Monday, August 24, 2015

Market Takes a Breather and Drops over 9% in 4 Days

What a difference a week makes! Last Tuesday, the Dow closed around 17500. Today the Dow closed at 15781, about 9.3% lower – erasing all its gains for the year.

Of course all the market talking heads have plenty to say about it after the fact, but what were they saying before it happened? If they don’t have the ability to warn of impending market reversals, then how much weight should you put in their “after market” analysis?

Mega moves like this is a great illustration of why one should always employ stop losses and risk management when in the market. The only absolute control you have is when you enter the market and when you exit.

It’s a guaranteed fact that there were traders who were long in this market without employing any stop losses. It’s also a near guarantee that those traders had their accounts wiped out.

It’s also likely that there are traders who were short without using stops, and those who didn’t blow up their accounts with the market’s move up during this year likely made a killing these last few days, but these type of traders are doomed to give their returns back to the market because eventually they will be on the wrong side of a massive move and suffer the same fate as the traders who wiped out their accounts. Trading without using stop losses is equivalent to engaging in Russian Roulette on a continual basis- it’s not a question of if you will suffer devastating losses, but when.

The true professionals love downdrafts like this as they look for some good bargains that were oversold due to excessive fear. Of course low prices can head even lower, so risk management and stop losses are still needed.

Those like myself, analyzing market price behavior, have been given a golden year of data. The market spent several months in a pretty narrow trading range that heavily favored a delta neutral style of trading. The big drops now favor trending and momentum players. Seeing how the market behaves in both a tight range and trending environment provides great insight opportunities.

Saturday, July 11, 2015

Life Cycle of Trading Blogs

In the past I blogged about the scarcity of personal trading blogs, and the difficulty of finding US based trading blogs in general on the Web. For the trading blogs found, they typically go through the following stages of existence:

1) The Introduction

The start of a trading blog is very similar to any blog in general- a brief introduction followed by what they intend to write about. There we see one big split among trading blog intros:
a) Normal
b) Attention Grabber/Proclamation

Normal intros just state their case that it will be a blog on trading without much fanfare. The "proclamation" intro makes a big claim about intended performance that attracts attention from others. An example of attention grabbing blog intros:
I'm new to trading, but will try to make big bucks from my modest account.
These fall under claims such as someone starting with around $30K, and saying they plan on building it up past a million bucks over time. Some even put a time limit on this feat to add to the pressure of achieving it. Mind you every trader is aware of (or at least should be) the high rates of failure in day trading and the corresponding low rates of success. Hope springs eternal with new traders. =) Another example would be someone saying they will double their money on a regular basis over time.
It's fair to say even those who make far more modest claims privately hope to achieve these type of results, but don't wish to be judged by that bar level.

2) The Activity Phase

Here is where the actual blogs of traders put their plans into action. Results here invariably follow the reality of low success probabilities with the majority of trading results being mediocre at best or losing big sums of money at worst. There are a few rare ones that show high promise with successful results with at least a positive balance over time. The successful ones attract a good amount of attention since they are few in number.

3) The End Phase

Trading blogs reach a point in time where they mostly end in one of the following ways:

a) Blowing up- when a day trader loses all their money and can no longer trade. The odds favorite for this type of scenario typically goes to the blogs that make those big proclamations of making big bucks fast. This makes sense since the pressure to perform results in greater risks being taken. A side effect of many "blow up" blogs is their sudden disappearance, as in the blog will be taken offline as if to erase the past.

b) Abandonment- this is the typical path most blogs of all types take. Blogs become less frequent over time and eventually stop with no official ending.

c) Official Hiatus - When a trader decides to take some time off to work on their system due to lack of performance expectations. The majority of these don't return.

These above three are the most common ways trading blogs end. Here are the extremely rare ones:

d) Officially Giving Up- Trader admits day trading is too hard to master and actually calls it quits. No one like to admit defeat so this makes sense.

e) Successfully Retired- When a trader successfully trades the market over time and eventually retires the blog to move on to other ventures and generally enjoying the lifestyle successful day trading provides. As expected, this is the rarest of all endings.

