A New Year and A New Direction

It's been quite a while.  No the blog is not dead, I've just been thinking about it and I decided to wait for some new and fresh things before I posted.  My life has taken some good, yet intense, turns over the last few months..hence, the lack of posts.

Coming up..I've got some posts ready that will be appearing soon.  The new direction of this blog has been inspired by a new (updated) direction in my trading, thinking and living.  For starters, my wife and I had our first child towards the end of 2012..that sets everything in a new direction!  Although a blessing, the introduction of child puts lots of things into perspective and trading is no exception.  My trading and philosophy in regards to trading has shifted (not necessarily changed, matured might be a better way to look at it) and this blog will be reflecting those changes.  Posts will be more infrequent..likely 1 or 2 a month but they will be more in depth and higher quality..at least I hope so.

Over the last year, I've been in the process of preparing for a child, building a new business, planning the start of a new business, and intensely defining, testing and systematizing my trading.  I'm glad to say that after years of programming, testing, trial and error and much hard work, my systematized trading is finally coming on line.  It was kind of the perfect storm of events to get me here.

I've been working on quantitative trading strategies for 4-5 years now and over the last year, a few pieces fell into place and some lights clicked on...a transformation if you will.  As I was coming to grips with the transformation, as it's hard to let go of old beliefs and accept new ideas, I read Nassim Nicholas Taleb's new book, Antifragile.  This was kind of the nail in the coffin, as I realized that what I was working towards and trying to explain to business partners, clients, potential clients, family members and anyone who would listen was very much in line with what Mr. Taleb is preaching in his new book.  Fortunately, a man of such genius took the time to layout some very interesting and though provoking ideas in a well organized and thoughtful manner...now people like me get to piggy back on his ideas and explanations to our benefit.  Thank you Mr. Taleb!  Also, note that the Antifragile book is now at the top of my "Highly Recommended Reading" list..even above Market Wizards!

I'll be publishing a post within the next week that breaks down my new trading philosophy in more detail..some come back soon.  The long and the short of it for those that can't wait or won't return is that periods of stability achieved through control will continue to dominate and with that stability will come jumps in volatility and chaos .my trading now takes advantage of that chaos by thriving on volatility.  With politicians and central bankers getting more and more enmeshed in our financial system, this cycle will likely continue and even grow for some time.

In the past, I've always leaned towards trend following and momentum..concepts that do well with falling volatility and that follow the consensus.  It's fun to buy when things are smoothly going up and everyone is happy..however, the returns are highly volatile and inconsistent over the long run.  Before reading Antifragile, I started realizing that the most promising systems that I had were excelling during the worst years..they would under perform in 1998, 1999 and then knock it out of the park in 2000, 2001 and 2002.  Interesting! Same happen in 2005, 2006 then 2007 and especially 2008, they began way outperforming.  It has really shaken up many of my investing/trading beliefs.  Okay, enough of my brief summary, more to come soon.

Hope everyone is having a great new year so far!

TLT

Interesting Action in the Eur/Usd

I hope everyone is watching the Eur/Usd right now.  We're seeing a strong move higher and it looks like it's going to test the highs of September--roughly 1.3170.  I've got a long position and have been trading in and out of some short term rallies..break outs like these are when you've got to trade heavily in the currencies.

From here, I'll be looking for intra-day rallies to open additional longs (like the opening range break set up) and then I'll look for the Eur/Usd to take out the 1.3170 high from September.

TLT 

AEGR: The Highest Implied Volatility of any Optionable Stock

Straight from Options Alert today, they announced that AEGR has the highest IV of any trading optionable stock.  The stock is at 14.17 as of the close of today.  Right now, you can sell a Oct 15 call for $2.55.  That is some serious implied volatility.  So why the IV?  Because the FDA is meeting on October 17th and October 18th to debate the risks and benefits of two experimental drugs..one of which is from AEGR.  Here's a chart:

So how does one play this?  I bought the stock and sold a call...a covered call position as it is known in the options world.  My main risk is that the FDA announces something negative and the stock gaps down.  The FDA is meeting on the 17th and 18th and the option expires on the 18th, so I'm betting that either good news is released early or no news is released prior to expiration.  The ideal situation will be for the stock to trade up to the $15 area by next Wednesday and be able to cover the call after some loss of time value and hopefully some loss of IV.  We'll see.  This is one of those longer shot trades that you don't want to allocate too much to, but it's just attractive enough to nibble on.  I'll post an update on it next week.

TLT

Romney Coming Back on Intrade

At this point, everyone seems to be in agreement that Romney won the debate...I'm pretty sure that was the consensus going into the debate as well.  The interesting thing that I noticed is that after selling of heavily for the last month, the Romney To Be Elected President contract on Intrade is rising again.   In fact, check out the price action on the day of the debate..a big rise on much larger volume.  

