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Then Don't Trade

I've been reading a lot of blogs lately and the common theme I am hearing has to do with confusion. People are unsure of what is going on in the market, are we in for a deep correction, will the market continue to climb, is the recession over, etc. For many there seems to be more questions than answers.

Unfortunately, I've also noticed that many people continue to trade even though they have so much uncertainty about what is going on with the market and many are losing money as the result. Some even continue to hold on to long positions even though the market seems weak and prices are continuing to fall as the result. Now is the time when poor investors and traders alike are prone to get poleaxed. Smart and unemotional traders are doing three things right now:

1) Closing out of weak positions, regardless of their P&L. Based on technicals and/or fundamentals, some positions need to be liquidated if they are not working out as originally planned. I am not saying to jump ship too early but if your original thesis for entering the market is no longer valid based on current indications then only a fool would keep the position on. In other words, cut your losses short.

2) The brave and equally intelligent traders are taking small positions in strong names that have a high probability of taking off should this turn out to be a mild pull back from recent highs. However the wise are not building their positions at once. Instead, they are carefully scaling in to their positions little by little, as per their PLAN while remaining willing to quickly admit if they are wrong by selling said positions before taking any large losses.

3) Many traders are simply sitting on the sidelines until they get a better sense for what is going on.  There is nothing wrong with not doing anything when you are unsure of yourself and/or the market. Protect your capital and simply don't trade; just wait it out a while.

The following chart of the VIX will suggest that while fear and volatility are increasing, there is still more room for it to get worse before it gets better. Again, perhaps it is worth waiting it out a little bit before putting any money at risk

As for me and my day trading, I am trading cautiously by trading light. As an intra-day trader focusing on a 3 and 15 minute chart, I am not all that concerned with the big picture. I am aware of it of course but I am not overly concerned by it since it does not directly impact my trading time frame. However I am trading light and conservative in the event I enter a trade that goes hard against me. 

My longer-term portfolio is in cash at the moment other than a few option trades that I am taking that can turn a profit regardless of market direction.  I just need enough volatility in price to get through my break-even zone but I am willing to take that risk in this environment. Otherwise, I am not choosing a direction at the moment because I am personally unsure of what might happen. But this is just me.

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Understanding Price Action

Just like many traders I am sure, I have fallen into the trap of thinking/hoping that there is some indicator out there that can offer me an edge.  I do believe that indicators are very useful for trading but I don't believe the indicator itself is what offers an edge as much as it is your ability to read and understand price action, relative to that indicator.

Being able to read price takes a lot of patience and practice and I don't believe it can be replaced by some "guru" trading class or special indicator.  Sure, those things can help point you in the right direction but ultimately, successful trading is all about being able to read what price is doing so you can accurately forecast what price is likely to do next. Mastering this skill simply takes time and a lot of it.

Only recently have I started to understand what this really means as I've been able to get a sense for what price is going to do next, simply by watching what it is doing and has been doing on my charts.  Instead of waiting for my indicator to tell me exactly what to do, I've been more willing to pay closer attention to what price is telling me and then acting accordingly, regardless of what the indicator is saying. Now, I am not suggesting we throw our indicators out the window (however less is more in my opinion) but in my experience, relying more on price when making decisions is superior to relying on an indicator.

Understanding how to read price takes practice and lots of experience.  I still have a long way to go myself but lately I've really started to notice the benefits of all of the experience I've been accumulating over time. Most importantly, my bottom line is also starting to reflect this reality and this is the point in the first place.

Buying Dips & Shorting Bounces

At this point in my trading career, I believe one of the best things I have learned so far is the virtue of buying dips and shorting bounces. This obviously is not the only way to trade but it certainly is very effective once you learn how to do it properly.

I think many traders, especially new traders fall in to the temptation of buying on new highs or shorting on new lows after a lot of momentum has already been pushing price to those points. This is different from break-out trading, which I also think is very effective. But with breakout trading, you are buying at a point where momentum and volume are just starting to take off once price has pushed through a meaningful support or resistance area. But entering the market after price has already asserted iteself in a particular direction is not the best strategy.

