Archive for August, 2010

21
Aug
10

Mental Exercise

Trading isn’t easy. Markets are not intuitive. If they were, we would all quit our jobs and trade full time. Obvious to some, but not to all. While trading I watch the financial news shows with the volume muted. Their market commentary has nothing to do with trading in real-time. It is about capturing that microslice of attention span. Forget the “24-news cycle”. We’re in the sub-hour cycle, if not sub-minute.

Scream the loudest, have over-the-top emphatic ways of projecting your viewpoint and you “win”. I don’t understand that kind of presentation, nor why it has become the prevalent method financial networks present their “debates” over current issues. I could replace a talking head commentator with a air-horn connected to a random timer and it would be the same result. My odious honking would prevail over the rest of the conversation – and I win!

But let’s circle back to my main point. Mental exercises – have to keep limber while trading! No, not some new-age poofery where I ask you to rub an oversized quartz crystal while humming your mantra – just a simple mental trick I use to keep my trading mind flexible.

I try to visualize the absolute worst thing the market could do to me while holding a position. This has two objectives – first, it allows me to see the other side of the trade (what if I am wrong) and second, it allows me to understand why I may need to hang in there if my main trading thesis is correct.

I’m sure we’d all love to put a trade on and have it go our way immediately – Sold the top! Bought the bottom! Drinks are on me! This rarely happens, however. What is more common is after researching a trade using your preferred analysis method, you consider your entry point and pull the trigger. Then the market goes immediately against you. Now what?

Once you’ve crossed that event horizon of decision-making, now the real fun starts. Part psychology, part strategy. The worst enemy you face isn’t the market, it is yourself. Period. That is why picturing precisely what the market would have to do to absolutely make you back out of a carefully considered trade is so useful.

It is the mental equivalent to annealing, a process used to increase the strength and hardness of metals. You’ve pictured the worst path the market can take, and how your strategy would be applied to contain the loss. Even if you’ve accounted for “X %” loss factor, or however you calculate it – by actually applying this to market action you make it coalesce out of abstraction into trading reality.

There is stark contrast between “I will only tolerate a 5% loss” to “I bought at 10,000 – based on today’s action the worst thing the market could do is trade down to 9,500 bounce to 9,850 and then go lower.”

Picture the path, and you’ll be more prepared for the emotional minefield that accompanies adverse conditions.

Good Trading!

Trader Tim

19
Aug
10

Bearish Prognostications

Like the dieter that promises himself that he won’t eat all the pizza, (but does so anyway), I made myself a promise that I wouldn’t put a bunch of charts and technicals up here. Sure, it is a trading-oriented blog – but I find dissection of charts a bit dry after a while. If I wanted CHARTS, CHARTS, CHARTS all the time, I would probably visit chart.ly and be done with it.

Hell, if they were more like this – http://chart.ly/qhym5k I most certainly would!

But I have had this interminable itching in the back of my trading mind for a bit, seeing the large wedges forming on the Dow chart, the breakout to the downside and subsequent upwards retrace – and it gives me pause. Condensing daily ticks to physical output, I believe we’re in for another slapdown.

Heresy, I know – the FED is going to pump some massive amounts into Treasuries tomorrow and Friday. But the setup still exists. Here’s what I’m thinking. Dow gets inflated via the “FEDjection” into Friday, then sets up for a good fade into the rest of next week.

Not that I’m suggesting you take this as specific instructions to drop your beer and tv dinners, rush to the computer and place some orders – just that if you agree with me (after doing your own due diligence and financial homework), I think we’re setting up for a good smackdown.

There I said it – it will be google indexed and replicated in a few hours. I can’t go back now! (Not that I would, mind you.)

Here’s to next week! Bombs away!!!

Update: Looks like we’ve gotten a head start for thursday, as of this writing the dow is down 182.78 points! Heck of a slide going into option expiration.

Good Trading!

Trader Tim

16
Aug
10

Financial Writing

Welcome to financial writing, or “how to get paid with hindsight”. While most websites that post market summary stories aren’t completely automated yet, (and I stress *yet*) here’s my easy guide for writing a market summary in less than five minutes.

Start with a template – something like this:

Markets <rose/fell/traded sideways> and finished <higher/lower/mostly unchanged> <day>, though a <better/worse> showing from the <tech/finance/energy/healthcare/transport/utilities> sector<decreased/compounded> the <gains/damage> as investors <ran for cover/fled to quality/strengthened their positions> as the <Economic Report> showed <increased/decreased> <uncertainty/optimism> about the economy.