I've seen some short term successful trading blogs stop blogging, but I've never seen one that showed their continued success over a significant amount of time like at least a year or more of consistent high profits, which justified their reasons to stop blogging along with a formal ending saying they were moving on. Just to be clear, I'm referring to personal trading blogs and not commercial ones of any individuals selling training courses or systems of some sort.

Of course, that's not to suggest successful non professional traders don't exist, just that many likely don't blog.  Here's an example of one of the best past blogs I've seen chronicling the performance of traders that don't blog: Link

An example of an extremely successful personal blogging trader is Michael Burry, a medical doctor who traded/blogged during his off time as a hobby. He eventually created a hedge fund and scored huge on his correct market calls during the 2008/2009 market crash.

Thursday, June 13, 2013

The big market moves of Wednesday and today are a great illustration of how deceptively easy the market appears along with the potential for stellar gains and/or losses.

The chart above is  ES market activity for Tuesday, Wednesday, and Thursday of this week. I included Tuesday to show you a typical trading range for the market - about 15 - 17 points in a day. The market moves on Wednesday and Today were more than double that with a 40+ point range - giant moves!!
Viewing the completed chart makes it look fairly orderly and straight forward- market drifts, then dives sharply, then recovers. You might even be tempted to think the movement looks pretty predictable and easy to forecast. Ah, but things aren't as easy as they appear. Cover up the 3/4 of the right side of the chart, and slowly move the paper to the right, and try to predict where the market is headed. Not as easy or predictable now, is it? =) That's what traders face trading real-time - trying to gauge where the market is headed with only past data/charts as a reference/guide. They key to being successful is trying to map out in one's head what the "end of day" chart looks like long before it actually takes shape on the chart.

The majority of traders were fooled by the Wed/Thurs big swings. These are people who are seasoned traders, not beginners.

Before I describe the events on the chart, I need to define two terms. The ES futures market runs nearly 24 hours/day and is composed of two parts:
1) Cash ("Live") Market - This is the time floor traders at the exchange actively trade the market, 9:30am - 4:15pm EST.
2) Globex Market - The time outside of Cash Market hours - from the afternoon through the next morning until the Cash Market reopens.

Okay, so looking at the chart, Tuesday was a normal day and ended down. During the Globex session, the market rose slowly but steadily. Then we get to the Cash Open on Wednesday, and the market starts moving down. During this time all the Twitter message traffic shows traders are going long, buying as the market is dropping, thinking that the market is going to resume moving up. The market keeps drifting lower, but people still keep buying. At this time there is hardly anyone mentioning going short (selling).
As the chart shows, the market was basically a one way trip down and those who bought now had to get rid of their positions with losses, then they would buy in again at a lower level, only to exit that position with losses as well. They never considered reversing and going short instead.
Some who bought at the start of the day and held their position, starting feeling lots of pain later in the day with mounting losses until finally, they close their position with a big loss. This is why you should use stop loss orders to keep small losses from becoming big losses. Unfortunately traders including me don't like using stops because the market tends to seek them out before continuing in the planned direction. But big market moves like on Wednesday/Thursday show why not using stops poses such a big risk.
So the cash market closes and continues to drop during Globex before slowly starting to rise before Thursday's cash open. At this point Bulls are very jittery and Bears are licking their chops to short more when the market moves up. A lot of the same people who were trying to "buy the dip" on Wednesday are now shorting the market rally, expecting it to fall back down. As the really continues, they exit with losses, and short again higher, only to close with losses as the market moves higher.  The Twitter traffic is the reverse from the day before - lots of people selling, very few buyers. Instead of reversing their mindset to buy, they keep selling. Towards the end of the day the market climbs at a faster pace, giving enough pain to sellers to force them to close, which adds pressure for other sellers to close, otherwise known as a "short squeeze". The market zooms up and makes up all the ground it lost the day before, as if Wednesday never happened. shocked

Wednesday: Market falls but majority is tricked to thinking it will go up and wind up losing. Bears are giddy with delight, and think market will be falling further the next day.
Thursday: Market roars back, but the folks who lost money on Wednesday are not likely participating because they are too nervous and wounded. The Bears who stayed in thinking the market would keep falling lost all their profit. New Bears who shorted today and stayed in lost their shirts with big losses.

