Trader Rick

New Look at R Multiples and Partial Profit Taking

2011-08-04T10:56:00.000-07:00

This post will require a familiarity with R Multiples (Van Tharp's idea). I did a study on partial profit taking as my timeframe changed from intraday to swing trading. I know that Van Tharp doesn't believe in partialling out of trades, but there are psychological benefits in my opinion. My swing trading exit strategy is to partial out 75% of my position at 1.5R and let the rest go to at least 4R. When you are only holding 25% of your original position, you have the freedom to let it ride and feel less temptation to exit early. Holding overnight becomes less harrowing when you are only holding 25%.

To use this spreadsheet, you should have an idea of the probability of your first and second targets getting hit. If you don't have data, you can guesstimate or paper trade until you have enough data to determine how accurate your entries are.

https://spreadsheets.google.com/spreadsheet/ccc?key=0AicC1UrMfnSqdFhlMTVaYVpmWkJHTlg3RjIxNjg3VXc&hl=en_US

XLF - descending triangle

2011-05-13T10:45:00.000-07:00

I can't think of many reasons to be long here. XLF is setting up a descending triangle, there is the H&S setup in XLE, the dollar is getting a dead cat bounce or maybe more, the "sell in May" effect, end of QE2 approaching... It's very difficult for markets to rally without financials participating.

Volatility Based Position Sizing and Choppiness Index easy language code

2011-04-22T17:14:00.000-07:00

I don't really pay much attention to this little blog anymore but I've noticed looking at the stats that two of my most popular posts deal with volatility based position sizing and Bill Dreiss's choppiness index. So in the spirit of open source, I'm releasing my code here. Hopefully it is helpful to someone out there.

Inputs: InvestmentCapital (70000),
PercentRisk(.2),
MaxPercentAllocation(50),
StopFactor(.025), {volatility based stop}
ProfitFactor(3);

Variables: DollarRisk(0), NumShares(0), Vx(0), timeofentry(0);
Variables: HMax(0), LMax(0), Period(14), Choppiness(0);

DollarRisk = InvestmentCapital*PercentRisk/100;
Vx = SquareRoot(AvgTrueRange(50));

NumShares = DollarRisk/(Close[0]*Vx*StopFactor);
SetStopShare;
SetStopLoss(Close[0]*Vx*StopFactor);
If ProfitFactor > 0 then Begin
SetStopShare;
SetProfitTarget(AbsValue(Close[0]*Vx*StopFactor*ProfitFactor));
End;

If NumShares*Close[0] > MaxPercentAllocation/100*InvestmentCapital then Begin
NumShares = 0;
End;

NumShares = Round(NumShares, 0);

HMax = MaxList(Highest(Close[1], Period));
LMax = MinList(Lowest(Close[1], Period));
If Hmax = Lmax then Hmax=Hmax+.00001;
Choppiness = 100.0 * Log(Summation(TrueRange,Period)/(HMax -LMax)) / Log(Period);

Japan - deflation

2010-12-31T08:44:00.000-08:00

I'll let you draw your own conclusions and parallels to Quantitative Easing in the U.S.

Importance of developing complimentary systems

2010-02-24T10:37:00.000-08:00

Developing systems that work well in a trending market is not very challenging. But as they say, the market only trends about 30% of the time. Finding a system that works well in a low volatility, trendless market is more difficult, and that's what I've been searching for the last 6 months. I've now found something that works decently. There is little to no overlap between my trending and choppy system, so when one system is active, the other is inactive. When one system has a good month, the other tends to have less trades and lesser performance. The end result is a much smoother equity curve.

Monthly performance of trending and choppy systems

Combined equity curve

TSL - Bear Flag

2010-02-02T07:46:00.000-08:00

I'm personally not trading individual equities but I couldn't help but notice the solar stocks setting up for a possible continuation move down. See also STP for a nice symmetrical triangle. FSLR could easily move to 100.

Something is brewing

2009-11-12T19:52:00.001-08:00

Check out the huge volume coming in to UUP several days ago. Looks like the dollar is double bottoming while the S&P could be double topping. Check out $USD also.

As a side note my automated trading systems are forward testing perfectly. I would be trading them today if my broker wasn't being a pain in the neck about not giving me a pattern day trading account. But I'm pursuing some other interests and shooting a video of an idea I have to pitch to a local company. So that's my life in a nutshell.

Choppiness Index vs. ADX

2009-09-02T18:54:00.000-07:00

I just wanted to mention that in my testing I have found Bill Dreiss's Choppiness Index to be far superior to ADX. ADX is supposed to measure the strength of a trend, but the CI does more by telling you how orderly price is moving using fractal geometry. I just started live trading small positions this month with an automated strategy. Hopefully the volatility will start to pick up a bit as traders come back from vacation.

Volatility Based Position Sizing

2009-07-16T11:18:00.000-07:00

I just finished coding a volatility based position sizing algorithm and the results are pretty dramatic. My hypothesis was that it would transform my system's equity curve into more of a straight line and that's exactly what it did, smoothing the results over time. When conditions are more volatile a wider stop is used and less shares are purchased. Less volatile means a tighter stop and more shares, so smaller moves are capitalized on.

If anybody is interested in seeing the code I can post it with the disclaimer that it hasn't been tested in live trading.

Before Position Sizing with Static Stops

After Position Sizing with Dynamic Stops

New direction for this blog

2009-07-09T10:31:00.000-07:00

For those who may have been following this blog for a while, I want to let you know that this blog will be taking a different direction. If you are mainly interested in seeing examples of discretionary trading, than there are several excellent traders that I link to over at the left column. I was discretionary trading for the last year and a half to get familiar with the markets. I am now embarking on the second phase of my trading career. Discretionary trading taught me a lot about myself. If you don't think you are emotional, try trading for a while. I had some good months, but I realize that the biggest obstacle to my success is myself. I believe that to really become a good trader you must enjoy the challenge of trading and have extreme mental toughness. Watch Tiger Woods play golf and you will see that he is intensely competitive and always believes that he is able to win, even after some bad shots. As a trader you have to be able to shake off some bad trades and not get into a negative feedback loop. It is difficult to "keep the faith" after a drawdown period no matter how many psychology books you have read. My advice to those looking to discretionary trade is make sure you love what you're doing.

If you're still reading than you probably have an interest in automated trading. I've been using Tradestation for about a week and have already developed some simple algorithms that outperform my own trading record, so the results are encouraging. I don't think I will be sharing the specifics of my strategies out of fear that Golman Sachs reads my blog and starts frontrunning my orders :) My approach to developing automated strategies is to keep it simple and general. I think if you get too specific, you end up with something that works great for a short period of time and then stops working. If I look at the trades my systems make, I can see examples of how people trade, like that's a narrow range bar at the ORH, or that's a pullback to a 50% fibonacci retracement. But I'm not searching for those setups specifically. If you keep your strategies general, you cast a wider net. There is always the temptation to overoptimize. If my algorithms start performing at an 80% win rate, I get suspicious. I look for a profit factor around 2.0 and a win rate around 60-70%. Anything higher seems suspect. I backtest over several years but weigh the last two more highly. I test on SPY mainly, but I may be getting into currency trading as a backup market. Right now there is too much correlation though, so the benefit of diversification really isn't there.

MOT - ascending triangle breakout

2009-06-09T09:29:00.001-07:00

I'm actually in this long term. Thought it wouldn't hurt to talk up my book. If all my readers buy MOT right now it could move the stock up .001 cents. The market's been a real snooze--not much to comment on.

Thursday trade - SU

2009-05-21T08:17:00.000-07:00

I was seeing a lot of good setups today--it was hard to choose. I couldn't resist these two really negative candles (almost a tweezer top) at the PDL on high volume in SU. One negative was that there was a lot of congestion between 30 and 30.5 so I was expecting it to stall at the ORL at 30.4. It did stall there but on fairly low volume, but I didn't like how much relative strength SU and USO were showing. I tightened my stop to BE plus a little extra for my efforts and got stopped out for a small .46R winner.

Setup: 65

Wednesday missed trade - MS

2009-05-20T11:13:00.000-07:00

While the rest of the market was rallying in the morning, financials were going sideways and XLF printed a series of negative candlesticks. This trade was more instinctive, I just had a feeling that if MS broke 29, it would go down for a while. I waited for a break of 29 and then entered a limit order at 29. If I put the order at 28.98, I would have been filled...

