Introduction to Trading

Don't even debate it, just read it. It's an introduction to trading composed by one of the best--a psychologist that understands the mental aspects of trading. If you're not familiar with Dr. Steenbarger, you should be. And, fyi, he's got a new book coming out. This is certainly worth getting.

QCOR = Sell

I don't know what's going on with QCOR but the market is saying that it's a sell and I don't fight the tape. The S&P 500 closed up 10.79% (can you say bear rally?) and QCOR closed up a measly .83% and then it even traded into negative territory in the after hours(which doesn't mean much). That kind of divergence is not usely a good thing. Here's a 5 minute chart comparing QCOR to the S&P 500 for the last 2 days. As you can see, I used a yellow line with crude asterisks to show the spread between QCOR and the S&P. At this point, I don't care what the technicals say in the near future, this stock was left behind on a day when it should have been rallying. Either there is something majorly wrong with this company or this is just some crazy action that you can only find during a bear market in a high flying stock. Regardless, it's too risky for me at this point. Like I said, I don't fight the tape and the tape is telling me to stay away.

Good luck out there.

TLT

Adapting to Part-Time Trading: Automate

Well, I sat in a courtroom for most of the day ready to pick a jury and get going with a trial just to be excused at 4 p.m. and told to come back on a certain day in November. What a waste! I knew that being a lawyer would conflict greatly with trading and I've contemplating several ways to deal with the problem and today, I was reminded of how bad it could affect trading. First, I thought I would trade on longer time frames. This might work and I'll probably be able to use it to some extent but using monthly, weekly and even daily charts does not quite fit my trading personality. I do have some great daily and weekly strategies but I only see them as a side project. The intra-day (day trading) time frames are what really work for me.

For quite a while now I've been toying with automated trading. Recently, I've spent a lot of time getting familiar and experimenting with Meta Quotes' Meta Trader program. This is very versatile and programmable forex software that allows you to program indicators and trading strategies (i do not have any affiliation with this company nor do I receive anything for recommending them) and it even lets you back-test the strategies. To top it off, you can set the software to execute your automated trading strategies in a live account, which is what I'm very interested in.

So far, I've had some success with trend following and support/resistance trading programs but I must admit, the trend following systems seem to work the best. I've been using the old Donchian 5/20 ema cross over system and tweaked it some to get it to fit with my intra-day time frame. I've named my system the "Donch Crosser" and below is a screen shot of a chart that's being traded in real time and a back tested equity curve below. The back-tested equity curve began with a balance of $5,000 and it traded from 1-01-08 through 10-27-08.
As you can see, the initial $5,000 turned into approximately $17,000 in 10 months. Now that's some trading!!! The max draw down for the period was 22.84% and the win ration was only 42%. This just goes to show that they don't all have to be winners, you just have to make sure the winners run and the losers are cut short. I've had the most success with this program by running it in the hourly (1h) time frame. Although the hourly is the best, because it has a GREAT return with a relatively small draw drown in that time period, the system has also been very profitable in the 1, 5, 15, and 30 minute time frames and also the 4 hour time frame. In fact, the only tested time frame that was not profitable was the daily time frame and I think this probably has more to do with a fluke in the parameter settings or data than it does with the system.

What this testing shows is that the system is not getting stellar returns simply from curve-fitting the data. It is at least somewhat robust which gives the system a fighting chance for being successful in the future. Although this system looks incredible on paper and it's at least somewhat robust, it will still likely incur more volatile swings and draw downs in the future compared to the last 10 months of back-tested trading. The key is to determine what is statistically normal and expected through back testing in multiple time frames and instruments so that you can be prepared to face what the future brings. This is much easier said than done.

Only time will tell and I'm sure there will be plenty of unexpected surprises but it seems that the "Donch Crosser" is showing some promise and hopefully it will continue to prove itself as a robust and profitable automated system.

Good luck out there.

TLT

Might be in a jury trial for a couple of days

I might be sitting second chair in a criminal jury trial this week, we won't know if we're actually trying the case until later this morning (which is interesting because you have to go ahead and prepare for trial even though you may not try the case anytime soon). I'll be out and away from the markets for 2-3 days if we do have the trial this week. Having to work and being away form the markets is one of the pitfalls of trying to trade on the side of a full-time job. Nevertheless, this site is the lawyer-trader, not the trader-lawyer, so the law comes first and that's that. Gotta fund the trading account.

