Using the trading guidelines that you have written in the previous business project: My Trading Strategy; you are now to test this strategy utilising a virtual trading diary just as a trader would.
You are to select 10 different stocks to trade your strategy over. (Note: They don’t all have to commence on the same day. One of the disciplines of a trader is if there isn’t a trade presenting you don’t place one. Trades are only place when an opportunity presents itself. Additionally, a trader has to manage their margin. Everything must line up.)
You can either do this on paper i.e. diary only or open a virtual account with a broker that provides one. (Our preferred broker is OptionsXpress www.optionsxpress.com.au). (If you don’t have an account open, you will need to allow at least a week for this process.)
You are to submit screen shots of the charts overlaying the stock with Bollinger Bands, Slow Stochastic, RSI (Relative Strength Index).
You are then to note which options strategy you will be using and different possible trades. You are to virtual/paper trade them from 4-8 weeks from expiry.
Below is an example of how the detail required to diarising them should be laid out:
Date: 25/5/14
Stock: ABC
Stock price: $22.50
Actions:
STO 15 contracts x $20 PUTS
BTO 15 contracts x $18 PUTS
Profit = $350
You are to note the following stock, stock price, date, action i.e. sell to open, buy to open, sell to close buy to close.
If you are using a virtual broker also submit the margin the broker has held back and the return on investment (ROI).
Remember: Profit / Margin = ROI (Return on Investment)
You are then to look for exit points where you can lock in profit and submit how you closed out the trade.
Date: 25/6/14
Stock: ABC
Stock price: $23.15
Actions:
BTC 15 contracts x $20 PUTS (Cost to buy back + $100)
Let expire: 15 contracts x $18 PUTS
Profit = $250
If you have to roll down and morph note the steps you have taken and whether the trade is now profitable or a loss.
Actions:
Stock price = $19.90
BTC 15 contracts x $20 Puts (Cost to buy back -$750)
STC 15 contracts x $18 Puts (Sale price $250)
Profit = -$250
STO $19 PUTS (Income received +$850)
BTO $17 PUTS (Cost to buy -$500)
Profit = $-250 loss + $350 profit = $100
At the end of the trade analyse your actions and explain your thought process in taking the trades.
What were you expecting the stock to do?
What protective measures did you put into the trade when entering?
If the trade went against you what actions did you take to mitigate the loss?
Analyse if there was anything else that could have been done to improve the trade. (This exercise helps a trader acquire learning through experience.)
Students of the 12 Month Premium Course are required to submit their charts, diaries, and findings at expiry of the options for the 10 stocks they did this for.
Happy virtual trading!