Tuesday, September 11, 2007

Learning to Trade... the hard way

So the last week of ups and downs have taught me two lessons I really should have known:

  1. Use bracket orders to set sell points, both at profit-taking and loss-prevention points.

  2. Gold used to be a hedge against the stock market. Now, it mirrors the stock market.
(1) I realized because the market has been making huge swings, and obviously, trading at work prevents me from watching the market constantly. I ended up missing great selling points and then getting really screwed on the way down, as everyone jumped on the profit-taking wagon.

I now have a pricing rule for my options (using + to indicate profit percent and - to indicate loss percent):

25 cents or less: +40,-25
26-50 cents: +25, -20
51 cents to 150 cents: +15, -10
151 cents or more: +10, -5

If you consider options in general, you will see these price points make sense, as early on, the out of the money options tend to swing a lot and have lower prices. Closer to the money options are also more expensive, but this also prevents huge swings.

(2) I did manage to sell my gold options for a 5% profit, but for a good 3 days, they were down 20%. Why did this happen? I thought perhaps when the market was down, people would rush to a safe commodity, gold. Instead, as a co-worker explained to me, gold has been mirroring the market in recent years because the same money being put into the market is also put into gold. So when investor confidence is low, and the market is tanking, that same money is not being reinvested into gold. Instead, its probably being pulled out of the market altogether.

No comments: