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Market is like an Ocean

  
  Education
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oceanThe market is like an ocean – it moves up and down regardless of what you want. You may feel joy when you buy a stock and it explodes in a rally. You may feel drenched with fear when you go short but the market rises and your equity melts with every uptick. These feelings have nothing to do with the market – they exist only inside you.

The market does not know you exist. You can do nothing to influence it. You can only control your behavior.

The ocean does not care about your welfare, but it has no wish to hurt you either. You may feel joy on a sunny day, when a gentle wind pushes your sailboat where you want it to go. You may feel panic on a stormy day when the ocean pushes your boat toward the rocks. Your feelings about the ocean exist only in your mind. They threaten your survival when you let your feelings rather than intellect control your behavior.

A sailor cannot control the ocean, but he can control himself. He studies currents and weather patterns. He learns safe sailing techniques and gains experience. He knows when to sail and when to stay in the harbor. A successful sailor uses his intelligence.

An ocean can be useful – you can fish in it and use its surface to get to other islands. An ocean can be dangerous – you can drown in it. The more rational your approach, the more likely you are to get what you want. When you act out your emotions, you cannot focus on the reality of the ocean.

A trader has to study trends and reversals in the market the way a sailor studies the ocean. He must trade on a small scale while learning to handle himself in the market. You can never control the market but you can learn to control yourself.

A beginner who has a string of profitable trades often feels he can walk on water. He starts taking wild risks and blows up his account. On the other hand, an amateur who takes several losses in a row often feels so demoralized that he cannot place an order even when his system gives him a strong signal to buy or sell. If trading makes you feel elated or frightened, you cannot fully use your intellect. When joy sweeps you off your feet, you will make irrational trades and lose. When fear grips you, you’ll miss profitable trades.

A professional trader uses his head and stays calm. Only amateurs become excited or depressed because of their trades. Emotional reactions are a luxury that you cannot afford in the markets.

Rules for Bear Market

  
  Education
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1. Good news in a bear market is like smoke in the breeze (i.e., soon dispersed). Don’t buy into upgrades or analyst recommendations. Analyst “upgrades” or recommendations can kill you.Every person reading this has access to some kind of trading platform, trading tools or systems that afford instant access to the financial markets. Good news like upgrades in bear markets typically has about five minutes of fame.

 

2. Bear markets are not a time to learn how to “day trade” in an effort to recoup losses (no matter how many times you hear that “this is a traders’ market”).

 

3. Accumulation days (there may be three or more in a row) are shorting opportunities, but resist being aggressive until the S&P 500 shows a 3- and 5-day moving average bearish cross. (Remember that it’s 50% market, 25% sector and 25% stock as far as direction, but some could argue in markets it’s 75% index, 15% sector and 10% stock.)

 

4. Chart patterns (unlike ice cream) come in just two flavors: continuations and reversals. Reversal patterns mostly form in weak trends. If the trend that the market or stock you are watching has been strong, then chances are that any pause is just a consolidation before the next leg down.

 

5. There is no such thing as “safe sectors.” Sure, each bear market brings sector rotation. But make sure if you are playing this game that you don’t have the flexibility of wood. And when the music stops, quickly find a chair!

That is, you must keep a flexible mindset so that you are able to change with the markets. The best traders are those who are nimble and approach the markets without bias.

 

6. Your stop-losses are YOUR stop-losses. The pain of being down 8% in a bull market is no different than being 8% wrong in a bear. If your risk tolerance requires you stopping out at 8%, then be consistent in any market you trade, but trade “with the primary trend.”

It takes greater emotional balance to trade a bear than a bull. So, always manage your risk — just remember that, in the markets, your money is always at risk.

Great traders manage emotions and risk. This makes them great. YOU know your risk tolerance and YOU control what happens between the “keyboard and chair.”

 

7. Bear markets are generally slow-moving affairs. However, stocks in bear markets can move much faster than you think (hence the reason that volatility rises drastically). But the “time” we spend in a bear is what everyone needs to keep in perspective. Bear markets last much longer than most are willing to wait. (more…)

Trading Your Personality

  
  Education
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It’s been said too many times to count – that you must trade according to your personality. In the movies they might call it “being true to yourself” or something cheesy, but it’s a necessity in this job.

Recently I was asked which chart patterns I prefer to trade, continuation chart patterns or reversal chart patterns. My answer was that while I will actually trade either, I suppose the continuation and breakout type of patterns are the ones I trade more often than reversals or buying on support levels.

I don’t think one setup is superior to the other, they both have their pros and cons, and you have to go with what fits your style best.

Buying on support is an anticipatory play, which may take a few extra days to get moving. It can give you a lower cost basis than another trading strategy, but will require greater patience on your part while you wait for the stock to find traction.

Buying a stock which is breaking out puts you (by definition) in a stock that’s already on the move. This is a confirmation play. You get instant feedback on how your trade is developing and how much momentum the stock has.

The setups you select for your trades need to incorporate your personality tendencies on managing those trades once you are in them. For me, I tend to be a bit impatient and I want to know as soon as possible whether or not I’m right or wrong on a trade. Other traders don’t live in the left lane, and they’re willing to give a stock some time to get moving one way or another. They place their protective stop and turn their attention to something else in the meantime while waiting for their trade to make a move. Personally, I prefer to have my money at risk for the shortest timeframe possible. I really prefer the times when the market conditions are producing breakout plays and continuation patterns like the bull flag or ascending triangle patterns.

