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

Where does the time go....it 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:

ALL TRADING IN ANY TIME FRAME CARRIES RISK WHICH MUST BE MANAGED TO AVOID BIG LOSSES.

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.

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. 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.

Blue Tuesday

Monday trading was a hot mess since I was so eager to put my methods in action that I made careless mistakes aplenty.

But Tuesday I was calm, cool, and collected, determined to do things by the book as I wrote it.

The result was the best single day I've had in a while and I believe the best stats to date:

9 profitable trades out of 9: 100%

9 good trades out of 9: 100%

I started the day with an EOD swing trade of SINA from Monday, and focused on that stock's movement throughout the day, selling at higher points, and buying back at lower points. It can be difficult to execute at times since you have to make sure you're on the correct trend movement as opposed to a trend change reversal.

I'm continuing to trade in smaller lots as a safeguard.

Now all I have to do is keep the "Tuesday Trader" in action and keep the "Rogue Trader" at bay and I should be all right.

Ten Rules for Rookie Day Traders

I saw this on Market Watch, and thought it had some good info worth passing on. many of these rules apply to veteran traders/investors as well, especially rule number 1: "Enter, Exit, Escape". Just applying this rule alone would make a BIG difference in turning most peoples investment experience from negative to positive.

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10 rules for rookie day traders

Commentary: : Set limits, stay focused, and use your money wisely

By Michael Sincere

MIAMI, Fla. (MarketWatch) — If you are going to day trade, it’s essential to have a set of rules to manage any possible scenario. Even more important, you must also have the discipline to follow these rules.

Sometimes, in the heat of battle, traders will throw out their own rules and play it by ear — usually with disastrous results.

Although there are many rules, the following are the 10 most important:

1. The three E’s: enter, exit, escape

Rule No. 1 is having an enter price, an exit price, and an escape price in case of a worst-case scenario. This is rule number one for a reason. Before you press the “Enter” key, you must know when to get in, when to get out, and what to do if the trade doesn’t work out as expected.

Escaping a trade, also known as using a stop price, is essential if you want to minimize losses. Knowing when to get in or out will help you to lock in profits, as well as save you from potential disasters. Read more: 4 big risks to your investment portfolio now.

2. Avoid trading during the first 15 minutes of the market open

Those first 15 minutes of market action are often panic trades or market orders placed the night before. Novice day traders should avoid this time period while also looking for reversals. If you’re looking to make quick profits, it’s best to wait a while until you’re able to spot rewarding opportunities. Even many pros avoid the market open.

3. Use limit orders, not market orders

A market order simply tells your broker to buy or sell at the best available price. Unfortunately, best doesn’t necessarily mean profitable. The drawback to market orders was revealed during the May 2010 “flash crash.” When market orders were triggered on that day, many sell orders were filled at 10-, 15-, or 20 points lower than anticipated. A limit order, however, lets you control the maximum price you’ll pay or the minimum price you’ll sell. You set the parameters, which is why limit orders are recommended.

4. Rookie traders should avoid using margin

When you use margin, you are borrowing money from your brokerage to finance all or part of a trade. Full-time day traders (i.e. pattern day traders) are usually allowed 4:1 intraday margin. For example, with a $30,000 trading account, you’ll be given enough buying power to purchase $120,000 worth of securities. Overnight, however, the margin requirement is still 2:1.

When used properly, margin can leverage, or increase, potential returns. The problem is that if a trade goes against you, margin will increase losses. One of the reasons that day trading got a bad name a decade ago was because of margin, when people cashed in their 401k(s) and borrowed bundles of money to finance their trades. When the bull market ended in 2000, so did many traders’ accounts. Bottom line: if you are a novice trader, first learn how to day trade stocks without using margin.

5. Have a selling plan

Many rookies spend most of their time thinking about stocks they want to buy without considering when to sell. Before you enter the market, you need to know in advance when to exit, hopefully with a profit. “Playing it by ear” is not a selling strategy, nor is hope. As a day trader, you’ll set a price target as well as a time target.

6. Keep a journal of all your trades

Many pros swear by their journal, where they keep records of all their winning and losing trades. Writing down what you did right, or wrong, will help you improve as a trader, which is your primary goal. Not surprisingly, you’ll probably learn more from your losers than your winners.

7. Practice day trading in a paper-trading account

Although not everyone agrees that practice trading is important, it can be beneficial to some traders. If you do open a practice account, be sure to trade with a realistic amount of money. It’s not helpful to practice trade with a million dollars if the most you have in your account is $30,000. Also, if you do practice trade, think of it as an educational exercise, not a game.

8. Never act on tips from uninformed sources

Most pros know that buying stocks based on tips from uninformed acquaintances will almost always lead to bad trades. Knowing what stocks to buy is not enough. You also have to know when to sell, and by then the tipster is long gone. Legendary trader Jesse Livermore said it best when he wrote this about tips: “I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment.”