You should find it fascinating that so many seasoned traders were tricked into doing the opposite of what they should be doing. This is what makes trading difficult - the market send out signals that are meant to confuse the majority of traders, despite their preparation.

How did I do? Well, I successfully got the bulk of Wednesday's down move, but even though I expected Thursday to be an up day, I got left watching since it never pulled back to what I was expecting as a low risk entry point. I can live with that, and I'm all kinds of glad I wasn't lured into trying to short this market was a beast in the up direction!

In terms of the potential gains or losses made by traders - they were amplified by the big size of the swings: a 40+ point range! So for example, 1 ES contract gives you a $50 gain/loss with every point move up or down respectively. So a 40 point swing represents a $2000 gain/loss depending if the trader had a winning or losing trade- and that's just 1 contract. So you can see if a trader had many contracts and was wrong, things could get ugly fast.
In a worst case scenario a trader would be long on Wednesday and stay long, getting big losses. Then they would try shorting the market Thursday and wind up with huge losses again. The size of these swings could easily break an account - which is the risk all traders face. On the other hand, the trader who is on the right side can get tremendous gains. Therein lies the risk and reward of trading. It's not easy, you can lose big if not careful, but the potential is also there to make life changing wealth.

Thursday, February 28, 2013

Automated Vs Discretionary Vs System Trading

In the world of trading, there are two main schools of thought- programmed/automated and discretionary methods of trading.

Discretionary trading is when one is making decisions on what to do real time based on market activity. Automated trading removes the human decision making element out of the process and does pre-programmed responses based on market activity.

For computer automated trading - ideally the biggest pro would be that you'd be able to turn it on and just sit back and let the cash roll in while it does its thing. No thinking required- just a simple flip of the switch to make money. No faulty human interaction to mess things up...

It's the Holy Grail that every trader has thought about at some point and would love to have- who wouldn't? cool

On the opposite end, you have discretionary trading, where people decide whether to buy or sell based on what they see going on in the market. This is what the majority of non professional retail traders do.
The region of space both types can share is systematic trading - where you trade according to a defined set of trading rules and methods. The automatic traders will have these rules programmed in while the discretionary trader manually operates his system. My trading style falls into the category of discretionary system trader.

Which method is better? People working on automated systems swear by them and condemn discretionary traders as giving their money away to the market. Discretionary traders scoff at automated traders as trying to perform an impossible task resulting in a big waste of time and money.
In the professional world of Wall Street, automated trading machines exist but they only look to make pennies per trade- the key for them is performing thousands of transactions per second so they can make big profits on mass volume. You need big bucks to have such a machine and a big outlay of capital to be able to afford to trade on such a large scale. In other words, this is not available to non professional private traders like myself that trade on a far smaller scale.
On the smaller scale,  an automated system would have to place fewer trades that would last longer. To date, while I have "heard" of automated systems that are successful for the retail trader, I have yet to see a bonafide proven system that one would say is successful if your goal is to keep risk low and live off the income.

The Kryptonite of discretionary traders are their emotions. The market is geared to induce an emotional response that will lead you to doing the opposite of the right things to do. One of the first things a competent trader has to master is the control of their emotions and ego- it's the cause for most discretionary trading losses.
Purely discretionary traders treat the market like an extension of a Vegas casino and make "bets" based on gut feelings. As you move towards more organization and control, you have "system" traders who have a defined method/strategy of making trades, but it's not automated and instead done manually.

This is the biggest "pro" of automated trading - removing the human chaotic human emotional factor from the equation.