It will be interesting to see how predictive Intrade was once this is all over.

Have a great Friday!

TLT

The Fat Finger F#%$ Up!

Well, it wasn't truly a "fat finger" trade but I did manage to accidentally put on a trade that was 10 times the size intended..so it's pretty much the same thing.  Tuesday, I scanned for potential weekly options trades, meaning I would put the options trade on Tuesday morning and the options would expire, hopefully worthless, on Thursday.  I put on 3 trades, all of them Bull Put Spreads.  A bull put spread is where you sell an out of the money put and then buy a put that's got a lower strike than the put you sold...the idea is that the stock trades up and you keep the spread between the contracts as your profit.  Worst case, the stock tanks and you're out the spread..generally $500 or $1,000 per contract on a 5 or 10 point spread.

Well, I put on trades in AAPL, BIDU and GOOG..all good candidates at that time.  The only problem, I accidentally put an extra zero behind my AAPL contracts and that meant the position was ten times larger than it should have been.  Even worse, I didn't realize the error until Wednesday morning when I checked my account and noticed a large loss.  As it would happen, the only stock to trade down to its strike was AAPL and after fretting about it for a couple of hours, I decided to take the position off and eat the loss.  For these types of trades, I risk between 1-3% of my account value.  The AAPL f-up instantly took my account down 10%..however, the account could have gone down to 25% if I'd of left the position on and it kept going against me.

As much as this sucks, it could have been worse.  I can make up a 10% hit, it will just take time.  The take away for me is to double check my orders when entering the order and then check it again after the trade is put on.  I have had a busy week and was likely multi-tasking when this trade order was entered...that should never be the case.  Furthermore, I hesitated on getting out of the trade when I realized the mistake..not a good idea.  The loss would have been a little less had I just bailed immediately.  I haven't made a good tuition deposit to the school of hard knocks trading university in a while, but that was a good one.

Mistakes happen and we have to deal with them.  We also have to deal with the psychological effects of the mistakes.  One can easily begin to over trade in order to make up a loss and that generally turns things from bad to worse.  For me, the game plan is still the same.  Next week, I'll be scanning for weekly options trades that fit my trade criteria and slowly but surely, I'll dig out of this little draw down.  Just thought I'd share this with everyone...you might relate to it or will some day.

TLT

DT 2000 Gave a Buy Signal a Month Ago: Here's the Thinkscript Code for the Indicator

The DT 2000 is a trend following indicator that I came  up with about a year ago.  It uses linear regression and it's purpose is to determine the trend of the overall market.  It uses linear regression slope readings on 4 different symbols and its defaults are qqq, xlv, xlf, tlt.  The indicator tends to work well on the weekly time frame..which makes sense because the longer time frames smooth out the choppy price action of equities.

Here's a chart, the DT 2000 is at the bottom and it's coloring the bars on the chart as well:

This indicator is just one more tool in my collection that I look at to help gauge risk and market bias.  I don't necessarily trade this like a system in and of itself--such as buying the SPY or SSO on buy signals.  What this buy signal does for me is it gives me the confidence to put on more long positions, whether the positions are stocks or covered calls or options spreads.  As you can see from the chart, we've had 3 other buy signals in the last 4 years and the buy signals tend to last several months before petering out.  We'll see if this signal has any legs to it.

Here's the thinkscript code for you thinkorswimmers out there:

####DELETE THIS LINE WHEN PASTING INTO TOS####


declare lower;

input symbol1 = "qqq";
input symbol2 = "xlv";
input symbol3 = "xlf";
input symbol4Inverse = "tlt";
input lrlength = 20;

def data1 = close(symbol1);
def data2 = close(symbol2);
def data3 = close(symbol3);
def data4 = close(symbol4Inverse);

def trend1 = linearRegressionSlope(data1, lrlength);
def trend2 = linearRegressionSlope(data2, lrlength);
def trend3 = linearRegressionSlope(data3, lrlength);
def trend4 = linearRegressionSlope(data4, lrlength);

def score1 = if trend1 > 0 then 1 else -1;
def score2 = if trend2 > 0 then 1 else -1;
def score3 = if trend3 > 0 then 1 else -1;
def score4 = if trend4 < 0 then 1 else -1;

plot DT = score1 + score2 + score3 + score4;    

def buysignal = crosses(DT, 0, crossingDirection.ABOVE);
def sellsignal = crosses(DT, 0, crossingDirection.BELOW);  

assignPriceColor(if dt > 0 then color.green else if dt < 0 then color.red else color.blue);


####DELETE THIS LINE WHEN PASTING INTO TOS####


I hope everyone is having a great week so far.