Good luck out there.

TLT

Honor Thy Stop...and Other Musings

Well, good morning. The markets are in panic mode and I even heard some chatter on Biz Radio this morning about the markets potentially being halted today. Right now that seems unlikely but we'll just have to wait and see.

As for honoring the stop, yesterday was a perfect example of how dangerous it can be to second guess yourself after you've made a game plan and initiated a trade. Perhaps QCOR is a little too volatile for a tight stop but that type of stop fits my personality. I have found that I can handle my emotions better by getting stopped out sooner and taking a couple of losses rather than using wide stops and sitting under water waiting for my position to come back. It works for me but not necessarily everyone.

When I take a position, I generally try to zoom in with an intra-day chart to pin-point a precise entry and if the position doesn't take off pretty quickly, it's usually a sign that I'm wrong and need to get out.

While tight stops may not be for everyone, one rule that does apply to everyone is honoring your pre-determined levels (whether they're stops, profit targets etc.). Had I lowered my stop or even just pulled my stop, I would be hurting today. Sure taking a small hit yesterday was not fun, but it's necessary and it's part of the plan. See the 15-min chart below. The green arrow shows where I went long and the red line shows where I got stopped out. More importantly the yellow line shows what I would have suffered through if I'd not have had my stop. Whew! That kind of drop can wreak emotional havoc on me and I imagine many other traders as well.

Bottom line, you've got to have a plan and stick to it if you ever want to even have a chance to make it as a trader. I'll be looking for new opportunities to enter QCOR and I'll let you know if I see a good set up.

Good luck out there.

TLT

QCOR Update

Ouch, already stopped out. It started falling right after I called the buy. I've heard this called the "me effect" as in, it started falling because I bought. Pretty sure my stop was a little too tight on that one, oh well. I'll look for a good re-entry point and let you know.

TLT

QCOR: Trending Up in a Down Market

Finding stocks that are trending up in this bear market can be difficult but you can find some potential long candidates with a little work and a lot of patience. One that is really impressive right now is QCOR. This stock has been on a rampage and is still trending up in an aggressive manner. If your gonna go long in this market for any time period longer than a few hours and shorter than a few years, stocks like this are a good way to go.

One strategy that can work out favorably is to buy a stock like QCOR and simultaneously by a broad short index fund, like SH. This strategy can minimize you're overall returns but it will also cut out some of the volatility. If you buy a stock like QCOR and the broad markets tank, they could easily drag down QCOR with the overall market. On the flip side, if the markets rally, a well performing stock like QCOR should rally more than the overall market and then you get to book the differce between the index and the stock as profit. Let's take a look at the QCOR chart.
Above is a daily chart from QCOR saved after yesterday's close, which was October 28, 2008. I like the look of this stock so much that I'm calling a buy right here. If I'm buying in this market, this is the kind of stock I'm gonna buy. As of this very moment QCOR is trading at $7.77. I'll put in a protective stop at $7.45, which is just over a 4% stop loss and it's located just under the short-term trend line. Hopefully it will provide a little resistance.

There are 3 main factors that are triggering a buy for me.

1) Long-term trend is up--this means I'll only trade to the long side.

2) Good short-term trend that's making new highs on higher than normal volume--love to see this.

3) Moving averages are all saying buy and they're not spread too far apart, MACD says buy and the bb width is moving up but not setting highs.

So I've got my buy signal and my stop loss figured out, now I just need to set a price target. Since it's a strong stock making new highs, I'm going to shoot for $10.00 a share. If we hit that I'll immediately sell half and then move my stop on the other half up to just under $10. This is a profit target of roughly 28%, so I'm risking .04 to make .28. That gives me an R-multiple of 7 or a risk to reward ratio of 7-1. This is a somewhat big R-multiple (which is good) but, when using a trend following style system, I need high R-multiples because I could easily get stopped out by a violent whip-saw. If that happens, and the buy signals are still intact, I'll just re-enter the trade and try again. A high R-multiple will provide a profit even if you have a couple of unsuccessful entry attempts.