I think a great example for this was this past Thursday and Friday when the DOW was passing through 10,000. There was already a lot of momentum and volume in the market, and a lot of emotion and I am sure many people, again, especially novice traders were jumping on board when the pros had been entering in the weeks before while price was dipping again. Friday as we know, was a down day, so some people instantly lost money by getting into the market too late. Perhaps there is still some more gusto left in the short-term but from a probability standpoint, I believe the odds are higher that we will see a temporary pull back before another push higher by any meaningful amount.

This said, waiting for those dips in this current run up is a better strategy for entry. This takes some patience and fortitude but can certainly pay off in the long run.

I see this time and time again in my own trading where I almost excllusively focus on buying on the short-term pull backs away from the prevailing trend. Or as they say, buying the dips and selling the rips. I find it much more profitable to be trying to exit a trade when the masses are placing their market orders to enter. And it is much easier to get in to a trade when fear is high and people are willing to take anything just to get out of a trade.

Just like any strategy however, there is always a risk for loss so that is why proper money management strategies come in to play and this where I am currently focusing most of my efforts. I feel like once I master my money management and risk control, I will be in a position to make big and consistent gains. I can feel it getting closer and I am excited but not impatient.

It will be interesting to see what the market decides to do in the next few weeks but hopefully, it will present some great opportunities to enter on some nice dips that will take our profits even higher.

Calculating Your Per Trade ROI

The other day I came across an "educator" specializing in e-mini strategies and they told me (as is also stated in their marketing claims) that their students get a 10% return on their money trading the e-mini S&P's for every one point in profit. My first thought was, "you do? Wow, that must be some system." My second thought was, "you are retarded".

In reality I just sat there and smiled whilst they carried on about how fantastic their returns are but it got me thinking.

His math works like this: His broker gives him $500 day trading margins.  Every point on the ES is worth $50. Therefore, $50/$500 is 10%.  It looks even better for those of us trading the Russell (TF) since one point is $100 or 20% with $500 day trading margins.

I suppose there is some logic to this calculation but I still think it is flawed.

First, not all brokers will give you $500 day trading margins therefore, this 10% ROI trading the ES is not universally applied.  For example, TradeStation gives me $1375 day trading margins so my ROI is only 4% trading the ES - no wonder it feels like I'm hardly making any money!!

Second, to take advantage of the $500 margins you actually have to open an account with lets say, $2,000 (TS requires $5K, making my life even harder).  Therefore, you really have $2000 at work when trading that one contract. As an aside, I realize that you can still trade if your account drops below $2K after you open the account and I also realize you can theoretically hold four contracts with your comfortable $2K account balance but if you do that, I wholeheartedly stand by my second claim regarding retardation.  

Third, and following up from my second point, in reality, when smart traders are trading, they are not controlling as many contracts as their account will allow. To do this is suicidal. But unless you are doing this, then once again, these per trade ROI figures are bogus. 

Normally, when one calculates their ROI they do it on a per trade basis and then based on the overall account. Unfortunately however, I don't think there really is an easy answer for a per trade ROI when trading futures. Though it works differently with stocks, options and EFTs.

For example, today I closed out of an options trade I put on a few weeks ago. It looked like this:

Bought 1 Dec. 95 call (DIA: DAVLQ.X) for $3.57 per contract.  The actual debit from my account was $357 (plus commissions). Today I sold said contract for $6.25 and the actual credit to my account was $268 (again, less commissions).  Therefore my (gross) per trade ROI was 75%. If I add that $268 gain to my overall account balance, the ROI is much less, it's actually rather nominal.

At a minimum, futures traders should calculate their ROI based on the overall account balance but once again, I think it is very difficult to do it on a per trade basis and I don't think the method that spits out a 10% return as described above is the right way to do it. Furthermore, doing it this way to market your education business is flat out wrong, in my humble opinion. 

If I feel compelled to calculate my per trade ROI, which I currently don't, this is probably how I would go about it:

Per my rules, if I decide that I will control one contract for every $5K (choose your own number) of account equity, and I happen to have on 3 contracts during a particular trade, I actually used $15K of account equity to control that trade and therefore, my profit (or loss) on the trade would be divided by $15K to calculate the per trade ROI.  I know that doesn't sell very well in the education business, which is filled with hype and an abundance of bullshit but in my opinion, this is an appropriate way to think about it. 

If there are any other opinions on the matter, I would be interested to hear them.  In the meantime, congratulations to the DOW for crossing 10,000!!