TLT

2016..I you haven't yet, go see it.

This is a well done and very interesting moving.  I encourage everyone to go see it, regardless of which party you affiliate yourself with.

TLT

Do More of What Works...

I've been reading Jack Schwager's Hedge Fund Market Wizards, which is a phenomenal book and is just as good as his first two and I highly recommend it to anyone who trades or is interested in trading.  One of the hedge fund managers in the book gives the advice of "find out what works and do more of that" or something to that effect.  Although simplistic, there is a lot to this.  One thing that I've been doing more of lately is active currency trading.  Why?  Simply because my account records show that it works for me.

That is why I want to talk about how smooth the currency market and in particular the Eur/Usd currency pair has been lately for short-term trend and swing trading.  When trading currencies, you must have a routine and specific set ups that you look for and then trade them.  And when those set ups are working well you have to trade them more.  Right now, the opening range breakout trade has been excellent.  The past two days have provided great opportunities to make significant returns with only trading this set up.

I have addressed the opening range break out trade in several posts, but I'll quickly explain what it is for those that are unfamiliar with it.  Basically, you take the first 15 minutes of trading (or it can be 5 minutes or 30..different people use different times) and you note the high and low of the period.  That creates the range. Then you patiently wait for the price action to trade out of the range and trade in that direction.  Generally, I'll day trade with the 5 minute and 1 minute charts.  I'll first look to the hourly and daily charts to determine the bias or the primary trend and then look to for break outs in that direction to trade.  So for the past few days, the bias has been to the higher side...that tells me the path of least resistance is higher and I should look for long trades.

Then I wait for the break out and put the trade on immediately after a 5 minute bar closes outside of the range.  After that I trail a stop with the 1 minute chart and look to book partial profits into momentum and use the trailing stop on the remainder of the position.  If the currency trades back into the range or to the bottom of the range you get out..or have a stop sitting there.  With currencies, it is a little difficult to determine the open.  I will generally trade the 8:30 stock market open with the Eur/Usd since it is pretty correlated with the US stock market.  After I've exited a profitable trade, I look for pullbacks and the support to initiate a follow up trade back to the highs.  After this, I'll look for the highs to be taken out and then trade that break out.  Then I'll look for another pullback from the new high and once it finds support I'll put on another trade.  That's it..plain and simple.  If I'm seeing follow through and the trade is working, I'll keep doing it over and over and over.

Here's a 5 minute chart with today's Eur/Usd with an opening range plot on the chart and some of the trades that I made today.

The opening range is the yellow shaded region.  The bars are all green on this chart because my trendfuzz indicator was in Strong Up Trend mode all day long...not a common event.  Notice that I did not take the OR break below the opening range, as this was a low probability trade given that the trendfuzz was green and the overall bias was up...that's not to say that it always turns out this way, just that today was a perfect day not to take the short trade.  Other days I might take the short trade even with a prevailing bias to the upside, I would just trade a smaller position and book profits very quickly.  Today was a little different because yesterday was incredibly strong and my personal sentiment is very bullish.

This type of trading can be very profitable and very rewarding, you just have to maintain discipline to wait for the proper entries and cut losses quickly.  It is by no means easy and often is very frustrating which is why some people are not suited for day trading.  Over the years, I've gone through periods where I thought I was good at it and was very suited for it and other times where I questioned whether it was for me.  The thing that I've noticed is that day trading equities is a little more hit or miss with me but currencies have been profitable for several years..I just have to stick with it and trade through those incredibly difficult draw downs that have a tendency to leave traders gun shy right at the moment that the next winning trade needs to be put on.  Ok, that's enough rambling for one day.  Hope everyone had a great week and has a great weekend.

TLT

Bullish Percent: Another Useful and Free Indicator

A friend of mine showed me the Bullish Percent charts on Stockcharts.com about a month ago.  I guess I've never paid attention to these but I'm glad he showed them to me because they seem very useful.  The chart that I like the most is the Bullish Percent of the Nasdaq with a couple of exponential moving averages.  Here's a chart:

As you can see, the crossover's have some fairly decent signals...at the very least they can indicate when to aggressively trade to the long or short side for you shorter time frame trades and for the longer time frame investor/traders, it could indicate a time to lighten up or put on a hedge.

Here's the link to this actual chart.  I keep this chart, along with several others, bookmarked on my computer and I just glance at each chart once a day.  It's just one tool in an arsenal that I use to help navigate the markets.  Remember, this chart is using moving averages so it will be a little lagging in nature, but it can help confirm moves as they are occurring.

