Joe Satriani and Leslie West

Boy, my ears are ringing this morning. I went to the Joe Satriani concert last night at the House of Blues in Dallas...f.y.i. an excellent venue. For those non-guitar players that are unfamiliar with him, he's one of the greatest guitar players in the world and arguably one of the best ever.

Opening for Mr. Satriani was Mountain, whose front man Leslie West is also an amazing guitar player and quite a good singer as well. You might know Mountain's one big radio hit "Mississippi Queen." (I'm pretty sure its picking up popularity with the young crowd because of the songs appearance in Guitar Hero).

At the end of the show, Leslie West came out and played along side of Satriani for a couple of songs. What amazed me was the amount of respect Satriani had for Leslie West and for that matter a couple of other well known guitar players that he mentioned during the show. Although more famous and technically even a better guitar player, Satriani had no problem stepping back and letting Leslie West take center stage. It's great to see people like Satriani that just seem to be grateful to be in the league he's in and not have a big head or ego about it.

These same principles can certainly be applied to the worlds of business and trading. Those that stop acting grateful and respectful towards their colleagues and even the market as a whole tend to suffer from over-blown egos and ultimately they fall pretty hard. I'm going to keep a picture from the concert in my desk for a while as reminder of Satriani's respect and hopefully it will help keep me in line a little.

I haven't even looked at the market today, so I have no idea as to what's going on in the world today...will probably take the rest of the day off and read the headlines and blogs this weekend to see what I missed.

Good luck out there.

TLT

My Own Volatility Stop

Whew, I've had a crazy couple of days. I managed to catch a couple of counter-trends in the Eur/Usd pair and I watched my account equity expand very rapidly. And it was about the time that I started feeling invincible in my trading that I got caught in some very choppy sideways moves. Man those are frustrating because you see a good profit on a trade and then it reverses on a dime and the trade gets closed out for a loss. That's just the nature of trend following.

These things shouldn't shake me because I've been using an automated trading system, however, I have the system set to where it does not trade in counter-trend rallies and we've mostly had counter-trend rallies (at least how my system defines them) over the past couple of days in the Eur/Usd currency pair. Thus I've been manually trading for the past 2-3 days. There have been some HUGE rallies lately and just catching small pieces of the moves has been very profitable. Needless to say, I've ended the past few days up quite a bit but it still hurts that a small chunk was returned to the market to pay off the trend-following tax gods. Just a part of following trends.

I credit a lot of the success over the past few days to a new stop that I've recently developed and have been implementing for the first real-time trial run. It's a volatility stop that uses a couple of standard deviation lines of a custom momentum oscillator to exit the trade. The idea for this stop came from a trade that I recently made; I bought a currency pair on a squeeze trade and then sold after a quick gain. The problem was that the currency pair continued to move up by 150-200 pips after I sold...which is leaving a lot on the table. This is when I realized that I did not have a good exit signal for the squeeze trade, which is a manual trade as of now, so its not part of the automated system. I needed an exit indicator that could let a position run but also get me out very quickly when momentum dissipates. Thus my standard deviation volatility stop was born.

Here's a chart of a recent trade. The latest purple down arrow was my entry signal to sell the Eur/Usd pair. The top indicator window is the volatility stop indicator (it looks like a MACD but it doesn't work like a MACD at all). The indicator consists of a momentum histogram with a couple of standard deviation overlays. The premise of the stop is that I'm trading quick breakouts that have lots of momentum and the standard deviation lines alert me to reduced short term volatility that tells me the momentum is waning. It doesn't get me out at the absolute top or bottom but it generally catches most of the move and allows for a decent profit. You can see from the chart above that the green standard deviation is above the purple line. The green line is a shorter period line than the purple, which indicates more immediate volatility/momentum. I look for the shorter line (green) to be above the long line (purple) when I enter the trade; this indicates that volatility is rising. Then I exit when the short line crosses the long line, which indicates that momentum is declining from lowering volatility. See the chart below. It's a screen shot from when I closed the trade 21 minutes after the above chart that shows my entry. Notice that the short line (green) crossed the long line (purple). That's when I exited and it was an excellent exit.

Just thought I'd share this idea with hopes that it might help someone out with their own trading. I'm certainly not saying it's the absolute best exit because it does have some glitches and I've had to develope other rules to accomadate those issues. That will make a great post for some future date, although, let me just say that the momentum histogram has a lot to do with making up for the flaws in the standard deviation stop. My next step is to automate and fully test this stop, I'll let you know when it happens and what the results are.

Good luck out there.

TLT

Update: Live Currency Trade

Just hit the profit target on the trade. The trade lasted 2 hours total and booked a profit of 77 pips. Below is the hourly chart showing the profit target (green line) being taken out. Nothing left to do but sit an wait for a new signal...maybe there will be a nice rally back up to the long ema line that will offer another good entry.
I'll also be looking for a squeeze trade (using the indicator on the bottom of the chart) this afternoon but first we'll need to see some congestion and tightening for that setup. I'll save the explanation of the squeeze set up for when I get a signal...it's a very interesting and profitable setup.

Good luck out there.

TLT

LIve Currency Trade

My trading system fired off a sell signal this morning on the Eur/Usd currency pair. I got a fill at 1.2762, a stop was placed at 1.2795 (above the hourly bar) and a profit target limit order was placed at 1.2685.

This trade is risking 33 pips (in currency pips are the equivalent of points in futures) for a potential profit of 77 pips. This gives the trade an R-multiple of 2.33 which is acceptable (2 is the cut-off) . Below is a chart showing the trade on an hourly chart. The vertical blue line shows where the sell signal occurred, the green line is the profit target and the red line is the stop loss. We'll see how it turns out...the fun thing about using a mechanical system is that the trades happen and you get to just sit back and watch. If this one doesn't work, no biggie, the system will fire off another signal shortly and we'll try again. Each trade is nothing more than a number and as long as you know the odds are in your favor, you can just let the numbers work for you.

I'll post an update later.

Good luck out there.

TLT

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