Wednesday trade - POT

2009-05-13T12:01:00.000-07:00

I traded this as a bullish pennant. The setup was nice and the breakout occured on pretty strong volume. I was really on the wrong side of the market though. After entering the trade I looked at the market internals, which were awful, so I tightened my stop aggressively to 104 and got stopped out for a .45R loss. We're entering summer trade, so I'm trying to be more selective and only trade stocks that are in play.

Setup:65

Friday trade - DRYS

2009-05-08T11:46:00.000-07:00

DRYS was showing a lot of relative weakness today compared to the market and DSX and EGLE. It was bouncing off of 8.3 on very low volume midday. I shorted on the break of 8.3. The breakout bar was a nice WRB with high volume. I was holding out for 7.5 and kept tightening my stop. It ended up bouncing off of 7.6 with no real indication it was about to turn around so I got stopped out at 7.85 for a 1.9R trade. Lately I have been getting faked out by something I see on the tape so I didn't tape read today and I had a more relaxed state of mind.

Setup:65

Monday trade - ACAS

2009-05-04T12:47:00.000-07:00

I was planning to trade this as an OR breakout. My broker won't let me place stop orders within 10 cents of the ask price, so on low priced stocks I have to use limit orders and enter manually. I jumped the gun on this one when I saw some strength in the tape and entered early. It ended up breaking 4.25 in the afternoon after I had scratched the trade for a small .33R loss. Today's action felt very fishy as financials were the primary mover. There was a noticeable lack of herding. But I was on the right side of the market, in the right sector so I'm patting myself on the back for going with the flow and not trying to stubbornly short today.

Setup:60

TLT breakdown

2009-04-28T12:40:00.000-07:00

The most interesting thing that happened today was TLT broke below 100. Either we've already entered slow summer trading mode or everybody is waiting on the FOMC annoucement tomorrow, but it's been like watching paint dry.

Discretionary vs. Automated Trading

2009-04-18T10:04:00.000-07:00

I've been neglecting this blog lately because I have started the transition to automating my trading. My long term goal has always been to develop automated trading strategies. First I needed to become familiar with the markets so I could discover firsthand what works and doesn't work. I do believe that the best automated trading will underperform the best discretionary trader in terms of win/loss ratio and expectancy. However, there is expectancy and opportunity as Van Tharp explains. If I am only able to find one or two excellent trades per day manually, and an automated system finds 10 decent trades per day, the results can be equivalent in terms of P&L. For example, 2 discretionary trades with an expectancy of 2.0 will result in 4R profit. Ten automated trades with an expectancy of .4 will also result in 4R profit. The one drawback is that the 10 trades incur a greater transaction cost in terms of commissions and slippage.

The transition to automated trading won't occur overnight. This is going to be a lengthy process that begins with translating all of my favorite setups to code so an alert will be triggered every time something sets up. I think this alone should improve my trading because the criteria will have to be clearly defined (should reduce some impulsive trades that don't completley fit my criteria) and the universe of stocks that a scanner can monitor will be much larger than my small watchlist and unusual volume scans. I have been coding in Metatrader MQL4 and will eventually port over to Tradestation's Easy Language.

Note to self - stop fighting market

2009-03-26T09:34:00.000-07:00

This rally seems to be getting a little out of hand. Almost like we need a downtick rule to keep irrational exuberance in check. Speculators are profiting from stocks going up! I keep trying to stubbornly short though and am missing some of the upside moves out there. Solar stocks were on fire today. TSL and FSLR had some very nice volume. So what if it's insane, there is money to be made from extreme emotions.

Warning: as soon as I come around to going long that usually means the market is about to nosedive.

Friday trade - FWLT

2009-03-20T11:11:00.000-07:00

This is the first time I've traded an h pattern. Jamie and Anarco swear by them, so I was pretty confident when I saw this pattern set up in FWLT. The target of the pattern was about 18.2, the optimistic target was 18, filling the March 23rd gap down. The breakout bar was nice but lacked volume. The move slowed during the Bernanke speech at noon, but it wasn't seeing any volume and was weak relative to the market so I held on. I exited (early in hindsight) for the following reasons for a 2.6R win:

Extreme TICK reading

Quadruple OPEX day, didn't want to push it

S&P was approaching 775 support level

Sharp move down felt like a possible knee jerk Bernanke speech over reaction

Capitulation volume at S2

Setup: 75

Wednesday skipped trade - KBH

2009-03-18T11:07:00.001-07:00

I skipped this cup and handle because this was FOMC day and the market was very choppy.

Setup: 75

Friday missed trade - KBH

2009-03-14T08:33:00.000-07:00

I was looking at homebuilders on Friday because they had a very weak opening 15 minute bar. KBH had a nice run up into resistance at 11 on declining volume on the daily chart. It bounced off of 11.20 and put in a tweezer reversal on the 5 and 10 minute charts and a hanging man on the 15. Even if I had got the order in at the break of 11, KBH moved from 11 to 10.9 in about two seconds so I might not have been filled.

Friday trade - AMAT

2009-03-06T11:28:00.000-08:00

I traded this as a speculative double bottom. If you buy at a strong support level that is likely to hold, then the worst case is you break even (in theory). Trader Stewie often makes these trades in choppy conditions. AMAT has strong support at 8.5 on the daily chart. This stock tends to move in fifty cent increments. After 25 minutes of AMAT barely moving, I exited at break even. I'm trying to be quicker to fold a trade that isn't working right away. The TICK never broke 100 and it seemed like many traders took a half day. I also didn't like how it wasn't moving in conjunction with USO. It's a bit tricky right now trying to buy support and sell resistance since the levels in the indexes aren't clear yet. I was assuming that 6500 on the Dow would serve as psychological support to some degree. Fortunately we didn't close at the low of the day in the S&P: 666.

Setup: 75

Thursday trade - QQQQ

2009-03-05T10:54:00.001-08:00

After my HNT trade this morning not following the market, I opted to trade the Qs this afternoon. I traded what looked like a perfect inverse H&S pattern that turned out to be a headfake. I don't usually trade these so if somebody can critique any problems with the pattern, I'm open to input. Looking back I shouldn't have been expecting much buying before tomorrow's jobs report, but I try to trust these technical patterns.

Setup: 70

Thursday trade - HNT

2009-03-05T08:34:00.000-08:00

One of the most annoying trades is where you are right about market direction and timing but the stock you selected does not move with the market. I had one of those trades today and I think you can see what the missing ingredient was. The setup looked pretty good on 10 minute charts with a couple narrow range bars at the base of the open range but there was hardly any volume on the first bar. When a stock doesn't have unusual or at least normal volume it increases the likelihood that it will just drift and not follow the market.

Setup: 55

Wednesday trade - JOYG

2009-03-04T11:46:00.000-08:00

I traded JOYG as an open range breakout. I liked the unusual volume (earnings) and the high base that met resistance at 18. I entered on a pullback to 18.05 after seeing the heavy volume on the breakout bar. It started to stall out so I moved my stop to breakeven. I wanted to see more volume come in and I didn't like how choppy the overall market was looking.

Setup: 65

Monday trade - HNT

2009-03-02T09:09:00.001-08:00

This is my first day back making actual trades after paper trading some new ideas last month. Of course once I started developing a system for choppy, directionless markets--wouldn't you know it, the market started showing some direction and we had an unusually high number of trending days last month! But now I have another tool in my toolchest and I'm sure it will come in handy.

Starting out this morning it looked like we were in for a slow bleed down to 700. HNT looks like it's in freefall on the daily chart at least until it gets to support at 11. XLV was setting up an h pattern. I shorted HNT at 12.50 with my stop at 12.73. It was very slow to breakdown, but eventually accelerated. Half of me just wanted to cover when the S&P hit 700 but I couldn't ignore what looked like capitulation volume. This was a 1.95R trade. That could have been 4R with more patience but it's nice to start the month with a winner.

Setup:65

GDX - Rising Wedge

2009-02-18T15:37:00.000-08:00

That huge volume looks like distribution to me ahead of the strong resistance around 38. Looks like a good place to take some profits off the table if you've been long gold for a while. Just my two cents.