Hope everyone's summer was good.  We're about to enter the fall, which is generally a great time for trading.

TLT

Popular Post Replay: The New Erkel

Originally posted on March 10, 2009...it seems more fitting today.

The Real Cost of Fees: Wall Street's Dirty Little Secret

I've been doing some research on portfolio construction using ETFs and decided to see exactly what impact fees have on a portfolio.  The portfolios that I've been testing are very low fee--most of them have a total annual expense ratio of .25%.  To illustrate the impact of fees, I ran annual compounding rates of 10% and included different levels of fees over a 50 year horizon.

The results are staggering.  Wall Street has a dirty little secret and it's that Wall Street is designed to make firms money first and customer's money second.  Kind of like the classic book by Fred Schweb, Where Are The Customer's Yachts.  Given that the book was originally published in 1940, this secret isn't anything new, it's just that the industry wraps up the fees/commissions in new products and gives it a new marketing spin.  Whether it's called a management fee, an administration fee, a commission, a surrender fee, a front-end load, a deferred load, a 12b-1 fee, or an "other" (yes, I've seen a statement that said "other" next to the fee), it's all a way of making the firm money and slowly and quietly charging the client.  It happens more than most people think and most individuals are in products that have fees baked into the product that have other fees on top of them--for instance, the mutual fund fees that are inside a variable annuity that has its own fee.  Yes, most people reading the blog are not likely to have variable annuities in their portfolios, but tons of individuals have them and they usually don't even understand that it's an annuity platform and that they are getting fee'd to death.  Enough of my rant..let's look at the numbers.

 Here's a table that shows a portfolio starting with $10,000 that is compounded annually at 10% with the annual fees taken out.

Here's a graph of the results.

Here's a graph of the first 20 years zoomed in.  This is helpful for those that say it's too late, that they only have another 10-15 years before retirement...look, it still costs thousands and thousands of dollars.

So what is the solution?  Obviously, replace your mutual funds with low cost ETFs.  If your comfortable with it, replace your financial advisor with low cost ETFs.  There's no sense in having an advisor tack on another 1-2% on top of the fees just to put you in the product and re-balance it for you if you're able to do it yourself.  Some people like the help and want an advisor and I understand that, but many do not need it.

If you're interested in learning more about ETF portfolios, there are plenty of great online resources and books to learn from.  Look at John Bogle's book, The Little Book of Common-Sense Investing, or Mebane Faber's The Ivy Portfolio--both are great places to get started.

I hope everyone has had a great weekend.

TLT 

Summer Reading: Deemer on Technical Analysis and a TOS Code for His Break Away Momentum Indicator

This summer, I've been reading Walter Deemer's Deemer On Technical Analysis and it has been one of the best technical analysis books that I've read in a really long time.  Mr. Deemer gives his take on using TA for longer term investors and he shy's away from the ultra short term time frames that many modern trading books focus on.  He had a long career as a technical analyst and his book is chock full incredibly interesting and witty observations based on his own experiences from his career.


Deemer  not only breaks down what he feels is useful about TA, he also does a great job of explaining his beliefs on why the TA that he uses works.  You're not going to see pictures of massive charts with multiple indicators and squiggly lines in this book..he keeps his charts to the bare minimum of what he considers useful tools.  This book will likely be the book that I recommend to people when they ask me for a good book that can help them get started with investing/trading or with TA in genearl.  If you haven't read it yet, pick it up or order it for the kindle/ipad.  It's well worth the read.

As a bonus, I coded his Breakaway Momentum indicator for think or swim.  This indicator uses the NYSE advances and declines that are added together for the trailing 10 days and then a ratio is created of advances to declines.  To be breakaway momentum, the reading has to be above a 1.97.  These readings only happen once every 31 and a half years on average.  That being said, we had three in 2009..a bit of an anomaly and a testament to how oversold the market was after the 2008 meltdown.  For more info and historical recordings of breakaway momentum check out Mr. Deemer's website here.

Here's a chart, note TOS has some data issues with advance decline numbers starting in 2009 and going backwards, however, this indicator works well with recent data and you can still see the 3 breakaway readings in 2009..there are just some holes in the data that don't look pretty.

And here is the code for you thinkorswim fans:

####Delete this line when pasting in TOS####


declare lower;

input adv = "$ADVN";
input dec = "$DECN";
input length = 10;

def up = close(adv);
def down = close(dec);

def sumup = sum(up, length);
def sumdn = sum(down, length);

plot ratio = sumup/sumdn;

plot breakaway = 1.97;

####Delete this line when pasting in TOS####


Have a great weekend!

TLT