Shorting the Bounces

I have some good news: my trading was not infected with the swine flu today!  I traded with a face mask on and I always washed my hands after I got out of the market. Both are critical these days.

I took four trades in the following fashion:

Net result: 650.40.  I like it.

My use of the pivot points seems to be getting better by the day.  As I've mentioned in posts of past, I set the floor trader pivots on a 15 minute chart and I use them to help me determine long-term price objectives while I pick and pull at the tapes.

This morning, price opened just below the 499.67 R1 level and then proceeded to trade up to it wherein it consolidated for a while. Price was up against a flat Bolligner Band, the moving averages were coming together, Stochastics and RSI were near oversold levels, and I was on the sidelines.  Soon thereafter, we got a moving average cross and a signal on the Stochastics to boot so my focus turned to short trades with a price target down to the daily pivot, which is quite probable in any given day.

Knowing where price was likely to go made it more comfortable to short the bounces. I like comfortable.

Here is the 15 minute chart I'm referencing:

Where to Now?

Where in the hell is price going to go? For the love of dirty kids and lemonade, find a direction!

Today price on the mini Russell crossed the 200 period moving average eight times (watching the 3 min), which is only one short of the number of times Ferris Beuller missed class - nine times.  That's a lot! But seriously, what the hell?!

The good news is that I am learning from past mistakes and it made a big difference today. I am also still a bit scared of my own shadow but that probably helped more than it hurt today.  Had I still been swinging at the fences I would have lost my shorts in today's tapes for sure. My strategy performed horribly overall but I stayed on my toes and avoided trades that seemed suspect and got out of others that didn't feel right.

At the end of the day, I finished down net $142 on five trades. I experienced some major slippage on one of my trades and instead of taking out two points, I broke-even. I've never experienced that before and perhaps that should have been a sign to come back another day.

Prior to this post, I took a quick surf of the Internets and found that many traders had a tough go with today's market action - even Lord Miller. This brings me comfort because I don't want to be the only loser out there! :)

In my opinion, it looks like the bulls are losing steam. I thought that it would have happened a while ago given all the bad news and certain technical indicators at the time but I clearly underestimated the strength of this move. However it seems like now may be the time for some type of a correction.

Today's open and close mark the third inside day from April 9th's strong upward trading day (on the Russell). We are getting lower highs with lower lows right now, price is coming off the Bollinger Bands, Stochastics and RSI are both in a tight coil with strong resistance levels, and ADX has dropped below 20.  All of which are signs of a pending reversal in my opinion, but when?

Thursday and Friday could prove pivotal in terms of setting a direction for next week's trade. As for me and my trading, I might head back to the sim for a session or two for some more practice while I protect my capital from any crazy market moves that might be pending.

Moral of the story: Be on guard peeps, the market loves to steal cash!

On a final note. I have a hypothesis that suggests another big bear run might be pending. Even though some news is starting to improve, I still feel like the overall economic outlook seems bleak; it certainly feels that way on the ground. I don't trust all the big news outlets that continue to suggest perhaps we've hit the bottom and the worst is behind us. I'm not so sure. It seems to me that during the last few sessions the big money has been taking gains and all the dumb money has been rushing in so as not to miss the bottom. If in fact all the retail ("dumb") people are rushing in, this will make for a great time for funds to create some liquidity, which could drive markets lower in a big way, especially once all the retail people realize they just got punked. I'm just saying. I've learned that once the masses start to do something, you should probably do the opposite and I'm starting to hear a lot of talk about "great buying opportunities" at these levels and I'm just not so sure, especially given the technical picture I just mentioned above.

What do you all think?

Here's to the Bulls!

I guess my long-term market analysis was way off.  I projected new lows into the 200's for the Russell but after today's session, it looks like we may have actually found a near-term and even long-term bottom, which makes me the dumb ass for thinking otherwise. I am a short-term trader for a reason so I don't really care about the validity of my long-term prophetic powers.  Besides, I can still be a prophet even though I am wrong most of the time...just check out the guys in the bible! ha

Just like most everyone I assume, I would prefer the market to pull out of it's funk and head higher so the economy will pick up along with my bank account. My IRA is smaller than my kid's piggy bank, my 401K is depressing, my commissions are non existent and the bills are relentless. So here's to the Bulls and their new market highs in the coming days and weeks!