Testing new setups

2009-02-12T18:44:00.001-08:00

This month I'm paper trading a couple of simple setups designed to work better in a choppy market. One is fading an extended move to a major support or resistance point and the other is a speculative double top at an important level. It is not the most comfortable way of trading as it feels like you're stepping in front of a bus sometimes, but it seems to have a high win rate. I'm using tape reading to filter out stocks with very high momentum.

Here is an example of the double top setup:

40 is a significant level and the 200 DMA was at 40 on the daily chart. I look for a bearish candlestick in the morning and expect price to get rejected at the same level as long as I don't see too much momentum on the tape. I like to see the tape slow and a mix of red and green (trades being executed at bid and ask).

Market evolution

2009-02-07T08:56:00.000-08:00

I've been thinking a lot lately about how dramatically the market has changed over the last year. The overall behavior of markets is a synthesis or average of the behavior of each individual decision maker participating in the market. Those with more capital have a greater influence of course. I think that market participants can be broken down into four categories: hedge funds, mutual funds, retail investors and retail traders. I'm going to ignore the effect of market makers, as their influence has probably remained relatively stable and doesn't apply to Nasdaq stocks.

From 2003-2007, hedge funds were a growing segment. When hedge funds were at their peak, they could produce strong, trending moves as more and more money was poured into the hot sector of the moment (i.e. oil). Today there are far fewer hedge funds left standing after the crash in 2008 and they have less money to manage. I have read that many hedge funds have resorted to intraday trading. According to Hedge Fund Research, the assets under management have declined from a peak of 1.9 trillion in 2008 to 1.4 trillion due to losses and investor withdrawals. This is a significant change.

I view the influence of mutual funds as more random. At the end of the month, they rebalance their portfolios which shows up as sector rotation. When they want to invest in a particular equity or sector I think they basically use programs or bots to buy in over time and I don't believe they pay much attention to technical analysis. Mutual funds control vast quantities of cash so their effect is important in the long term, but I'm not sure if their presence is predictable in the short term. The effect of mutual funds has probably decreased slightly since 2008 as the quantity of cash under their management is less vast. I'm sure that many seniors close to retirement have moved their money to less risky investments and that money will unlikely reenter the market.

If you define a retail investor as someone who invests in the long term and holds for a period of months or years, then I think you would agree that the number of retail investors has declined since 2008.

That leaves the retail trader. From what I've read, this is a fast growing segment. Brokers are gaining customers at a rapid pace. Many believe that buy and hold is dead and that our markets could be rangebound for several years, or even a decade as seen in Japan. The number of traders seeking to gain from intraday price moves has arguably grown considerably over the last year or two as holding anything overnight has become a very risky strategy.

To summarize, the effect of hedge funds is decreasing as there are fewer around and they have less cash under management. Large, trending price moves will likely be a thing of the past in the near future. I've noticed that the average intraday setup is now more likely to only extend to .382 or .500 (for the Fibonacci lovers). Less money at work means less extension. The influence of mutual funds has decreased. More retail investors are evolving into retail traders. Swing traders are becoming intraday traders. The intraday trader who used to hold for two hours is now holding for one. The scalper going for 5 ticks is going for 2. The retail trader segment is becoming very crowded. In the past I think that this segment could be safely ignored as most retail traders were riding on the coattails of the hedge funds. But I think today they (or we) have reached a level where they are starting to shape price movement as all other influences in the marketplace are contracting.

Hopefully this little essay has sparked some reflection on how the market has changed and how we can adapt our strategies to conform to the current market conditions. I think it was possible to trade using the same basic strategy from 2003-2007 but I doubt that there are many traders using the same strategy today as they were using during that period. As traders we must evolve along with the market.

Further reading on Hedge Funds:
http://marc.brightonhouseassociates.com/wordpress/2009/02/demand-increases-for-short-term-highly-liquid-trading-oriented-hedge-fund-strategies/

January Review

2009-01-27T11:08:00.000-08:00

I'm done trading for January. My performance has declined over the last few months. I haven't been seeing many good setups and even the ones that look good don't fully extend. And of course when there aren't good setups there is always that temptation to trade less than stellar setups. I overtraded at the beginning of the month because I had too much of a preconceived idea about January's. One would expect an increase in volume and for certain sectors to start pulling ahead of the crowd. This is usually the month when new money goes to work, but that hasn't been the case. Over the last few months I've been trading less and trying to wait it out until conditions improve but now I have to assume that this is how conditions may be for the next few years. I need to find a way to trade low volume, choppy, directionless markets--the achilles heel of any trending system.

I reviewed my trades during a successful period last year. What I noticed was that not many entries were that great, but most trades at least went my way for a little while and I was quick to bale out of trades that weren't doing much. Lately, I've been "going down with the ship" too often and stubbornly staying in trades that I know aren't working in the back of my head. I'm considering using time stops. For example, I will start a stopwatch at the beginning of a trade and move my stop to the point where I would only lose .25R after 10 minutes. Then I would move to break even after commissions after 30 minutes. I'm going to be paper trading some new ideas in February so I might not be posting much...

Weekly SPX chart - disturbing symmetrical triangle

2009-01-25T09:26:00.000-08:00

I don't focus much on the long term but I noticed this symmetrical triangle on the weekly SPX chart. If this resolves to the downside, we could see the S&P at 500. It's not too unrealistic if you consider several of the financials/banks could be nationalized like AIG and approach zero.

Having too much directional bias

2009-01-23T17:30:00.000-08:00

Am I the only one who has trouble going long? I'm like Paul Giamatti in Sideways, "I am NOT drinking any Merlot!" but substitute drinking any Merlot with going long. That was a stretch, I know. I've heard that a lot of new traders have trouble shorting, but I have the opposite problem. The majority of my trades are shorts. I like how fast stocks can go down. When a stock goes up it pauses retraces, goes up some more, pauses. With a good short you are often in and out on one bar. I don't have any long overnight holdings (except for Motorola, don't ask) so that I can be market neutral, but I'm thinking about actually going long a token amount just so I can even out my bias. Short covering or not, if the market's making a move I should be in on it no matter which way it's going.

Friday trade - WYE

2009-01-23T17:17:00.001-08:00

This was a pretty nice setup that didn't work out. I was sensing more choppiness today so I wanted to trade a gapper that was in play so it wasn't as affected by the overall market. WYE broke out but couldn't get past the open range low. I stayed with it because buyers weren't coming in even while the market was beginning a choppy rally. It got stuck in a tight range so I kept tightening my stop. I wasn't sure which way it would break but odds seemed to favor breaking down. It got stopped out before CNBC announced that the merger with PFE was more certain than initially reported in the WSJ, supposedly something will be done Monday. In retrospect I should have just closed out the trade so I could focus on stocks that were actually moving. I told myself I was being patient but I think I was truthfully being stubborn. This one trader always says treat your capital like it's your employees. You don't want your employees standing around doing nothing. I took a small .4R loss but it distracted me from better trades.

Setup:70

Thursday missed trade - DRYS

2009-01-22T15:58:00.001-08:00

I have a bad habit of staring at the indexes instead of shuffling through the stocks on my watchlist. I simply missed this divergence between DRYS and QQQQ. You can see at 1:45 that DRYS fails to rally along with the overall market, and the other shippers: EGLE, DSX, and TBSI.

Friday trade - AXP

2009-01-16T08:45:00.000-08:00

Going into trading this morning I wanted to be open to the possibility that yesterday was a key reversal day. There was some enthusiastic buying at the open but the TICK never exceeded 554. Financials continue to weigh down this market, so I started focusing on the credit card companies. JPM, MA, and AXP are all headed toward their November lows. There was a nice bear flag in V but I let it go and instead shorted AXP after a couple of narrow range bars with volume contraction. There is also a miniature C&H on the 5 minute chart. I exited as my 3R target was approaching. It looked pretty clear that the PDL would be tested, but I wasn't going to push it. A good trade is like a gift. If someone gave you a $20 gift certificate, would you tell them you were hoping for $40? I'm thankful for a 2.83R trade in this market.

Setup: 75

Wednesday trade - ACI

2009-01-14T11:17:00.001-08:00

I traded this as a symmetrical triangle at the base of a wide ranging bar. It was slow to break out, stalling at the ORL, but then it accelerated at 10:30. That's when I remembered about the oil inventory report. I wouldn't normally trade ahead of that but it worked in my favor this time. It felt like a gift, so I exited pretty quick after the thrust down and big volume bars. This was a 1.43R trade. Today was nice because there was no question that I wanted to be short after the weak defense yesterday of the 850 area.

