash to trade with, then don't go creating a $100,000 virtual account to trade with. You will be a sloppy, careless trader and will learn nothing more than how to throw up a million trades and maybe get lucky.


• Treat your virtual account like it's real money. You can't expect to learn anything if you don't treat it like the real thing. For every trade, stop and think "Would I do this if it was real money?" This rule is more for the beginning traders. For you more experienced traders, I mentioned using virtual trading to try out questionable or new trades. You're mostly exempt from this rule, but you still need to keep it rational.


• Don't trade in hindsight! One temptation is to enter your orders at the end of the day by looking at the stock price and think "Oh I could have bought this stock here." NO!! You put in conditional orders before the trade, just like any real trade. How you do this will depend on your tracking method, but make a static note of some kind beforehand what your entry/exit conditions will be. Unless you are backtesting a specific strategy (a topic for a whole discussion of it's own) you do not pick your trades in hindsight.

Now that the important points have been emphasized, let's take a look at some ways that you can use to implement virtual trading. I originally started out years ago using a few paper forms and file folders to track trades. It was cheap, and worked fine for the slower moving stock strategies I was using back then. However monitoring trades written down on paper can be cumbersome, and there are much better computerized methods available. If you are just going to be trading a few stocks this method could still work, but any more than that and I'd highly recommend finding a more automated method.

The next thing I used was a simple spreadsheet to keep a record of trades, profit/loss, and running totals. I actually still use this method for tracking the performance of my individual strategies. This method is also very cheap. If you don't already have Microsoft Office there are also free alternatives available. I currently just use a Google Docs spreadsheet so it is accessible from anywhere I have internet access. The other advantage is that there are almost endless possibilities for tracking and mining data from your spreadsheets. There is however still the disadvantage of not being directly tied to the markets. This makes it very difficult to virtually trade options if you buy options with the stock price as a trigger like I do. There is no good way to figure out what the option price was at the moment your trigger was hit. So I only use the spreadsheet to track trades after they are closed in my paperMoney account.

The best method is to use an online virtual trading tool, such as Thinkorswim's paperMoney. The great part about using an actual virtual trading tool is that it is tied to live (or 20min delayed) market data, which allows for the most realistic trading experience. It provides easy trade tracking and order history. I would highly recommend finding and using an online broker that offers a virtual trading tool! The additional advantage you gain is that your virtual trading platform will closely match the platform you use for live trades. This helps to make your virtual trading feel a lot more real, and it simplifies the transition from unfunded virtual trades to funded live trades.

There are a lot of social fantasy trading sites for stocks, such as Wall Street Survivor and Covestor. Unfortunately I still have not found any good sites for trading options other than a few of the online brokers such as Thinkorswim, OptionsXpress, and Zecco. I personally use Thinkorswim (ToS) for both my virtual trading (paperMoney) and my funded trading. The great thing about ToS is that they use the same platform for all trades. If you want to virtual trade you log into your paperMoney account, and if you want to make funded trades you just log into your normal account (same login credentials). This makes for very realistic virtual trading and ease of use. I have been very satisfied with their customer service even for issues with paperMoney. So far I've always received a resolution within a couple minutes via an easy-to-use online chat feature built into the platform.

If you want to sign up for a paperMoney account just go here and sign up. They may start asking questions for funding a live account, but you can just cancel out of the registration at that point (it's been while since I signed up for mine). They will let you demo their platform and virtual trade before funding an account. I used mine for about 2 months before funding, and a friend used it for longer than that.

To be continued ...

Be sure and subscribe to my RSS feed so that you don't miss part 3 "Downfalls of virtual trading". And, if you would like live trading updates be sure and follow me on Twitter.

Part 1 of this series was recently featured in the 191st Carnival of Personal Finance. Be sure and check it out.

Trades closed in January

Finally getting my month end summary up for the month of January! Life has been pretty busy lately with finding our first house and getting all the paperwork ready. We have a closing date set for February 13th (guess I'm not superstitious :-) ), and a move date of February 21st. Since we're going to have that nice first-time home buyer credit coming I've also gotten most of our taxes done and entered into Turbo Tax. Planning to submit right after closing and get that fat check coming :-)!