If you can’t trust your own judgment, you may want to avoid day trading altogether.

9. Cut your losses

Managing losing trades is the key to surviving as a day trader. Although you also want to let your winners run, you can’t afford to let them run for too long. It’s more art than science to get it right, but learning how to control losses is essential if you are going to day trade. Once again, never forget the three E’s: (enter, exit, and escape).

10. Be willing to lose before you can win

Although many traders can handle winners, controlling losing stocks can be difficult. Many rookies panic at the first hint of losses, and end up making a series of impulsive trades that cost them money. If you’re day trading, you must be willing to accept some losses. The key: know in advance what you’ll do if you’re confronted with losses.

Although anyone can learn to day trade, few have the discipline to make consistent profits. What trips up many people are their emotions, which is why it’s so important to create a set of flexible rules. Your goal: follow the rules to help keep you on the right side of any trade.

Michael Sincere (www.michaelsincere.com) is the author of Start Day Trading Now (Adams Media, 2011), Understanding Options (McGraw-Hill, 2006), All About Market Indicators (McGraw-Hill, 2010), and Understanding Stocks (McGraw-Hill, 2003).

Week of Trading Wrap Up and a One Time Snapshot Summary

I have to say this week started out iffy, but turned out good in short order. My trading mistake, AKA Walter Energy, had moved against me by several points and I had failed to exit when i should have earlier. I knew that Monday would be the day to either exit and take my painful medicine if it continued to climb. So when it had gapped up by 4 points Monday morning, I didn't panic, but knew i was going to have to start closing out my position at the end of the day.

As fate would have it, I was saved by the Bear as the stock reversed course and gave back all its morning gains. The rest of the week went pretty smoothly by comparison.

Friday morning with the market in a major gap down with the Japan tsunami report made me feel very uneasy about being long, and decided to closed my CF stock and put positions to go flat and wait.

When I resumed trading I mismanaged or maybe I should say "mangled" my new trades and would up giving back the lion's share of the profits I had. I was way too focused on expecting trending breakouts and not planning for ranging moves. The market can be such a tease- it sure seems like when I correct follow my ranging rules the market breaks out and I lament over the extended move I missed. Then if I plan on breakouts, the market ranges and I wind up giving back gains. In this case, i just waited too long and missed the obvious signs to exit earlier.

All I have left is one small short position in WLT, which was all I was willing to risk over the weekend. This market is poised to move strongly either up or down, and it's highly news driven right now.

I decided to make a snapshot of my trades for the week, but will only do this once. It takes time, and I know myself too well, and would likely eventually forget to remove my account number or do some other oversight and wind up setting myself up for ID theft. Perhaps I'll do a weekly summary if I do decide to keep a running log.

At least this time you can compare the trades with the pulses I made during the week to see if there's truth in advertising. ;-)

I'm a Hybrid Trader

In the day trading world, you typically have two groups of people - those who scalp many smaller moves throughout the day, and those who trade longer time frame moves, which may occur only once or twice a day. On an even longer term, you have swing traders who may have a position open for several days.

I prefer to combine all methods - initiating a trade when I believe there's a longer term move happening- preferably long enough to qualify for a swing trade. Once in the trade, I can then actively manage it by adding to or reducing my position as the stock does mini-reversals in the shorter time frames as it moves towards my longer term target price. So in a sense, I'm day-trading my swing trade. The benefit of trading this way is if I screw up on the day-trade part with a bad entry, there's a good chance I can be saved by the longer term trend which is moving in the same direction.

By day trading the swing trade, I can extract more profit rather than wait for the target to be reached while the stock is oscillating up and down. It also ensures profits are locked in throughout the main trade.

Trading Update with Bonus:

This will also appear in my xanga blog (http://soullfire.xanga.com/)

I covered my last position in Amazon in the morning, a bit too soon I might add - and re-shorted on rallies. It was trending up so shorting gains were reduced, but I was not yet willing to go long.

Closed my last position during after-hours as I think Amazon could still go lower, but it could also reverse and start heading back up strongly. Plan to day trade on the short side until the up trend is confirmed- then I'll go long.

After getting bruised by Walter Energy for several days during its run-up, today marks the first time adjusting my position in the stock was profitable per my average price in. Maintaining a position...

Now for the bonus - a snapshot of my trading log for the day:

Still trading smaller sizes while I work on fine tuning my trading/timing strategy as well as precision in entries and exits.

Time to Fire This Up Again

It's been awhile since I've posted anything here. Much has changed since my last post. For one, I have undergone pretty intense self-training in the science-art of short term trading and after foraging in the wilderness for a good period of time, I have now finally come out feeling like a brand new person with new skills and insights.

The investor/trader who posted here last May has been replaced by an improved version with a new mindset and plan. =)