However, as a discretionary system trader, my answer may be biased, but I think "organized/system" discretionary trading is superior to automated trading for the following reasons:

1) The market is comprised of living/thinking traders, which makes the market a living entity of sorts composed of the summation of human actions. Trying to code that type of random behavior analysis into a working program is incredibly challenging and perhaps beyond the scope of the technology that currently exists for it to perform consistently well for retail traders.
2) It's said that the market never repeats but often rhymes- making it difficult to program in those subtle variances.

3) The learned response: being able to learn/adapt from past mistakes favors discretionary over automated trading.

From the above, I think #3 is the biggest reason against automated system trading. When market conditions cause a trader to lose money, they know they need to make changes to their methods. A discretionary system trader likely has a better feel for the market than an automated trader who just plugs in market variables. As a result, the discretionary trader will have a better chance at pinpointing the exact problems while the automated trader only knows the current running programs need changing, but no specifics on which variables or rules to change.
Running automating trades comes at the price of not having a hands-on feel of the market, so detailed knowledge of market behavior and nuance is not as developed as those with their hands continually on the driving wheel such as discretionary traders are.
I can point to my own trading growth from being able to do analysis on my trading logic and figure out what improvements to make to adjust for the market.

Saturday, August 18, 2012

Amazing Skilled "Retail" Trader Winds Up Making $$$$

This story is quite amazing-

Karen was a CFO for a small company who didn't actively manage her investments - she had a financial adviser for that.
Sometime in the year 2000, her friend got her to go to a seminar on investing and she decided to take a 1.5 year $22K specialized investment course. shocked I would never take such a course as I would immediately be wary of a scam with pricing like that.
After that, in 2002, she opens her own account with $10K and begins trading.

In 2007, a "light bulb" in her head goes on and she takes a leap of faith to move on to attempting to trade full time for a living and leaves her job as CFO. She starts her initial account with her liquid life savings at $100K that she got from her former financial adviser.

In 2008, she had a 50% return, and some of her friends gave her money to manage/invest.

Fast forward to 2011, and Karen has made $41 million in profits!! shocked

The video is an interview of her telling her story. I wholeheartedly agree with her work ethic about needing to diligently put time in studying and analyzing mistakes for improvement to reach higher levels.

By the way, regardless of her great success, I do NOT recommend anyone spending $22K for an investment course. That is waaaaaay too much- I don't care how good they claim their training is. With some searching, I think all the info you need is freely available via the library and other sources.

Saturday, December 31, 2011

2011 Market Stats & Day/Swing trading Vs "Buy and Hold"

Where does the time feels like the year really flew by...

With Friday's closing market data, the final stats for how the market fared in 2011 are in:

The Dow was the only one of the three popular indexes to finish in the green, and a bit anemic at that. Nasdaq was in the red and the S&P 500 finished the year just as it began - it's like the year never happened.

Short Term Trading Vs Buy and Hold Long Term

I can't tell you how may blogs and articles I've read that "love" to preach that day trading is bad and buy and hope hold investing is soooo much safer and the smarter choice.

All these articles seem to miss one tiny detail:


Far too many people who write about the benefits of long term buy and hold strategy make it sound like the extra time spent in the market somehow makes that decision safer in the long run.

Most make this call as they don't believe anyone can successfully time the market. Of course, if this were truly the case, then none of us should be in the market, period, since be it long or short time frame, that means we don't have the ability to respond intelligently to changing market conditions.

Here is one good example why buy and hold is NOT a substitute for proper risk management of your investment-

Netflix (NFLX)

Netflix started the year at about $175 and was off to the races in no time. It peaked at about $300 in July, then ran into a brick wall of bad business moves and bad press which started a prolonged descent. It ended the year at $69 and change.

An investor who sold at the peak in July would have had 71+% gains for the year, while the person who "dilligently" followed the rules of "buy and hold" ended the year with about a 60% loss.

Okay, so some will argue that there was no way to know $300 was the peak and it was time to get out then. Fair enough, but proper risk management would have alerted all those who were paying attention that the long term up trend was broken through in August and that was a clear EXIT sign if there ever was one. The exit price at that time was about $246, so a person paying heed would have wound up with a 40+% gain for the year, still very impressive and light years better than the 60% loss buy and holders now have. Even if one missed the first big exit signal, there were many opportunities to exit with yearly gains intact before the floor completely collapsed.