I will also use a wide trailing stop, probably 5%, just in case the stock goes up and runs out of steam before my $10 target.

I'll give and update within the next week and let you know how it's going.

Good luck out there.

TLT

Dollar Update

The dollar has continued to rally lately and it's even set some new highs (or lows on the Eur/Usd pair--it is bullish when the price goes down on the pair because it takes less dollars to buy a euro) So why is the dollar rallying when the economic outlook of our nation looks really bad right now? There are some good theories out there (e.g. flight to safety, interest rate cycle...). In my opinion, one person who is really on top of the fundamental picture with the dollar is Warren Mosler. Our Federal Reserve has entered into agreements with the European Central Bank to essentially guaranty their entire financial system by loaning them an unlimited amount of dollars. One of the problems with this arrangement is that the euro and the ECB is not guarantied by the individual countries that make up the European Union, unlike the dollar which is completely guarantied by America.

If the EU goes under, it will obviously hurt our country in many ways, especially if they're defaulting on their debts to us...but is that likely? Now let's look at the situation and ask ourselves how it will likely play out if the EU doesn't go under; I know, the less "doom and gloom" view is not as exciting, but it's practical. Although I can't predict the future, I can look at what must happen in order for them to pay us back. The ECB will have to convert euros to dollars. In forex terms, that means sell the euro and buy dollars. This is very bullish for the dollar...central banks tend to have an impact when they make hundreds of billions of transactions in the currency markets.

That's one of the fundamental reasons for the dollar to appreciate, but as some of you know, I tend to trade off of the technicals. That's why I've provided my thoughts on where the dollar currently stands by using a multi-time frame trend analysis. Below are the monthly, weekly, daily, and hourly charts for the Eur/Usd pair with some of my comments for each time frame. Remember, the price going down on the chart is bullish for the dollar because the strength of the dollar is inverse to the price move on the Eur/Usd pair.

The monthly chart paints a pretty bearish picture for the Eur/Usd pair...which is bullish for the greenback. It's significant that the price has broken the 50 period moving average (the red line). Not to mention the MACD is bearishly pointing down and the 10 period ema (aqua blue line) is pointing down. Next is the weekly chart. I like to look at the longer-term trends and pair up my shorter-term trades to be in line with the longer time frame. The trend channel (brown shaded area) is pointing lower. The 10 period Ema is below the 50 period ma. These things tell me that I want to be looking to go short the currency pair.
The daily chart confirms that going short is the right direction go. You can see that the Eur/Usd broke to new lows and started the down trend back in August and it has recently made new lows...indicating that the trend is still intact. This makes me really want to be on the short side. Now it's just a matter of waiting for a good entry point for the trade. There are a couple of things that I'll do in this situation. First, I'll wait the for pair to rally on the daily chart and sell when it gets up to the top of the trend channel. Second, I'll pull up the hourly chart to look for favorable entry signals. Another thing that I'll consider is taking on a small position here (very small) and setting my stop loss out quite a bit (maybe above the center line in the trend channel) while also considering adding to my position if it starts making money. Let's look at the hourly chart to see where we're at right now.
The hourly chart shows that the dollar has gained quite a bit in short amount of time. It gained 100 pips during Henry Paulson's speech tonight, which was quite a move. The bottom line is that the risk to reward is a little high for entering a position right now. My signal to go short flashed at the second to last pink down arrow, which was alomst simultaneous to the 10 ema crossing below the 50 sma. That was also the time that the pair broke out of it's range that it had been trading in from October 10th to 15th. The point is that my trading system says to be going short the pair (long the dollar) and that I need to wait for a rally or a new trading range to form before I establish a position, unless I take a very small position now to see if the strong down trend continues.

There are plenty of fundamental reasons to go long and short the dollar, put personally, I could really care less what they are because the trends on the charts paint the picture for me. Everyone has to develop a system that works for their own personality and this seems to be what works for me...at least for now. Just thought I'd share my perspective when I'm looking to enter a trade.

Good luck out there.

TLT

Market Wizards

Ah, yes...it's a classic and we all reference it as being one of the best trading books of all-time. Well, I recently began reading the book for the 2nd time, after reading Market Wizards, The New Market Wizards and Stock Market Wizards. This series of books is excellent and I would encourage anyone who is interested in trading or even an investor, to buy all of the books and read them.