Setup: 65

Tuesday skipped trade - CI

2009-01-13T11:55:00.001-08:00

This is a setup I was looking at but today was just insanely choppy and I try not to trade during lunch. Going forward, I'll be focusing on stocks that are "in play" in order to cope with the chop. As much as I like trading stocks on my watchlist that I'm familiar with, if they aren't getting unusual volume, they are going to be off limits.

Thursday skipped trade - CF

2009-01-08T12:34:00.001-08:00

This is the trade I would have made if it wasn't such a chopfest today. Break of 53.50 with target of 55. CF was getting a lot more volume than POT and MOS today.

Wednesday chart of note - TIE

2009-01-07T19:09:00.000-08:00

This setup is similar to the DRYS trade I made on November 10th. There is just a complete lack of buyers after the move down in the morning. There was probably one buyer showing a lot of size at 8.70 that finally decided to lift. You can see the bearish candlestick at the top of the range on high volume where the bulls threw in the towel. I passed on this one because the risk/reward just wasn't there as I wasn't expecting TIE to get below the strong support at 8.50.

Wednesday skipped trade - DAL

2009-01-07T19:05:00.001-08:00

With the choppiness we've been seeing, I've been more hesitant to trade. This isn't really one of my normal setups, but you could see the lower highs and the symmetrical triangle. There is an NR7 on minuscule volume right before the breakout. The overall market was actually moving slightly higher at the time, so I passed.

Monday trade - AAPL

2009-01-05T17:11:00.001-08:00

This was a good setup that just didn't work out. I did feel like the overall market was short term overbought at the time, but a couple narrow range bars with volume contraction at the top of the ORH is too good to pass up. I was looking at trading ACI from 19 to 20 (looked very good on the daily charts), but it didn't set up properly.

Setup:70

Fear vs. Greed

2009-01-03T14:46:00.000-08:00

I'm feeling philosophical with the start of the new year. I've been thinking about the old axiom that stock prices are moved by fear and greed. But when you think about it, greed can really be thought of as another form of fear. There is the fear of losing money and the fear of missing out on an opportunity to make money. So before you put on a trade you have to accept the risk involved and realize that it is possible for you to lose money. But you also have to be relaxed and not be afraid of missing a big move. Like in surfing, there is always another wave coming right behind the current wave.

Tuesday trade - AMAT

2008-12-23T09:10:00.000-08:00

This trade was more instinctive than my usual trades. I'm trying to trust my instinct more. AMAT looked very weak relative to the market and it had been testing the 10 level repeatedly over the last week. Looking back it was a 3 pivot point B&B entry. This was a 2.32R trade.

My reasons for exiting were as follows:

Choppy conditions, quicker to take profits

SMH was nearing PDL

Indexes were nearing support levels

Very oversold, started seeing green on the tape

Setup:70

Failed breakout idea

2008-12-20T07:31:00.001-08:00

I was actually looking at going long at the break of 10.5 yesterday in AMAT when I realized this is one of those setups that isn't quite right and is more likely to fail. The volume contraction is there but the bars aren't very narrow range, and it looks overextended. I'm always looking for a strategy that works well in choppy, rangebound conditions and trading failed breakouts is one contender. This could work well because it doesn't require a complete shift in thinking. I'm always looking for breakouts anyway, so if I find a weak setup, I can take the opposite side of the trade.

Thursday trade - POT

2008-12-18T12:45:00.000-08:00

This was a breakeven trade. USO was looking very weak and I liked how it was testing 33 for the third time. Oil will often make a big move around 2:00-2:30 at the end of open outcry trading. There were also narrow range bars at the ORL in the indexes. Oil and the indexes were both setting up so I was looking for a stock that would move with oil. I chose POT since materials was one of the weakest sectors of the day and MOS and CF had already gone to new lows. I liked the rounded top look. Unfortunately, POT didn't move as much as oil and I was quick to move my stop to break even due to the choppy conditions so I got stopped out on a retrace.

Setup: 60

LEN - Bull Flag Setup

2008-12-14T15:34:00.001-08:00

More chop - back to sidelines

2008-12-10T10:01:00.000-08:00

This has not been a good month for me. The last two months I broke even so I was beginning to doubt whether I could make money in this high volatility, increasingly unpredictable market. I overtraded the first week of December. The setups I was taking actually were fairly good, but everything I touch isn't working right now. Either I'm off or the market is off, either way I need to stop for a while and preserve my capital. I've learned that one of the paradoxes to trading is that the harder it is, the less rewarding it is.

Monday BOR trade - SSO

2008-12-08T18:00:00.001-08:00

My first two trades using my simplified BOR technique have failed so of course I feel like abandoning it. Today seemed like a good day for this type of entry with the European markets up about 7.5%, relatively good news in the morning, and a gap up followed by a shallow retrace. I thought it was impressive that buyers stepped in at the ORL instead of the gap filling more. But buyers vanished and I got stopped out. The one warning sign was that the TICK was mostly negative. There were a couple of volume spikes in the QQQQs, when AAPL was bouncing off 100. Since there was a breakout I had tightened my stop for only a .46R loss.

Setup:65

Thursday trade - AAPL

2008-12-04T17:25:00.001-08:00

This was a frustrating failed trade. This was a good setup for several reasons. There is a descending triangle formation with a series of lower highs on the 15 minute chart. It also has a cup and handle look. This was the third time the 92.5 level was being tested. You can see the nice breakout bar on the 5 minute chart after a mini bear flag. The tape was looking really good at the time of the breakout. My stop was pretty tight so I got stopped out when the indexes bounced off of the ORL, then everything proceeded to plummet. The most frustrating trades are the ones where you do everything right, you have a lot of confidence in the setup and it still doesn't work out. It's easier to take a loss on a bad setup.

Setup:65

Tuesday trade - RIMM

2008-12-02T15:15:00.000-08:00

Today was a tricky day. It was far more bullish than I was expecting. It's like yesterday never happened. My new BOR technique would have worked nicely today but I wasn't expecting such a strong move. Then after the big initial move, I wasn't really expecting much continuation so that left shorting (or a better option probably--not trading). I almost didn't post this trade but I saw that Tyler at "Am I Bald" made the same trade. It really wasn't a bad setup, narrow range bars with volume contraction with the 5 period MA directly above. On the daily chart, RIMM is breaking out of a descending triangle. I also liked the big volume and thought that it could be immune to the overall market. RIMM hardly budged when the market made it's big move in the morning. In the end, I think today was more about the market reacting to all the GM bailout talk than supply and demand.

Setup:60

Monday trade - CF

2008-12-01T16:43:00.001-08:00

I traded this as a pennant. The one thing I didn't like about the setup was the lack of volume contraction, but I liked how weak CF was compared to POT and MOS. At 11:15, USO put in a huge capitulation bar on high volume while CF didn't budge. That really bothered me and I didn't want to sit through a choppy lunch, so I tightened my stop to break even and got stopped out.

Setup: 60

BOR - new entry technique

2008-11-27T08:13:00.000-08:00

Technique may be too sophisticated of a word for the entry method I'm going to describe. I'm simply going to be buying the break of the open range. This entry will be for days where I'm expecting a large momentum move in the market (i.e. European markets up or down more than 3%, our own markets gap up or down big, the Treasury just announced some new acronym to fix the market...). The price action I've seen play out over the last couple of months has been: 1.) Market gaps up or down 2.) Gap gets partially filled 3.) Price reverses and accelerates strongly to new highs or lows, slicing through the open range high or low. This usually looks likes a rounded bottom or a V bottom.

I'm calling this technique BOR because it is more boring than my normal style and doesn't require much skill, but sometimes the simplest entries are the most effective.