The above chart shows you the inherent weakness of buy and hold strategy - it makes the assumption that the stock will eventually recover and make everything good. The unanswered question is what if it doesn't?

The bottom line is there is NO good reason why anyone should let yearly gains of 70+% turn into a 60% loss. Properly managing your investments mean taking profits when they are high as well as cutting losses.

Another argument against short term trading is you will have to pay higher taxes than if you held onto your investments. So who do you think is happier- the person who made big bucks this year selling in the short term, of which a portion they have to pay taxes on, or the "smart" bagholder buy and holder who can now claim a big fat long term capital gains LOSS?

One more argument is folks will say, just invest in index funds as they are safer than separate stocks. That may be true in general, but the returns can be anemic (see above stats for the year) and in a Bear market can be just as dangerous as stocks to own.

To be clear, I'm not advocating that people start "experimenting" with day trading or short term trading - as they both require study and practice to become proficient. What I am saying is EVERYONE who is in the market needs to understand to how employ proper risk management no matter what time frame you're in. If you have a broker investing for you, it still pays to know about risk management in order to tell if your broker is doing a fair job or not. At the end of the day, the person with the most to gain or lose in the market is YOU and no one else, so it can only help you to know these things.

Wednesday, August 3, 2011

Market Starts Day Positive, Takes a "Death Dive", Then Reverses Again Reaching The Highs of The Day

Day Traders had a stomach churning session of a day today at different times depending on whether one was long or short in the market.

After 8 straight days of losses, the market was due for a positive day, and that's the way it started out. However, shortly after, it went negative and the selling started to accelerate. It was NOT a pretty sight if you were long. This is one advantage the average "buy and hold" investor has over day traders - they don't have to watch their positions deteriorate with increasing losses with each passing second.

Even with only a relative fewer shares, I was not immune to the big dive without feeling my stomach tighten a bit. CRR had dropped over 10 points from yesterday - so with even less than 100 shares, I was looking a sizable loss for a small trade. Training and practice prevented me from panicking, as I had already planned to buy more shares if the market went lower - I just wasn't anticipating a 10+ point drop in about an hour. I bought a few more shares at my first target area, but that was before the big plunge down. I mapped the next buy target area, but got distracted with other activities and missed making a purchase - which turned out to be at the lows of the day. It wouldn't have made a big difference, as I was only going to add a few more shares in case there was more down side.

So while I was disappointed that I missed getting shares at the lowest price, I felt relieved we were moving back up. CRR grinded up today and did so in such a way as to not leave a clear entry point for adding more shares. It ended the day gaining back what it lost, so the early purchase I made as it went down in the morning became profitable. I was quite happy I didn't panic sell my position at the morning lows which many may have done. My small position made it easier to control the fear factor.

My other position, NFLX, also dived, but it was for less points and I had less than 1/2 the number of shares I had in CRR, the losses were light, especially compared to CRR. However, I screwed this trade up. It started off positive and profitable in the morning, and I failed to cash out when I saw some warning signs. I was so "sure" the market would be moving higher, I ignored them - my "rogue trader" got me again. Eventually NFLX also reversed and I was profitable again, but this time I missed cashing out again thinking it would go straight up. The stock eventually gave the profit back and was meandering when I decided to just close it out as I feared it would be going negative. Of course knowing Murphy, shortly after the stock started moving up again. For my time and trouble, I netted the big sum of 25 cents. whatevah If I had sold when I was supposed to based on my analysis, the profit would have been from $50 - $100. Three words come to mind - bad trade management.

Ironically, I made five trades today and the two I traded badly gained money (but left much on the table) while two of three I did by the book lost money (sometimes even perfect trade set ups don't work).

As for the market in general - the market dive and reversal created a very bullish candle, which may have noted the market bottom - we shall see.