Tonight, I was reading the classic "Ed Seykota" chapter and I was struck by his answer to what his views of fundamental analysis were as to his trading approach. Here is his answer (emphasis is mine):

"I am primarily a trend trader with touches of hunches based on about twenty years of experience. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading. Way down in very distant fourth place are my fundamental ideas and, quite likely, on balance, they have cost me money."

If you aren't familiar with Mr. Seykota, you need to be. Check out his website, it's filled with wonderful information.

Good luck out there.

TLT

Potential Swing Trade...AFAM

This stock has been on my watch list for some time now. It has had a tremendous run-up over the past year, especially considering what the over-all market has done at the same time. Recently, AFAM's run has stalled and now it's entering the bearish stage of the trend cycle. This can potentially present a good opportunity to get into this stock at a price that offers a nice risk/reward trade. As you can see by the above chart, AFAM initially broke out of its overhead resistance, the blue line, and ran all the way up to $45. Now it is falling from its highs and the indicators are looking bearish. Their was recently a bearish cross on the MACD, the blue circle. Also the 10 period exponential moving average has started to point downward, which is a sign to sell. I would be looking to enter a long position in this stock around the $22-$26 range, somewhere within the green box at the edge of the chart. The $22-$26 range should offer some support because it's close to the break-out range and the price will be low enough to make several indicators give a buy signal. Once it touches the 26 level, I'll be looking for the MACD, BB width, and the moving averages to start giving bullish readings. Only time will tell, I'll give you an up-date in a couple of weeks after the stocks had time to play out. Good luck out there.

TLT

Back to Reality

Well, it's obvious that the recent rally was a typical "Bear Run." So what is a bear run? Well, a bear run is a counter-trend rally (rally in a bear market) that is generally very swift, very big, and there is a lot of chatter about the rally being the end of the bear market. This last part is key. The rally has to be big and strong enough to make lots of people actually believe that prices are rebounding and that we're all gonna see blue skies from now on. Next, the euphoria turns to concern as the rally starts to stall and then fear sets back in as the market begins to slide back down and selling commences. The above chart is of the S&P 500 for the last 10 days broken into 15 minute increments. The colored arrows demonstrate the various stages of the bear rally. The first blue arrow shows the overall bear market. Then the purple arrow shows the massive rally. Last, the other blue arrow is where we're at now...watching the market stall and start its slow painful slide back to reality. Good luck out there and be patient, plenty of great opportunities will present themselves before this bear market is over; just don't be in a rush to jump in.

TLT

Morgan Stanley, Ok?

It looks like MS is off the "Death Watch" list. They came to an agreement with Mitsubishi last night and all looks well, or at least they're still in the game. I think this is actually a good sign for the market because they're one of the first firms to make it after being put on the "Death Watch" list(as opposed to Wachovia, AIG, Freddie and Fannie, etc.). Maybe I'm speaking to soon, only time will tell.


Overall, the markets gapped up pretty big this morning but keep in mind that it's a holiday and the move might not mean much if volume is light today. We've been overdue for a bounce and we're finally getting it, both in the stock markets and forex; now it's time to stay alert and look for good setups for entering the longer term trends. Good luck out there.

TLT

Excellent Insight

Charles Kirk at The Kirk Report has provided some excellent insight into what we're seeing with the markets lately. The overall message is that we're not likely to see a bottom if everyone is calling a bottom; and everyone is indeed calling a bottom.

Morgan Stanley on Death Watch

The markets are nuts today which is not much of a surprise. Dylan Radigan declared that all the indicators are broken on Fast Money yesterday which has to be some kind of indicator in and of itself.

To top things off, Morgan Stanley is latest on the death watch list. Still plenty of time to short this one if your up for a little extra risk. There's always someone who owns s a stock like this and asks after the fact how they could have avoided the situation of owning a stock that is going or about to go under. My answer is to take a good look at the above chart. If you ever own a stock and its chart looks like that, sell it! Either sell it or be willing to take the hit when in gets taken over for $1-$2 a share. Good luck out there.