After trading <higher/lower/unchanged> today, the Dow Jones Industrial Average finished <points> points<higher/lower>, or <percentage change>, to <close>. The S&P 500 was <higher/lower/unchanged> at <close> and the Nasdaq settled <higher/lower/unchanged> at <points>, or <percentage change>, at <close>.

<Concern/Optimism> about the <recent economic event> in <day>‘s session following news that <economic statistic grew/fell> for the <1st/2nd/3rd/4th> quarter as <convenient implications from economic report>.

<Random official source> <predicts/expects/indicates> that a <short-term economic event> will <longer-term economic forecast>.

<Talking his position>,” <official source> said. “<longer term meandering to support my trade>

Overseas, Hong Kong’s Hang Seng <rose/fell/unchanged> <percentage change> while Japan’s Nikkei <rallied/slumped/fell> <percentage change>. The FTSE in London <rose/fell/was unchanged> <percentage change>, while the DAX in Frankfurt was <higher/lower/unchanged> by <percentage change>.

Hey, that is a mouthful. But with proper tweaking of the inputs, you can get a reasonable sounding summary like this:

Markets traded sideways and finished mostly unchanged Monday, though a better showing from the tech sector compounded the gains as investors fled to quality as the Empire State Manufacturing Index showed decreased optimism about the economy.

After trading lower today, the Dow Jones Industrial Average finished 1.14 points lower, or -0.01%, to 10,302.01. The S&P 500 was higher at 1,079.38 and the Nasdaq settled higher at +8.39, or +0.39%, at 2,181.87.

Concern about the ESM Index in Monday‘s session following news that UBS GDP forecast fell for the 3rd quarter as expectations for softer consumer spending showed further economic weakness.

Economist K. McSpenderson predicts that even at current levels of government spending will not cause overall harm to the economic recovery effort.

I think the pessimism is overblown,” Mr. McSpenderson said. “The government has shown ongoing support by passing legislation to help overburdened taxpayers make ends meet.”

Overseas, Hong Kong’s Hang Seng rose +0.2% while Japan’s Nikkei slumped -0.6%. The FTSE in London rose +0.01%, while the DAX in Frankfurt was unchanged.

My, it sounds so professional! The first person to reduce all these variables to a script is going to make MILLIONS.

Good Trading!

Trader Tim

15
Aug
10

Blowing Out – Live on video

Blow up, blowing out, faceripper, knife in the gut. There’s probably a thousand ways to describe the process that takes many new traders out of the market. Even if you are a seasoned professional, it is the dark cloud in the back of your mind, rumbling ominously. Did I make a mistake? Could something be horribly wrong, my risk parameters incorrect – or trading gods help me – my protective orders not filled right?

These are thoughts that keep traders awake at night.

I present for your consideration a link to a video that shows an unfortunate trader doing just that – blowing completely out. At first I thought it was staged – but from further research on the conditions and an excerpt from the original post by the trader after the video aired, I think it is real.

http://www.youtube.com/watch?v=NYeLrcWFitY

In his own words:

For those that didn’t see the video when it originally aired January 22, 2008, I lost over 30k holding a trade over the weekend being long the stock Futures indices. I was overleveraged, but I never thought the market would go limit offer (Dow Futures down 650pts) with the US markets closed on Monday in observation of Martin Luther King day. I sold my long before the market opened due to a potential margin call that would have liquidated everything. On Tuesday, the Fed did a surprise interest rate cut, and the market popped 500pts. The Dow dropped close to 1000pts in 3 trading days.

After viewing the video, I had to wonder – what did the equity curve look like in those short minutes? A bit of video scrubbing and noting the loss numbers gave me this horrific graph:

This is what a blowup looks like. All the market truisms triumph here – notably, “Cut your losses short”. This graphic should be printed out and put up next to every trading screen in the world. You don’t cut your loss, you are in for a bad ride to blow-out town.

This is the dark side to trading. We’ve all been there. If you have made a trade and let it ride just a “little bit longer”, you’re flirting with the same results. Is your pulse racing? Breathing faster? Good. It means you are alive and willing to learn from past mistakes.

I don’t know if this person is trading today. My research turned up a somewhat inactive blog with a post from July of 2010, so it is hard to say. I have to give him credit for having the balls to post this on the internet. You always see and read the stories of great success, but rarely do you get to witness the more common failures.

Keep your head in the game, and trade your plan.

Good trading!

Trader Tim