Wave Chasing

So, the overnight US futures are looking OK at the moment, even though Asia is a nice, bright red. Might actually have a chance at a little pop at the open if the US markets decide Asia was being reactive and not predictive, and realize we really *are* oversold yet again, which we are.

I’ve got a couple crap holdings I’ll be selling into the next bit of strength I see on them. It’s not a matter of the overall bad tape getting to me, these are just basically crap that I’ve held too long and aren’t going to recover and turning them into a “long term” holding isn’t going to make them any better, that’s for sure.

Now, I could sit here and cry in my beer over it, but I’m not going to. When I set my targets on trades, I take into account the past 12 months of gains, losses, hold times, as well as the current holdings. As these have gone south, it’s been taken into account along the way and the targets I set take into account the fact that there are a certain percentage of losers in the port. It’s all good.

I’ve been thinking about how I’ve been setting my targets and measuring my progress. At the moment, it’s based on YTD results and basically I’m attempting to “make up” for prior bad months. This makes me wonder if I am overreaching on some of my targets. This is the first full year I’ve been trading, and yes, I’ve made some errors along the way, but with each error, I get better.

The timing of these musings is a good one – given that we’re right at quarter end, I think that for Q4 I am going to base my targets on the Q4 performance only and leave the first 3 quarters behind. It wouldn’t be that I am just sweeping those results under the rug, just more staying in the present so to speak. So, if I’m shooting for a 30% annualized return, I’m not going to muck around with trying to make up for Q1-3, just shoot for a 30% annualized return in Q4. And if I hit it and/or go above it, trading ceases.

Had I used this strategy all year, I probably would have missed out on a lot of the July pain.

I’ll still be doing the pick service report card on YTD numbers, cause that spreadsheet hooks into another calculation, and I don’t want to have to reinvent the wheel on that one. It will only require a few minor adjustments in my main calculations. I think this could work better for me on many fronts. So, I guess I have my project for the weekend getting all everything switched over to QTD calculations. Nice that Q3 ended on a Friday, isn’t it?

I’d also considered only working on a MTD basis, but that seems too narrow. I realize the daily postings show MTD progress, but those are just “how things have changed over the course of the month” and do not factor into how my targets are calculated – this change will be on how I calculate my targets and if/when I stop trading for the quarter, as well as for comparisons against my broker & SPY on a QTD basis. Also, average hold times will be based on QTD trades, not on YTD, which is important as my hold strategy has changed over time and I don’t feel that it is fully being taken into account.

The only wrench I see getting thrown into things this quarter is the sale of my townhouse. That influx of cash is going to push down my returns, but there are much worse reasons to have returns go south.

And hopefully we’ll have a big honkin’ up day to start off the new quarter.

ETA:  And yes, there is the mental aspect of starting off with a clean slate quarterly vs annually that has a lot of appeal.

I trade across 4 different accounts – one taxable, and three retirement/tax-deferred accounts. I’ve been thinking about this for a while, and I am going to let the trades in the tax-deferred accounts unwind and then just put all of the funds into SPY’s. It will make things a little simpler to only be trading from the one account, and simple is good. Also, I’ve been choosing more conservative trades for the retirement accounts anyway and I’m not super happy with the performance. (On the other hand, the taxable account is going great guns – beating both the S&P and my broker’s returns.) So, I think that moving the retirement funds into the SPY’s will make things easier, give me the diversification and equity positions that I’d want anyway, and the returns are decent as are the dividends.

I’ve already worked it into my planning, and it surprisingly doesn’t mess up my targets for the taxable account by a large amount.

The market pullback of the last 2 days should also give me some nice entry points over the next couple weeks as I move into the new security. I’m looking forward to seeing how focusing all energies on the one taxable account affects the returns there – hopefully well!

Realistically, probably not really farther than tomorrow – next week if you’re exceptionally lucky. So, why the hell bother at all?

Because plans are a tool. They can be a motivator, a measuring stick, a way to keep some focus on things.

I know very well everything could change in the blink of an eye. My brother (and co-owner of the house I live in) could decide he wants to move somewhere else, so suddenly I have a house to sell. I could get married and move to New Zealand. Hell, I could marry the guy I know that already has a place at the beach. Maybe I decide I’m tired of waiting, sell this place, leave my brother homeless (but with some cash at least) and go get the condo now and just change the plan to getting the land someday.

But despite all that uncertainty, I still keep my plan intact (with necessary tweaks along the way, of course) and keep moving towards it. When things change, the plan will change, but for now, it’s the plan.

Quick Stats, at current returns…
Early Retirement Only: 18.2 years
Buy the Condo 18.0 years
Retirement at the beach: 23.0 years
Ahead/Behind on 10 Year Plan: $34,050.53 Behind
Discretionary spending up/down from 2006 Down 1.77%

The beauty of using your own techniques is the ability to make changes when necessary. Not panicking and making changes on a single trade, but a change made to an entire technique.

I’ve decided to remove upside stops and go with all trailing stops. The initial stop will be based on chart analysis and support levels. (Stage n1) When the holding reaches 1/2 to the target, the trailing stop will be changed to break even. (Stage 2) When it gets to the target, the trailing stop will be seriously tightened up and that’s that. (Stage 3)

Should be a little easier to maintain, and today’s trade that ended up so well that I’m glad I’ve made the change.

So, this weeks carnival of dentistry got me rethinking how I’m planning for health care costs. Up until now, I’d just dumped them into discretionary spending. But this big hit made me realize that it needs to be set aside in its own category. Even though I don’t normally spend a lot on healthcare (thankfully), it still skews discretionary spending and I need to be able to have other potential big hits (such as having to actually use my entire insurance deductible in a year) accounted for in my planning.