TLT

Follow Up On the Dow

In an earlier post, I showed a chart of the Dow (DIA) and commented that the index looked like it was nearing a short-term bottom. One indicator I referenced was the Bollinger Band Width (BB Width) and I pointed out that it showed a reading of 15, the highest since July of this year. Well now the BB width indicator on the DIA chart is clocking in above the 25 mark, approximately 10 points above it's most recent high reading. So what does this mean? For starters, it says that we're most likely even closer to a short-term bottom. The BB width is a dynamic volatility indicator, similar to the VIX or the Average True Range. Generally, a high reading on the VIX, ATR or BB width will signal extreme volatility which is quite often an early signal of capitulation or a bottom (or a top in bull markets).

The nice thing about the BB width is that it is computed for the individual instrument (stock, bond, currency, etc.) as opposed to the VIX, which is a general volatility index that represents the entire market. For this reason, a reading of 25 on the Dow will be high but that same reading may not be high on a different stock or index. You have to compare the levels for each individual security, which is nice because you can use it in conjunction with other indicators to formulate buy/sell signals. Currently, the BB width on the Dow is a screaming buy, but we'll just have to wait and see how it plays out. Good luck out there.

TLT

Fear, Rumors and Speculation...?

I heard an interesting ad on the radio today. The message was that this market is being "driven by fear, rumors and speculation." Okay, as opposed to what, euphoria, rumors and speculation. I don't get it. Rumors and speculation are always present in the market, they only get such negative treatment when there's a bear market going on. When the markets are up, rumors are exciting and passed around with much excitement and speculators are the heroes that quit their day jobs to become millionaire day-traders. I don't know why ads like that one bug me, I guess that I hate seeing the term speculator used in a negative light. As if the "Conservative Buy and Hold" investor is not a speculator. That person is still trying to make money by buying a security and holding it in hopes that it will appreciate. Yeah, yeah, yeah, I've seen the figures that say the market has averaged 10% per year over the last X number of years but I don't buy it--the buy and holders are still speculators in my book.

Love em' in the good times and hate em in the bad, I guess that's the public's view and it will probably always be that way. Well I want to thank all of the speculators because I think they deserve some praise. They're out there trying to earn a living by doing something that is very difficult, both intellectually and psychologically, and they're risking their own hard earned money in an attempt to make money. My hats off to you guys.

TLT

Continued Selling

Another day of relentless selling that ended in a S&P close below 1,000, the first since 2003. Although we're due for a good bounce soon, I think it helps to step back and look at a long term chart to see what we're dealing with. Below is a monthly chart of SPY that spans the last decade. You can clearly see the end of the .com run-up and the subsequent bursting of the bubble. I plotted a couple of horizontal blue lines to show where I think possible support areas will be.


Basically, as the chart shows, I think that we still have a little ways to go before we can expect any long term turn around. In short, we're most likely heading down for quite a bit longer, which is good to keep in mind if we get a nice counter-trend rally to the upside. Looking at the long-term chart helps keep things in check and hopefully will help keep us unemotional and objective, despite the talking head chatter on CNBC. Best of luck.

TLT

Dow Down and Dollar Up

It's a bit counter intuitive, but it's what's happening right now. The best trade that I've seen lately is to short stock indexes and go long the dollar, particularly the Eur/Usd pair. The Eur/Usd has been trending nicely which has offered numerous opportunities to hop on board. Most recently, the rally to the 50 day moving average offered a great point to jump on board.

Judging by the above daily chart of the Eur/Usd, the rally in the dollar will likely stall soon. This happens; markets tend to snap back pretty quickly when they move as fast as they've been moving lately. I would at least wait for the price to fall back closer to the 10 day moving average (the aqua blue line) before taking a position.

As for the Dow, the chart pretty much says it all.

The Dow has blown through the short term support and looks to be in a free fall motion. Although it looks bad, and I will certainly be staying bearish for a while, the dow seems to be close to a bullish counter-trend rally. Take a look at the BB Width indicator at the bottom of the chart. It has moved all the way up to the 15 mark, which indicates that a near term bottom is either here or close. Notice that the last time the BB width was 15 was back in July.

Personally, I'll be looking for short-term counter rallies in order to load up on dollars and short stocks. The fed cutting rates at the up coming fed meeting would be an excellent catalyst to get a good counter trend rally which should provide some nice low risk entry opportunities. Good luck out there.

TLT