Trading has been a little slow so that has been a blessing in disguise, but that doesn't mean it hasn't been profitable! I love trading strangles because I can just let them ride out the storm and when the markets finally decide to make a move I make money no matter which way it goes :-). A great strategy when you don't have a lot of time and energy!

January Trades

1/9 - OXY May 55P - Net profit $134.10 (19.84%)
1/16 - SPX Jan 815/810P 975/980C - Net profit $183.20 (60.10%)
1/20 - GS Apr 55P/80C - Net profit $213.20 (10.02%)

Total loss realized in January $530.50 (8.03%)

Ending account value = $6,847.35
Realized/unrealized January gain of $725.30 (11.85%)

Why everybody should be virtual trading

Virtual trading is something that I think is a highly overlooked tool that any trader can use to make themselves a better, more effective trader. In this 3 part article I will look at several reasons why I think any trader should be virtual trading. Then I will jump into some good practical, hands-on ways that you can use to put virtual trading to work for you, and then finally some good tips and cautions to make sure you get the most out of your virtual trading experience.

Virtual trading goes by many names - "paper trading", "simulation trading", "fantasy trading", "practice trading". But no matter what you call it, the fundamental idea is the same. You are pretending to trade something (stocks, futures, options, etc) without actually trading the real thing. For the purposes of this article I am mainly referring to stock and options trading, but the same principles can be applied to just about anything.


Part 1 of 3 - Why everybody should be virtual trading
Beginning traders are the first people that come to mind when I think of virtual trading. Even though I think it can help all traders, I think beginning traders need it the most. The stock market is not a place to get rich quick by any means! Some people see it as this magic place where people make fistfuls of money for very little work. Granted some do, but I'd rather not find out I'm not one of those lucky few after putting my own hard earned money on the line and losing it all. The markets can be a harsh and unforgiving world for those who haven't learned the skills necessary.

Virtual trading provides several benefits to beginning traders. First of all it allows them to get their feet wet in the markets, and get a feel for what it's like. Then after trading for a little while a trader will start to get a good feel for their trading style, risk tolerance, and maybe some favorite strategies. Once a trader has learned a little more about how and where they feel comfortable trading, they can start honing in on those areas and gaining more specialized expertise. There is no right answer for trading the markets. Some people think they have the win-all and be-all strategy for the markets, but they really don't. You have to pick the style of trading that fits you. And you will only find that by being active in the markets.

Why risk your own hard earned money before you know what you are doing?? Sure some of you probably have loads of money and can risk a small piece to get going. Others of us only have a small amount that has taken years to save back. My advise to you is to virtual trade until you have proven to yourself that you have found your niche, and can be successful at it. Then you can put your own money out there with confidence knowing that you already have proven skills you can use to make a profit in the markets.

For all of you more experienced traders I still think virtual trading holds two very important benefits. I have met some very successful options traders in the past (read multi-millionairs who started with a few thousand), and every single one of them said that they made a habit of trading unfunded virtual trades in addition to their normal trading. When asked why, they usually gave two answers. They used virtual trading to learn and develop new trading strategies, and to maintain an edge on the strategies they were already using.

Once your accounts start growing and you have more money to trade, you will probably want to start diversifying trading strategies. For example, I have been trading long strangles on stocks, but I am now starting to diversify into iron condors to help hedge against markets running flat and causing big losses. Also, I would have a hard time trading either of these strategies on an account much over $150-200,000 because you need to keep trade sizes small enough to remain very agile in the entrances and exits.

When learning a new strategy in some ways you almost go back to beginner status, especially if the new strategy is much different. What better way to tinker around and fine tune your trades than to trade the new strategy with unfunded virtual trades? Once you have built a solid record of virtual trades, then once again you can take the strategy live with confidence.