So, there is now a dedicated health care category in my plans, based on the average spending over the past 5 years. This month’s hit has it at a pretty high number, but hopefully I won’t have something like this happening every year and that average will slowly go down to a more reasonable level. If not, well, I’ve at least planned for it.  The drop in planned discretionary spending does at least partially offset the increased health care, so it hasn’t thrown the overall plan too far out of whack.

Just a quick overview of WTF I’m talking about w/my trades. The numbers used are just examples (nice round numbers!) -the real ones are all spreadsheet driven…

Calculated Minimum Target: 2.5% – this is the calculated percentage return needed on a trade.
Target: 3% – Calculated minimum target rounded up to the next full percent – that is the target actually used in trading.

Stage 1 – The start – Set the upside target at 3% and a hard stop based on chart analysis. Sort of “set it and forget it” – everything is in place if I can’t be watching the charts all day. Also covers me if there is a pop/drop at the open.
Stage 2 – When a trade has gotten 2/3 of the way to the target – I increase the sell target by 1% to give it some room to move, and change the stop to a trailing one, say 4% to a breakeven trailing % – in this example, 2%*.  Since the trade is showing some strength, no need to let it go all the way back down to the original stop if something goes wrong.

Stage 3 – When a trade hits the 3% number, I remove the upside target altogether, and place a trailing stop equivalent to the difference in the rounded up target (3%) and the calculated minimum target (2.5%) and just let it ride – so, a .5% trailing stop. This way I am at least getting the minimum calculated target if the trade should just turn right around, but if it continues to go up, I’m not leaving money on the table, and still protecting myself when it pulls back.

So, that’s what I’m talking about when I have trades in stages 1, 2 or 3.

This post is solely for illustrative purposes as to what I am talking about in other posts. It is NOT trading advice in any way, shape or form and most definitely should NOT be construed as such.

*Sorry for the post-posting change, the system is still being tweaked.

As I said in a previous post, I’ve got a big ol’ spreadsheet to figure out what my targets need to be to get to where I want to go. It can be easily adjusted for changes in expenses, target dates, etc, etc. It has a “projected” section, based on 1/1/07 balances and where I need to be on any given month – that is my ‘actual to needed’ info (what becomes the ahead/behind number in the quick stats.) Then I have a section starting with the current month and what I need for targets to still get to the end goal. (The start date/numbers on the projected side will be changed at most every 6 months, otherwise where you “need” to be can look too good when it’s not.)

Since I put it together, there have been a few tweaks – and I’ve not just made them on the “current” side, but also the “projected from 1/1″ side. No sense in penalizing myself for realizing I didn’t include something in the initial projections. If I’m 20K behind, but forgot to factor in 18K of improvements on the townhouse before it’s sale on the “projected” side, but they are included on the “current” side, then I’m really not 20K behind, am I? In the same vein, if I was 2K ahead but forgot to factor in an escrow refund of 1K, then I’m really only 1K ahead of the game. That’s why I feel it’s OK to revamp the projected numbers of where I should be vs. where I am – because life is fluid, and you don’t necessarily think of every single little thing on the first cut of any projection. (I know from too many years of doing financial forecasts that you never believe your first cut, ever.)

This week already has included changes for my cell phone bill (flat out had the wrong number), annual pool dues (it was always included in my HOA expenses before now), and an electric bill average that was too high (pulling off a bad spreadsheet.) Then there was the matter of vacations. I’ll be at the beach for two weeks this summer, then there is the week between Christmas and New Years. Plus miscellaneous days where I have to put things on autopilot and days that the markets are closed. So, trading targets had to be adjusted for that as well. (225 trading days vs. 260) So, I made the adjustment and didn’t think twice about it.

Still not sure how to take into account portfolio rebuilding after the beach and Christmas, or if I’ll even really worry about it. I’m just planning on setting my targets and stops before I go and letting them unwind on their own – so I’ll probably return to a large cash position after both. It seemed to take a very long while to get my port built in the first place, but that was over 6 months ago and I was also only using one pick service at the time and still getting back into the swing of trading.

There is also the matter of where I live now – I co-own it with someone who is not in a position to buy me out, so I can’t factor it into any of the equations. However, if he were to decide he wants to up and move, you can bet your sweet ass my cash on sale would definitely be factored into my plans.

So yes, plans and targets are great, and important – but you have to be willing to change them as other things change around you. If you can’t do that, then you’re just looking at frustrating yourself for a very long time.

Even when things are going well, you have to be willing to look around and see if there are things you can be doing differently. Today, I implemented some new tweaks to my trading strategies, and I am already seeing improved performance from them. They require a little more attention during the course of the trading day, which is fine as these changes only provide a “bonus” over what I’m doing anyway, so if I do have a “set the targets and stops and leave” day, it’s still good.

Being able to figure out a way to tweak a little more out of trades while still being able to take a “day off” when needed was critical. I don’t want to be tied to the charts all day if there is something else I want or need to be doing.  Summer is right around the corner and I definitely see some time being spent outside.  :)

Is actually fairly straightforward, and started as of 1/1/07.

1/1/2012 – Buy condo at beach, keep trading
1/1/2015 – Buy land at beach, keep trading
1/1/2017 – Build house on land, sell condo, quit trading

I’ve got a big honkin’ spreadsheet to track where I am vs. where I need to be – allowing for adjustments as time goes on – no plan can be completely set in stone. It could turn into a 12 or 15 or 20 year plan, or who knows, maybe an 8 year plan. But since it is so very long term, all the more reason to make sure I am not just living for something way down the road.