BOR Rules:

1. Place stop limit order two cents above (or below) market opening price at 9:50.

2. Reduce risk after successful breakout by tightening stop.

3. Move stop to break even 30 minutes after initiation of position.

4. Exit position at 11:54.

November review

2008-11-27T07:54:00.000-08:00

My performance this month was better than last but I know that I'm missing a lot of opportunities. My win rate and expectancy were both improved. The market has traded totally different since mid-September. My entry techniques are still valid, but I'm seeing less setups. Price moves seem to be driven more by news, rumors, or just mob mentality. I'm looking for these subtle imblances between buyers and sellers, but when a move gets under way in this market you just need to jump on and enjoy the ride. While I'm scanning for nice setups the market just takes off and doesn't look back. Then I try to trade sloppy seconds. But it's unrealistic to expect continutation off of a 4 or 5 percent move. In a normal market you tend to have a couple of legs up in the morning. Most of my entries are from 10:15-10:30 expecting continuation of the initial move up. In these extreme conditions we tend to get strong moves that can last all the way until lunch without pause. So long story short, I need to come up with a new entry technique for days when I expect a major move. Now that I've seen a couple months of this new price action, I've come up with a very simple entry technique to add to my bag of tricks. I don't know how long the markets will remain this volatile, but I need to start taking advantage of it. I need to stop looking at the price action as an obstacle and start viewing it as an opportunity.

Friday skipped trade - KBH

2008-11-21T19:04:00.001-08:00

With options expiration today and the VIX above 70, I was only going to trade pristine setups. This setup looks even better now than it did realtime, but two things that would have made it even better would be more price contraction on the third bar and if it were fully inside of the second. I was also looking at trading the ABX symmetrical triangle but it broke out too quick and I usually don't trade before 10:15. Looking back over this week I was probably a little too picky in choosing setups. There were many potential setups that were less than perfect that ended up working out.

Wednesday trade - STP

2008-11-19T17:54:00.001-08:00

I had to choose between this descending triangle or a DRYS bear flag. In retrospect, I wish I went with DRYS, but I liked how STP broke the $10 level and was under yesterday's lows. It broke down pretty nicely, especially when it got below the 9.50 level. Then oil started going up and the market started getting real choppy midday. I thought STP would get to 9 quicker but it had a lot of trouble with the 9.20 area, so I tightened my stop to break even. STP was showing too much relative strength. It finally broke down at the end of the day and after hours.

Setup:65

Monday skipped trade - BIDU

2008-11-17T14:48:00.000-08:00

This was the best trade I spotted all day. I skipped it though because the overall market was drifting around on low volume and was about to go bullish.

Introduction to my trading style

2008-11-10T15:40:00.000-08:00

I've been trading full-time since September 2007. I think I'm beginning to find my style. I've borrowed elements from other influential traders like Trader Mike (position sizing) and Trader Jamie (entry techniques). I'm not suggesting that anybody tries to emulate my style, or that my style is better than another style, but it is simply what works best for my personality. I think of myself as a long term short term trader. I never hold anything overnight, but I prefer to be in a stock anywhere from 45 minutes to 6 hours. Early on I ruled out scalping as being too stressful. I had to scalp here and there in October '08 due to the frenetic nature of the market and the VIX hitting 90, but I didn't much care for it. I've read four books on trading just to give me a solid base, the rest I expect to learn from the market. Here are the books though: Trade Your Way to Financial Freedom by Van Tharp, Technical Analysis of Financial Markets by John Murphy, Trading in the Zone by Mark Douglas, and Market Wizards by Schwager. Education is important. At the same time, if you want to learn Spanish, you could take 4 years in high school, or 2 years and then live in Mexico for 6 months to pick up the rest. I think immersion is the best way to learn any subject.

I'll try to run you through a typical day. I start by looking at the European markets, which are highly correlated with our own. I look at whether they are choppy or trending. I glance at the Asian markets, but they mostly reflect what happened in our markets the day before. I look at the top headlines. If there is a mix of good and bad, and European markets were choppy with little movement, then I will probably form a loosely held expectation that our markets will be choppy that day. If European markets were down big and all our headlines our negative, then I might expect a downward trending day here. It's important not to have too much bias though and to look for early confirmation of your bias. I never trade before 10 EST, so that gives me time to look at the open range to gather evidence for sticking with my expectations. You have to be prepared to throw your bias out the window and be open to what the market is telling you. From 9:30 to 10:00 I look at the stocks on my watchlist to see what is moving the most and getting the most volume. I have about 10 stocks that I like to trade and I'll rotate stocks in and out. I have a Trade-Ideas unusual volume type scan going throughout the day but I don't often trade those stocks. It can be useful to see which stocks are getting investor's attention though. Throughout the day I watch the following using 15 minute candlesticks: QQQQ, USO, XLF, XHB, VIX, AAPL. When I narrow in on a particular sector I will bring up the charts of similar stocks. If I'm trading CF, I'll also be looking at MOS and POT. Looking at each of these charts, I ask myself where is this stock most likely going to go. I admit that I don't know exactly what is going to happen. But looking at chart patterns and support and resistance I take an educated guess about the path of least resistance. Admitting that you can't predict the movement of any stock with 100% certainty frees up your mind. My best trades come when everything lines up. For example, QQQQ and XLF are both setting up inverted cup and handles, USO looks like it's going down and I'm trading the same C&H pattern in AAPL. Every time I put on a trade, I try to have as many factors going in the direction of the trade as possible. I trade breakouts using several different entry techniques. I look at the time and sales when a stock is breaking out and try not to stare at it too much once the trade is looking good. I also use tape reading to help pinpoint my exits. This is an art that I don't think I have come close to mastering, so I won't even try to explain it right now. Just like with my entries, I like to have several reasons to exit a trade. I try to let my trades run until there is just too many reasons not to be in the trade any more. I have an alarm that goes off at 3:40 just in case I haven't exited a position yet.

I think that pretty much sums up my style at this moment in time. It is constantly evolving so I'll probably have to post an update in six months time.

Monday trade - DRYS

2008-11-10T12:40:00.001-08:00

This trade was more intuitive than my normal trades. DRYS just looked so weak compared to USO, similar stocks like RIG, and the overall market. There were just no buyers. The setup could be classified as a B&B or narrow range bars with volume contraction at a pivot point. I didn't get the greatest fill on the exit, so this was a 2.2R trade. Reasons for exit:

Nasdaq was nearing 1600 with a technical bounce likely

RIG and POT were showing signs of strength

High volume on hammer at 2:50 in DRYS (sign of strength)

Setup:65

Thursday trade - ACI

2008-11-06T15:57:00.003-08:00

Today was a good day to be trading. There were many stocks that made nice linear moves down just like this one. The nearest support level on the S&P was 900, and the index moved down there like being drawn to a magnet. After seeing the European and Asian markets down around 7%, there wasn't any doubt that I wanted to be short. I entered on the break of the ORL. You can see the two narrow range bars with the 5 period SMA directly above the NR7. The only thing that bothered me was that the NR7 had slightly more volume than the previous bar. This was a 2.6R trade. I exited for the following reasons:

3R target was approaching

USO looked like it would find support at 50, started going sideways

Approaching lunch hour where mass covering often occurs, didn't want to hold through lunch

Related stocks like CF and PCX were building bases

Setup:70

Market observation

2008-11-06T13:05:00.000-08:00

I noticed today that the volume was more evenly distributed throughout the day which is an anomaly. Normally, there is greater volume in the morning and afternoon, with an inverted bell shape. I'm guessing that this is a sign of mutual fund redemptions or hedge fund liquidation.

Wednesday trade - FWLT

2008-11-05T14:20:00.000-08:00

Missed it by that much. I traded this as a bull flag. The setup was a little messy but I liked the volume contraction on the narrowest, 4th bar. It was very slow to break out while oil and all the other commodity stocks were plunging. FWLT was holding up at 30.3, there must have been a large buy order there. I tightened my stop since it was showing too much relative strength. I got stopped out to the penny, before the stock made it's move down. Frustrating, but I don't think I would have played it differently. I might still be in scalp mode after last month.

Setup:60

Tuesday missed trade - GDX

2008-11-04T13:54:00.001-08:00

This was a really nice setup for several reasons. The US dollar was down big today, ABX and GDX had a nice daily chart, ABX showing nice volume contraction in a bull flag, and GDX had nice volume contraction before the breakout. My only reservation was that the 5 period moving average was too far away on the 15 minute chart. If I had been looking at the 5 minute chart I would have been quicker to take the trade.

The market appears to be stabilizing at least in the short term. The VIX is coming down and I feel like I can let trades go for more than 15 minutes now. I became reluctant to trade after last month, so I need to become a little quicker to trade now.