Alright, enough of that.

Today's trading resulted in five trades, all for wins and a total daily gain of 3.5 points on the TF. The bad news is that my caution prevented me from taking probably 2-3 times the loot but I only now know that in hindsight. I had expected the market to take a bigger breather to the downside than it ended up doing in reality so I skipped a bunch of set-ups thinking there would be better opportunities to enter on deeper pull-backs but they just never came. Regardless, I was still able to profit even though the market stayed in a consistent move to the upside.

My trade sequence was as follows:

1. $50
2. $30
3. $220
4. $30
5. $20

My strategy at this point is to continue trading with a conservative approach. This will no doubt prevent bigger and faster gains but at the same time it will also prevent the losses too. And given the size of my account (just shy of $10K), I need to focus on building equity even if it means I do it slowly.

When my account is larger, I will look to take on more risk by targeting every trade set-up I see.  Today offered about 16, which resulted in 20.6 points. However if I get caught in a wild one, the damage to a smaller account is much greater and could put me out of business if I am not careful enough. For example, with a 50,000 account, I am not too worried about a $1K loss on the day because it would only represent 2% of the account. However with a $10,000 account, that same $1K loss is equal to 10% of the equity, which is way too much to risk. Not that this should come as a surprise to anyone but this logic is what keeps me trying to trade conservatively.

It will be interesting to see what the market decides to do tomorrow. The Russell is approaching a gap fill and the all-important 61.8% FIB level. The gap will fill at 441.50 and the FIB level is at 443.90. Will it shoot through those levels or retrace? Stochastics is oversold and RSI is also very close. Perhaps the looming correction will show that I am indeed a prophet or perhaps it will simply form an upward sloping support line and make my prophetic genius obsolete until luck redeems me some point in the future. I can't wait to find out.

The Bears Are Starting To Wake Up Again...

Today certainly wasn't the best day I've ever had but it was also far from the worst day too. All-and-all, the tweaks I made to my strategy worked out as planned: I left some cash on the table due to "conservative" exits but it also saved me from a lot of anxiety, especially on what turned out to be my last sequence on the day.

I didn't manage all of my trades perfectly and that cost myself a few ticks in profit but I can't complain, especially after my terrible trading last Wednesday and Friday. I just need to be patient, accept small but (hopefully) steady gains and carry on.

Today's trade resulted in five Long orders, two for loss and a total gain of two points (better trade management could have eliminated the losses, especially the first...):

1. -$10
2. $50
3. $90
4. -$30
5. $100

While this is less than my daily goal of 3 to 5 points, I can accept today's results. I followed my plan, tried to select my trades carefully and didn't commit any major errors. I will admit however, that I traded with more fear than necessary but that should subside as I get my equity curve back on track.

On a technical note, it looks to me like the TF is forming a bear flag that is perhaps about to turn again. I drew what I guess to be the resistance of this move and it coincides with the 50% FIB level, which is 405.50. RSI is nearing 70 and Stochastics is also approaching overbought levels. So my guess is that in the next one to two sessions, the bears will start to wake up again and will push price towards new lows again. Here is a picture of the chart I am looking at and if anyone has any additional thoughts, I would love to hear them:

Note: as I post this (1:00 MST), price looks like it will close into session lows, forming a potential shooting star candle pattern on the daily chart. If this turns out to be the case, a close tomorrow under today's close would validate the candle pattern and suggest price is on its way lower again sooner than later. I'll be watching for a break through the lower support line on the flag pattern to initiate a lot of selling.  Again, it would be great to hear additional ideas from those who care to share...

Out.

This Rally Is a Castle Made of Sand

I may be totally wrong or simply tuned in with reality: The bears are just grabbing some water before the next stampede.

I like trading with the bears and they like me. Screw the bulls. I need the economy to rebound as much as the next guy but so long as I am making a pretty penny while the bears are in control, that's what I prefer.

This corrective rally is nonsense. Companies are still laying off herds of people (mine just downsized by 20% yesterday), many big companies are at serious risk of default, real estate prices are tanking, consumer confidence sucks, no one has any money to spend, life as we know it generally sucks right now. And the markets are in a "rally" albeit short-term.  Some people are calling this perhaps the bottom. Those people are retarded. I say, we are in for some more shorting and until then, I can barely take going long because at any minute, it feels like this market could reverse.

