Discipline is Key
Earlier this week I wrote about some lessons learned from a trade that I had deployed. Happy to say that I recovered quite a bit on the trade and ended up taking a much smaller loss than what I had anticipated when I wrote the note.
And I realized that it was down to the discipline of sticking with the system I had built for myself. When I was writing that note, I was unconsciously also “deciding” what I had to do to have a chance of getting out of the situation I was in.
One of the key tenets of my system is to have the discipline to be patient and let the market come to me. That is what I did. Instead of panicking and taking a big loss on the trade (which would be the expected thing to do - we have all heard about how one must not let losers become bigger losers and one should take the loss and move on) I decided to stay disciplined in the belief of my system. What ended up being a small loss actually felt like a win.
I will find the time to summarize this new system that I am using at some point here. Suffice it to say it is a very aggressive system and I am only betting on it with 5% of my total capital at this point in time. The system is geared to deliver returns more as short-term income than long-term wealth building.
As an example of what the system is, currently I am holding September call options on SPY and QQQ which are break even. Today, the markets look like will open down and I expect my call options to be deep in the red. I will be doubling down on the calls and waiting for a mean reversion. Yes, that is contrary to what we have usually been told to do.
What I have learned is that dollar cost averaging works both ways when you are playing the short-term game. As long as there is no complete capitulation of the stock markets, one can use it to lower the average cost and then get out with a small gain.
The intent is to stay as close to break-even as possible as the stock market is going against you. Then, when the reversal happens, I can get out with a 10-40% gain on the options. The way to do this is to plan for deploying the capital on the trade in increments so as to take advantage of lower costs if the trade starts to go in the opposite direction. Then when the reversal comes, get out with the gains.
I know all the above sounds cryptic to the reader. I will break it down in greater detail at some point in time here. This is my 7th week using this system and so far, it has worked extremely well. I am using the first 10-12 weeks to fine-tune the system after which I will document the “ruleset” and share here.