One explanation for recent volatility

2008-10-30T16:09:00.000-07:00

If you ask me, trading hasn't been the same since the short sell ban on financials. Stocks used to move smoother when arbitrage strategies were being used by the hedge funds. The five minute charts have become increasingly choppy, so I've started relying more on the 15 minute. The following quote describes exactly what I think is going on:

"Analysts said the low volumes could be attributed to the absence of many traders, particularly statistical arbitrage players who would ordinarily be responsible for significant volume on a daily basis.

Dan Mathisson, head of Advanced Execution Services, Credit Suisse’s algorithmic trading platform, says that when the short selling ban came into force in the US in mid-September, hedge funds “turned off their long/short algos, volatility began to spike and bid/ask spreads widened”.

“If you take algos out, you enhance volatility. A lot of people don’t understand that yet. It’s tied to the hedge funds reducing their trading and exiting the market, leaving the market much more exposed to volatility,” he says."

Source: Financial Times

More chaos

2008-10-30T13:02:00.001-07:00

Sometimes patterns emerge from chaos and sometimes chaos is just simply chaos.

Oil - direct relationship with market continues

2008-10-29T18:01:00.000-07:00

The link between oil and our markets appears to be strengthening. I would guess that the short term rally in the dollar was starting to hurt us in the U.S. Exports were the one bright spot in our economy. I haven't been trading as much lately. There are definitely opportunities out there, but I think this market calls for more instinctive trading. I'm still looking for picture perfect setups and there haven't been as many of those lately. We get these sharp moves that seem to come out of nowhere. I'm at break even this month. To those who are doing well this month, congratulations! If you can trade this market, I think you can trade any market.

Be careful out there!

2008-10-24T05:17:00.000-07:00

Look for the VIX to hit 100 today. If you're an amateur like myself you should be sitting on the sidelines today preserving capital or at least decrease your position size. On days like this, orders don't always trigger like they are supposed to so you're risk increases. I know agressive traders love this high volatility, but it stresses me out too much. I'm looking forward to a day when the VIX gets back under 30.

Monday trade - STP

2008-10-20T17:48:00.000-07:00

I traded STP as a bearish pennant. You can see the nice volume contraction and the three inverted hammers in a row. Oil was starting to move down after gapping up, XLF was setting up an inverted cup and handle, and the Nasdaq started making new lows. I thought seriously about exiting at 21, but I ended up getting out at 21.18 for a 1.38R trade. Once USO hit support at 59, the whole market turned back around along with oil. I've pointed out before how the market is moving directly with oil now instead of inversely and this continues to be the case.

Setup: 80

Tuesday trade - POT

2008-10-14T17:21:00.000-07:00

This was my fastest profitable trade so far. 2.79R in 10 minutes is not bad. I traded this as a bear flag shorting at 104 and covering at 101.21 (initial stop at 105). The setup wasn't extremely clean but there was volume contraction and I liked how it was close to the 100 psychological support level. I think of major support and resistance levels as exhibiting gravity--they will often suck price down to its level. POT took a stab at hitting 100, but then the tape slowed, so I exited. In better conditions I might have been more patient, but with the choppiness I was quick to take profits. With the huge volume POT was seeeing today, the orders executed in about .2 seconds.

Setup:75

Unprecedented Fall

2008-10-09T18:43:00.000-07:00

I've never seen anything like this. I thought we could see 9000 or 8000 in the Dow, but I thought it would take several months to get there, not two weeks. We sliced through 9000 today like it was butter. I was actually thinking about moving a small amount of money into the market in my 401K this morning but then I remembered the saying about falling knifes. We've never witnessed a massive deleveraging like this, so there is no case study. Being invested in the market long term also affects my market neutrality. It still seems like we should get one last massive bear market rally but I won't bet any money on that. I'm starting to wonder what trading is going to look like one or two years in the future. I'm guessing low volume, low volatility sideways action for several years as the number of players decreases. Bush is going to give a speech tomorrow to "Assure the Nation". It's like a CEO denying their company is bankrupt. The markets will probably sell off when he starts speaking. Sorry to be so negative...

Thursday trade - LEN

2008-10-09T15:35:00.000-07:00

This was actually a pretty decent setup that just didn't work out. This was a base and break, and you can see the volume contraction before the breakout, the breakout occured on increasing volume and then proceeded to do a 180. This setup would have been stronger if the peak before the breakout was even lower then the previous peak. Also, the time of day was not ideal and the day was very choppy until the late day breakdown.

Setup: 70

Interesting day

2008-10-08T16:12:00.001-07:00

Today was very interesting. A global interest rate cut is a lot to digest so chopiness was to be expected. But there were signs of buying at least for short periods of time. I don't know what happened at 1 p.m., if it was just traders returning from lunch, everybody spotted the falling wedge, or if somebody started a rumor, but that was a pretty strong move. In Google Finance, when I see all the indexes overlapping, that indicates to me that a move has conviction. At the end of the day though, the Nasdaq bounced off of 1800 and we're left with what looks like a double top.

Tuesday trade - DRYS

2008-10-07T17:43:00.001-07:00

I traded this as a bear flag / short term double top. Whenever I find myself trading the same stock several times in a row, I make sure that I'm not treating the stock as a good luck charm. This was a half decent setup but the one thing I didn't like about it was the volume spike early on indicating that most of the people who wanted to sell probably did so on that bar. But I liked the short term double top look, and I still thought there was a good chance it would retest the ORL. Once DRYS couldn't break 23, not even by a penny, I started thinking about exiting. When USO moved down from 73 to 72 like I was expecting, and other oil sensitive stocks moved in sympathy, and DRYS held firm, I exited.

I've started a new way of thinking for exiting. Before I enter a trade I try to visualize how I expect the stock to move. Once the stock doesn't conform to my visualization, I consider exiting.

Setup:65

Market indigestion

2008-10-01T11:14:00.001-07:00

I'm on the sidelines until things quiet down a little. Some major rumor or news is coming out every hour. This afternoon, the market has to digest the CNBC rumor that the ban on short selling may be extended, Ford had a terrible September, and GE is issuing more shares or something. Technical analysis is next to useless in this news driven environment and you can't tell if a pattern is being formed by supply and demand or driven by news.

Tuesday - dollar makes big move up

2008-09-30T11:06:00.000-07:00

Why do I get the feeling Paulson is trading Forex today? We've already seen the government is more than willing to interfere with our markets.

Looks like a weak kickback rally today (the percentage moves seems impressive at first glance though). Very little volume. Last day of the month sector rotation perhaps. When the bargain hunters appear after each big move down, it makes me feel like we still haven't hit bottom. When people are thoroughly disgusted with stocks, that will be the time to buy for the long term. The VIX seems elevated lately, probably because of the short selling rule. I think options activity has increased to get around the shorting ban. We don't normally hang out above 30 for several days in a row.

Friday trade - RIMM

2008-09-26T17:15:00.001-07:00

I really liked this trade. It ended up being break even, but the setup was good, and if I saw the same setup again I would make the same trade. There were several things that I liked about this trade:

Series of lower highs showing bearish sentiment

NR7 at base of ORL on 15 minute charts with volume contraction

Descending triangle look

Base & Break setup on 5 minute charts

With the strength of the setup this one should have broken out quicker, so I was quick to move my stop to break even when it didn't break as fast as expected. I started seeing some bullish setups in other Nasdaq stocks too. AAPL was putting in a rounded bottom. My one reservation with the setup was the time of day, right before lunchtime which is most often choppy. However on Fridays, I have a theory that traders try to take a half day and stick around until 1 EST. Perhaps this Friday was different with everybody waiting for news on the Congress bailout plan.

Setup:80

A Perfect Day...

2008-09-24T12:12:00.001-07:00

...not to trade.

On days like these, setups look like they're going to breakout and they never do or they headfake. We either have indecision or temporary price equilibrium. It looks like we'll print a doji by the close today.

Tuesday trade - DRYS

2008-09-23T19:32:00.001-07:00

This was an ok trade considering today's chop. I felt like commodities and oil were going to take a breather today (backed up by their charts of course). The breakout of the inverted C&H was fast and furious, but then it slowed. Once I saw the ascending triangle shaping up, I set a stop at 47.2 in case DRYS broke out of that pattern. It did break and dealt me some slippage. In retrospect I should have just exited the trade when I spotted the pattern but I was encouraged by how linearly POT and USO were moving down. I'm starting to rate my trades from a scale of 1 to 100. I've seen traders use a lettering scheme (i.e. A-, B+), but I think in numbers and this will let me calculate an average setup figure each month to indicate how selective I have been.