We are in a bear market and until things really change, I am sticking to my short bias and any longs I happen to take will be few and far between. Furthermore, I am not going to test the shorts on a day like yesterday when the market wasn't quite sure of itself. Patience will pay off in the long run.

With that aside, I placed two trades today, and ironically, both were longs. Though I pulled out 3.1 points in profits and I am now done. It is 11:30 MST and I don't trust the tapes for a minute. The 15 minute chart is so "overbought" it is ridiculous. Price hasn't taken a breather for hours and it is only a matter of time before the bottom falls out from this little love-fest.

As our man Jimi said, "A castle made of sand falls into the sea eventually." This rally is just that and will do just that.  As such, I'm not going to trade it anymore (I just watched two profitable long set-ups come and go). Today I brought my account back up to $9,064 (yesterday's high was just over $11K) and I am not going to press my chances. I am simply going to be more careful and that's how I will last in this business. There just isn't any sense in getting impatient so I won't.

In the meantime however, here are two interesting quotes I came across today, both of which I found fitting relative to my experience from yesterday and in days past:

"If you do not have the stones to suffer temporary set-backs, take your money out of the market and go wash dishes for a living." The Fly

Indeed. Yesterday's loss was and is just a temporary set-back. I learned from it and I am planning to adjust accordingly. I do not have any regrets about how I traded yesterday; I simply got caught up in a tough trade and I didn't take myself out early enough but in the moment, I did the best I could.

"Courage is not defined by those who fought and did not fail, but those who fought, fell, and rose again." Unknown

This last quote really resonates with me. It is hard to want to trade again after having experienced a big draw down but I argue that it's from those moments we grow the most. If we simply quit when the going gets tough, we will never achieve our dreams and furthermore, we will completely stifle our personal development. I will never quit. I may suffer temporary set-backs but as the saying goes, "where there's a will, there's a way" and we have to keep finding our way and eventually we will get to wherever it is we want to go.

Good day.

Monday's Trading Results

Today was another pretty tight trading range and that always makes me nervous because I don't want to get caught in a massive short squeeze if price ends up taking off in the opposite direction. And with the tape trading most of the session below the 200 period moving average, I was working away with a short bias. There were a few moments when the $VIX was starting to drop a bit and price looked like it wanted to test some Fib levels to the upside so it made me pause. Fortunately however, I looked at the price action objectively and relative to what my indicators were telling me, I thought probability was still weighted more heavily toward the downside so instead of passing up a couple of trades, I took them.

For what it is worth (nothing), my analysis tells me that the TF could trade down to the 260 to 270 level based on a measure move from a price break out back on Feb. 17th. Obviously the other indices would trade down to their comparable lows too.  Life will be ugly but of course it will get better sooner or later. From there I think the world will be calloused and fear will start to let up and the poop that hit the fan earlier will have been flung off and we'll be able to start the long awaited rebound. In the meantime, I am planning for a few short lived corrections here and there before we find the bottom and then start our way back up. But I'm not a bibilical superstar or anything so don't start quoting me to your friends during your Sunday School classes. I'm just saying.

As for today, I had a couple of issues getting my fills both on entry and exit but other than that, trading went pretty smooth for me.  I was profitable on all eight trades for a gain of 10.8 points - the profit sequence looked like this:

1. $40
2. $90
3. $170
4. $310
5. $20
6. $80
7. $130
8. $240

I exited my first trade sequence way too early but at the time it felt like price was trading into some temporary resistance and I didn't want to get greedy.  Though It is always such a great feeling to see price sprint off in your original direction the second you exit! Lame. However I must admit, my next trade made up for it a bit because I hung on to that bad boy until what later turned out to be the near bottom, at least in the near-term.  I managed that trade with a trailing stop and a wide target and I was able to take what I could before price took out my stop.

Just for the record, today's trading put me over the $10K mark, which is my "all-in" break-even point. Hopefully I can hang on to it much longer this time around but you never know. I will continue to trade my set-ups selectively and hopefully things will work out. I actually ended early today because I felt good with my gains on the day but that caused me to miss two additional set-ups that looked good. Oh well - hindsight is always 20/20.

Out.