Even if you're not attempting to learn a new strategy, any trader that has been around for very long knows that the markets are continually changing. Trading is part science and part art. You can rely on technicals, but those only help tell you what is happening, it still takes a special feel and skill to know what to do with that information. Because of this, I feel that is is good to always run at least a few virtual trades along side of your normal funded trades. You can make little tweaks and changes, and then watch how the two accounts compare. Often you will find that you can sense changing market conditions a little sooner this way, and already have a few adjustments ready to implement. Or maybe you have a trade that looks really good, but you just have that funny gut feel about ... just do it in an unfunded account and see what happens. Who knows, you might find some adjustments to your strategy on accident :-).

To be continued ...

Be sure and subscribe to my RSS feed so that you don't miss part 2 "How do I virtual trade?" and part 3 "Downfalls of virtual trading". And, if you would like live trading updates be sure and follow me on Twitter.

Late night update with a new long strangle play

Markets haven't been moving much in any one direction much the last week. That combined with no new good trade candidates has made for some slow trading. But that's fine by me as I have been busy getting a contract finalized on our new house :-), and helping start a new non-profit organization (not related to stock trading). Waiting to get a signed copy back in my hands, but it looks like we have a brand-new 3br/3ba house :-)!! Huge answer to prayer with the baby on the way, and our apartment lease coming due. More details to follow as things progress ...

Potential Trades

RIMM Jun 45P/60C ~12.00/contract
- Typically I put in separate orders for the put and call legs of a long strangle. The problem I see with that on this stock is that it gaps a lot. That is the one downside to separate legs with triggers based on stock price ... you can get burned if the stock gaps significantly. So, I'm going to try something new by submitting an order for the full strangle to execute at the market 15 minutes after market open. The 15 minute delay is to try and avoid the crazy first 15 minutes of trading that can throw off option premiums.

Updates

MS Apr 15P/20C - Seems to be bumping up against resistance at $19.58. It broke through yesterday, but then pulled back to close below. Today it closed above that line, but only marginally on lower volume. I'm putting in a trigger to dump the Apr 20 calls if the stock falls below $19.05, which is below today's low and the 100-day moving average that it broke above today. It showed a little strength after-market tonight, but we'll see.


OXY and FWLT - Both of these stocks have yet to make a decisive move. They are both May expiration, so there's still plenty of time.

Almost 90% trade accuracy!

There was a lot of chatter all over today about the big event, and how change is coming, blah, blah, blah. I'm not going to say much because this is a financial blog, not a political one (though they are very much tied together). I'll just say that the markets were about as, or more, excited for our new president as I was. Change is coming alright, but I'm afraid it's not for the better.

GS was somewhat frustrating to me today. Ended up giving up about $312 in profits if I hadn't sold it first thing this morning :-/. I did still make my target profit of 10% so I should be happy, it's just hard to see easy profits like that slip away. On the other hand that's expected with the way I play strangles. My idea is to make consistent, steady profits and not go for the big ones. Take a little piece on every play, and be more consistent at it.

Speaking of consistency, I currently have a profitable trade ratio of almost 89% :-)! Since I started tracking my trades the end of May I have had 39 profitable trades, out of 44 total trades. Not bad considering the crazy markets we've been in during that time. My trading account also crossed the $7,000 mark for the first time today, which puts me at 62.2% growth since May 27th. Every single trade I've closed can be seen here. (Note: In the interest of full disclosure, I did have another small account for a while where I was trying to see how small of an account I could start trading with. I am not counting those trades as that account was a bit of a flop. Also, my Iron Condor trade is not yet on my trade record spreadsheet since I haven't figured out yet how I want to track individual strategies in the same account.)

Recent Activity

1/16

Opened OXY May 50P/55C long strangle - 1 contract for $14.80
- Entered limit GTC sell order for $16.40 (~10% net profit)

1/20
Sold GS Apr 55 put - 1 contract for $6.95
- This closed out my long strangle for a net profit of $2.132 (10.02%)

Potential Trades

Not seeing anything that looks good right now. Trying to be patient and save my cash for a good trade when it comes along.