Setup: 75

Historic week

2008-09-19T16:32:00.000-07:00

That was the most insane I have ever seen the market. I made a couple of mediocre trades this week but I was not in a relaxed state of mind. My trading platform couldn't keep up with the volume, so my quotes kept dropping out and my orders took about 10 seconds to enter. Stocks were moving so fast, I think the possibility of getting major slippage or of a trade not triggering becomes a very real possibility. We set a volume record this week. I can imagine network switches in New York too hot to touch during these times. We're told as traders to control our fear, but there is a time for healthy respect as well. Know your limits and know when to sit on the sidelines. When the VIX gets over 30, the rumors start swirling. The probability of a game changing piece of information coming out increases (i.e. Thursday's CNBC rumors). I also found myself too focused on the fundamentals with a new bailout every day. I couldn't resist reading about every new development.

Anyway, I'm going to try to block out all the financial news this weekend and come back fresher on Monday. I'm not happy with the government's intervention in our "free" markets just like everybody else, but focusing on that won't make me trade better.

Enormous volume

2008-09-17T12:44:00.000-07:00

My quotes can't keep up with this volume. These conditions are really good, but it's too frustrating/stressful when my quotes drop out every 30 seconds.

Finding and maintaining the proper mindset for trading

2008-09-13T07:47:00.000-07:00

Anybody who has been trading for a while comes to the realization that trading has a lot to do with psychology. When I first started I thought trading was 50% analytical and 50% psychological. Now I think it is about 70% psychological. If you listen or read interviews with successful traders, they never say my trading was awful until I discovered that I should only trade when the RSI is above 20 or some other technical indicator. Breakthrough comes when a trader makes a mental breakthrough or discovers something about themselves psychologically that was hindering their trading. You know somebody has been trading for a while when they start to sound like Phil Jackson!

My win ratio first started to climb when I became more disciplined. It sounds easy--only trade the best setups. In practice though, sitting and watching charts for 6 and a half hours without making a single trade is difficult at first. Discipline takes energy. I find that my most impulsive trades come on Friday after I have been careful the whole week, and my discipline starts to wane. For a while I was getting in the habit of trading. I was making a trade or two per day. I always told myself, maybe I won't trade today, but it's hard to trick yourself into thinking that after you've traded 5 days in a row. If you find yourself in a trading habit, it is helpful to restore discipline by just watching the market for a day. You need to be able to watch good setups come and go for a day without any regret that you just missed out. Notice how much more clearly you see things when you aren't trading. It is easy to fall into a trading mindset, frantically searching for the next trade that is going to make you money. I try to stay in "impartial observer" mode until the last second when I need to actually pull the trigger and enter the order. What it really comes down to is clearing your mind of desire.

From craving (attachment) springs grief,
from craving springs fear;
For him who is wholly free from craving, there is no grief, much less fear. (Dhammapada Sutra. In Narada Maha Thera, The Buddha and His Teachings.)

I'm not a Buddhist or anything but I find this philosophy very interesting. I'm sure you have heard that you need to control fear and greed when you are trading. Well this shows that fear can come from craving. So it follows that if you can keep your desire to make money in check, then you can restrain fear. I remember in Market Wizards, one of the traders said as soon as he started to trade with a certain material object in mind that he wanted to buy, his performance plummeted. So his craving probably resulted in fear which interfered with his objectivity. Have you ever made a trade that didn't work out and then when reviewing the setup, it looked totally different than what it looked like at the time you initiated the trade? I know I have. This is a sign of lost objectivity.

Once you find the proper mindset, you must maintain it. It is normal for human emotions to fluctuate of course. You need to find a way to get yourself relaxed and into impartial observer mode. For me this was aided by listening to relaxing music, it could be different for you. Once you find the proper mindset, I think you will discover that your trading improves greatly.

Tuesday trade - DRYS

2008-09-09T19:20:00.001-07:00

I've mentioned before that I like to have several reasons to exit a trade. I also like to have several reasons to enter a trade. When I see a setup taking form, I try to gather evidence that the overall market is going to trend in the direction of the trade. Tuesday was nice because there was no question I wanted to be short after the second day in a row of the S&P bouncing off of the 50 day MA and the tepid reaction in the US to the Frannie bailout. In the middle of the day, XLF was setting up an inverted cup and handle and the QQQQs looked to be forming a short term double top. I also look at similar stocks in the same sector. I liked how DRYS didn't bounce off it's morning low as much as stocks in related sectors like POT, showing relative weakness. You can also see how little volume there is in the bear flag, and that the volume is declining. I try to put the odds in my favor as much as possible. This also gives you more confidence to stay with the trade. I exited this trade as the Nasdaq was hitting the previous day's low, DRYS was nearing 50 (strong support), the dojis were showing high volume (sign of covering?), and I was starting to see green on the tape. It's not every day I nail the exit, so I was happy with this 4R trade.

Oil - relationship breaking down?

2008-09-08T16:41:00.001-07:00

This graph shows how oil has moved more in step with the market over the last few days. Notice how today, oil formed a bit of a double bottom right before the Nazdaq did the same. Normally, oil has an inverse relationship with the market. I can explain this in a few different ways. One explanation could be that the employment report last week and the Fannie and Freddie bailout (not a backstop any more) far outweighs the daily fluctuations of oil. Another explanation is that the sentiment about oil prices could be changing. Normally, lower oil means the consumer will have more discretionary income which is a postive for an economy based largely on consumer spending. But the biggest fear lately is that we are going to experience a worldwide recession, not just a U.S. slowdown. So lower oil might now remind traders of slowing global demand, which will have more impact in the long term. The third explanation is that all of this is just a coincidence. I'll be watching this over the next week to see if this new relationship continues.

Wednesday trade - DRYS

2008-09-03T20:06:00.001-07:00

After 3 months of watching breakouts fizzle, I became very quick to take profits. Wednesday morning was very choppy so I was in quick profit taking mode. I saw that DRYS was slowing at 65.5, and my 3R target was 65.4. The one thing I failed to recognize was the Head & Shoulders pattern in the indexes. So instead of 7R I got 2.2R. Now that the volume has returned to the market I will have to be slower to take profits, and expect stocks to run a little further. I still haven't come up with a formal exit strategy, but I have several ideas in mind.

August review

2008-08-30T20:50:00.000-07:00

The first half of August was decent, but the second half was like molasseses. It was one of those periods where I kept thinking my quotes were frozen up since nothing was moving. It's also the first time I actually felt bored because I knew it wasn't a good trading environment and that I was better off not trading. But it was still my most profitable month yet. I set new records for expectancy and win ratio as well. I credit this to recognizing the change in conditions and the drop off in volume and being more hesitant to trade. In the past I would just charge ahead or get frustrated. But if the market is giving you lemons, don't try to make lemonade. Just sit back and wait for the market to start giving you -insert favorite fruit here-. Another good motto is "when the going gets tough, stop trading". The bulk of my profits in August came from the first two weeks, and instead of giving back those profits in the last two weeks, I made very few trades and preserved my capital. I switched in to observer mode and started thinking about how I could adapt to the changing conditions. Half of the stocks on my normal watchlist weren't trading with enough volume to avoid major slippage, so that reduced the number of opportunities. I noticed that Trader Jamie started trading more gappers, so this will be my focus in the future when we hit a low volume period. Gappers normally have an unusual amount of volume and ignore market direction for the most part.

I'm looking forward to September when traders come back from their vacations.

Friday trade - AAPL

2008-08-30T20:08:00.000-07:00

I liked my entry on this inverted cup and handle. Obviously, the exit could have been better. My 3R target was 169, but the whole morning was trending and very pessimistic after the personal income data and Dell gapping down, so I just tightened my stop to 170.2. I didn't notice the second cup and handle at 170 in real time, which would have made me quicker to exit at 169 due to the shallowness of the cup. But I got 1.81R out of this, and ended the month on a good note. I've noticed that Friday's trade much differently then any other day. It appears that many traders like to take a half day. Usually traders go out to lunch around 12, so they start covering at 11:54ish. On Friday's, there isn't mass closing of positions until 12:30-1.

Wednesday trade - RIO

2008-08-21T08:37:00.000-07:00

Wednesday was utterly choppy, and today is looking even choppier. I've adapted by focusing more on sectors and being quicker to take profits and/or tighten my stops. Oil made a big move down in the morning after the inventory report at 10:35. Then it started basing and turning around. When oil is going up, I decide whether to short a transportation stock or bank, or to go long in an energy stock. I found a nice base and break setup in RIO. I liked how it carved out a shallow cup before the breakout point of 26.62 and I thought that oil was likely to continue rising until it neared the morning's ORL. RIO broke out so fast I exited with a 1.93R profit after being in the trade for only 14 minutes. This isn't my normal style (really more of a scalp) but I don't trust this market, so I'll take what I can get.

When I'm trading at my best, I weigh several factors before entering and exiting a trade. My reasons for exiting this trade were as follows:

1. Oil nearing ORL, likely to slow (RIO was moving in sympathy with oil).
2. Time approaching 2:30, when open outcry crude oil trading ceases (less volatility).
3. RIO approaching upper trendline and psychological resistance at 27.
4. Choppy, low volume conditions.
5. Order flow was slowing, only one or two prints at 26.91.

Achieving Consistency

2008-08-14T17:29:00.000-07:00

Every trader should strive to be consistent. But what does consistent really mean, earning X amount of dollars every month? I think it is unrealistic to think you can make a certain amount of money each month, and dangerous to set this kind of goal. The market can be inconsistent and fluctuates between trending and choppy. There are some months that will offer more opportunity for your particular style of trading. I think a better goal is to aim for a certain win ratio, or expectancy. This is where discipline comes in, because you shouldn't be trading when the market conditions are not ideal for your trading style. So on those months where there is less opportunity, you can still have x percentage of winning trades, but on less trades, by being more selective.

It's simple really, but the two keys to consistent trading in my opinion are:

1. Only trading the best setups.

2. Only trading when the market conditions are favorable.

Wednesday trade - WB

2008-08-14T17:23:00.001-07:00

I traded WB as a double top. I was pretty confident that it was going to break down at least to the 15 level. That level proved strong though and it took some time to break through. After it broke through I wasn't convinced it was a clean break so I tightened my stop to 15.06 for a .91R win. If 15 was broken it should have served as resistance, preventing WB from hitting my stop. The market action has been underwhelming Wednesday and Friday (low volume) so I've been quicker to tighten my stops to protect profits.

Monday trade - MOS

2008-08-11T19:07:00.000-07:00

This was a nice 3.4R trade. Notice the heavy volume contraction and NRIBs after the big move down in the morning. Oil was coming down, even with all the Russian news and commodities tend to move with oil and inversely to the dollar. You can't kick yourself for not being omniscient. In retrospect, you always could have done something different to make a trade even better and it often feels like you're leaving money on the table. I exited because it looked like oils decline was slowing and possibly putting in a bottom. I was right but it took over an hour for oil to consolidate and eventually reverse.

Monday trade - DRYS

2008-08-05T10:43:00.001-07:00

This is an example of a good entry (inverted C&H) but a hasty exit. The market has been choppy this summer and this day was no different. So I took my 2.56 R profits at the round number 69. Energy stocks ended up being very linear this day, far exceeding my expectations given the overall market conditions.

Tuesday trade - CF

2008-05-27T18:23:00.001-07:00

This was a nice 3R trade off of a bear flag. I covered at 122 as the S&P was hitting 50 DMA support at 1373, and my target was reached.

Wednesday trade - CAL

2008-05-21T18:18:00.000-07:00

Today was a good day to be trading. This trade really tested my patience though. Most of my trades last less than an hour or two. But oil kept going up and the market kept going down so there was no reason to exit. Some of the other airlines were going down faster but I liked the descending triangle setup on the daily charts for CAL. I entered at the break of the ORL and exited when I saw a couple of volume spikes on the 5 minute charts as CAL approached 14. I nearly got filled at the low of the day so I'm happy with my exit. I had a pretty strong feeling that the 1410 level was going to break down after almost slipping through around 11 a.m and after testing this level twice yesterday. The negative FOMC minutes helped pushed the S&P past 1410 and out of a rising wedge formation.

Identifying trending days

2008-05-06T12:58:00.001-07:00

Today was a pretty nice uptrending day after the initial move down. To take advantage of these days you want to recognize them as soon as possible. One tool I use is the TICK. Trending days are one sided where there are mostly buyers or mostly sellers. You can see that the TICK today was mostly positive throughout the day. When it did go negative around 2:00EST, it only hit -280, while on the positive side the TICK peaked at 1753.

Monday trade - WM

2008-05-05T21:33:00.000-07:00

Today was really choppy so I was on edge. I had a good entry in WM but then all the other banking stocks made a big move up. In retrospect staying in this trade would have been good, but exiting seemed right at the time. I've noticed that on low volume, choppy days, there is slightly less herding among stocks within a sector. On these types of days I will place less importance on what stocks in the same sector are doing going forward.

Friday trade - UAUA

2008-04-26T09:32:00.000-07:00

This was my most profitable single trade so far. I'm not bragging, but not all trades work out this well so you have to celebrate the ones that do go according to plan. I got in at 14.95 on the break of the NR7 bar. All the other airlines were going down at this time so it looked like the only thing holding UAUA up was the psychological support at the even number 15. The pivot point was above my entry, all the moving averages were downsloping and evenly spaced, the overall market was going down at the time, oil was setting new highs, the 5 period SMA was pushing this stock down, basically everything lined up. My past exits have been too quick so I was consciously letting this one go a bit longer than usual. I covered at 14.278 when the S&P was hitting 1380 after a big spike down, the other airline stocks were printing hammers, and there was a volume spike on the 5 minute charts a little earlier in UAUA. So this was a nice 4R trade.

Another thing I liked about this trade was my psychology. I was very calm throughout this trade. Sometimes I get a surge of adrenaline when I cover, but I didn't even experience that this time. I think the more confident you are in a trade, the less fear and anxiety you experience. You get adrenaline rushes when you're in danger. So if you get a surge of adrenaline before a trade, maybe that is your subconscious telling you you're about to do something risky.

Friday trade - RIMM

2008-04-18T17:21:00.001-07:00

I had a good trade with RIMM today. It could have been great, but like I said, I'm working on my exits. The trade started with a good entry at the break of the cup and handle. At the time I exited, the Nasdaq was slowing around the 2400 point. RIMM retraced pretty good around 11:15. You can see the inverted umbrella at my exit point. If I was only looking at 15 minute charts, I probably would have stayed with this trade (ignorance is bliss, right :)). Another factor was that we were nearing the lunch hour which is normally choppy and directionless. Another 25 minutes in this trade would have made a big difference.

Week in Review

2008-04-12T07:37:00.000-07:00

This was my best week so far in trading. I managed to eke out a profit and the majority of my trades at least went my way long enough to move my stops to break even. My entries are getting much better and I'm getting a lot more "looks". My entry technique is more solidified and I'm working on my exits. I had a lot of opportunities to take 1.5R in partial profits this week. I may add this as an exit rule in choppy conditions. As far as the market goes, I think we had three good trading days this week, Monday, Thursday and Friday. The rest were pretty choppy. We never closed above the upper trendline in my previous post and now with the GE earnings as a forecast of what's to come (less solid companies will be reporting earnings soon), a cross below the 50 day moving average, it looks fairly downhill from here. My one reservation is that the VIX never exceeded 24 on Friday. Two reservations, the volume wasn't very high either. It as if the buyers just stepped aside to save their money for another day. So I'm short term cautiously bearish.

CF - cup and handle

2008-04-10T19:49:00.000-07:00

This is another trade I was looking at, actually would have worked out better than my INTC trade. Hint: When you see patterns start to form in the market overall, go through your watchlist and see if you see the same patterns in your basket stocks.

Thursday trade - INTC

2008-04-10T19:39:00.000-07:00

I don't normally trade Intel but this setup was too good to pass up. First there were a series of NRIBs, then the last one was an NR7 on lower volume. The Nasdaq was looking overextended at this point, so I was not going to hold this one for long. I saw the resistance on the daily chart at 22.45 and was looking for a lot of green on the tape and overall market momentum for me to stay in the trade. The tape really slowed down around 22.40, Apple started going down, TICK went negative, etc... so I exited almost at the high of the day. Only 1.42R, but better than a kick in the teeth.