So, when you’re doing your homework and looking for quality setups to trade, be sure to consider the ones which fit your personality and your style of trading. Those will be the trades which you ultimately will manage the best.

Just follow these Trading Rules

  
  Education
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  followtherules

 Stops – a stop price must be in place at all times for all positions.

 Balance – this one is the hardest of all to define, but because it is impossible to know with certainty the future direction of the market, a balance between bullish and bearish positions is the most prudent. In addition, if you are heavily weighted either bullish or bearish, and if the market moves strongly in your favor intraday, you should consider taking on a large opposite day-trade position for “insurance” profits in case that intraday move reverses. 

Freshness – positions should be regularly refreshed for the sake of updated stops. This is especially important when the market has moved in your direction a meaningful amount so that you can lock in some profits with tighter stops.

Emotional Awareness – use emotional awareness to your advantage, understanding fear often accompanies reversals in your favor and hubris often accompanies reversals against your positions.

Exits – the only acceptable exit is either being stopped out of a position or reaching a target price which has a clear technical rationale, and even in cases of the latter, partial exits are preferable to outright closes. (more…)

Trends- Reversals- Cycles

  
  Education
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Many assume the continuation of trends beyond their turning points. Such thinking is evident in the news. The opposite view is the statistical lack of trends and the assumption of reversion to the mean. However trends exist in a random or due to macro effect such as government (mis)policy or herding, none of which can be ignored except to one’s detriment. The pure quantification of price makes discernment of the change of cycles hard to see except in retrospect, thus other forward and current input seem worthy to consider. There are tells to macro effects if they can be discerned. The random trends also may have their characteristics. Philosophers like to define their terms, and traders also need to define their time frames to clearly state the issues. This seems to be a common point of misunderstanding in debates on these issues.

 

Ten Reasons – Trading Long Option Strangles

  
  Education
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A long strangle is long one call at a higher strike and long one put at a lower strike in the same expiration and on the same stock. Such a position makes money if the stock price moves up or down well past the strike prices of the strangle. There are higher costs and risks with these strategies, as I discuss below. 

 Strangles are low risk plays, one side of the options will go up in value when the other side goes down in value the majority of the time.

  1. If one side becomes worthless it generally means the other side is worth a lot.
  2. You can make money on strangles even when you do not know which way the market will move.
  3. It is much less stressful to hold a position with a hedge in place.
  4. The big risks are transferred from the option buyer to the option seller in this play.
  5. Strangles lose small  with small movements but win big when there is a big move. The are asymmetrical in their construction.
  6. When one side of the option sellers blow up their account due to an outsized move you will be on the other side of them and be the trader their capital flows to.
  7. Strangles can be played on any time frame.
  8. With the strangles the winning side has a growing delta and the losing side has a shrinking delta.
  9. Strangles can be used to capture trends, volatility, and reversals.

Where is the risk? (more…)

10 rules for Rookie Day Traders

  
  Education
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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. 

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. (more…)

The market is like an ocean

  
  Education
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trading_for_a_livingThe market is like an ocean – it moves up and down regardless of what you want. You may feel joy when you buy a stock and it explodes in a rally. You may feel drenched with fear when you go short but the market rises and your equity melts with every uptick. These feelings have nothing to do with the market – they exist only inside you.

The market does not know you exist. You can do nothing to influence it. You can only control your behavior.

The ocean does not care about your welfare, but it has no wish to hurt you either. You may feel joy on a sunny day, when a gentle wind pushes your sailboat where you want it to go. You may feel panic on a stormy day when the ocean pushes your boat toward the rocks. Your feelings about the ocean exist only in your mind. They threaten your survival when you let your feelings rather than intellect control your behavior.

A sailor cannot control the ocean, but he can control himself. He studies currents and weather patterns. He learns safe sailing techniques and gains experience. He knows when to sail and when to stay in the harbor. A successful sailor uses his intelligence.

Gorman & Kennedy, Visual Guide to Elliott Wave Trading-Book Review

  
  Education
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First, what Visual Guide to Elliott Wave Trading by Wayne Gorman and Jeffrey Kennedy (Bloomberg/Wiley, 2013) is not. It is not an Elliott wave primer. The authors direct the reader who knows nothing about wave patterns to the classic presentation by Frost and Prechter, available free online.

Instead, this visual guide shows how to actually use Elliott waves in trading, both as a stand-alone tool and, more perfunctorily, in combination with technical indicators. It also includes two chapters on incorporating Elliott waves into options trading strategies

Many of the Elliott waves the author illustrate (and naturally the illustrations are abundant) are of the “real world” vs. the “textbook” variety. That is, they are tricky to decipher even in hindsight. This difficulty has led many critics to claim that Elliott wave theory is useless in real time. In fact, the authors admit that “under the Elliott wave model, there is usually more than one valid wave count at any particular time” and that “sometimes these wave counts point in opposite directions.” (p. 195) (more…)

The Universal Principles of Successful Trading

  
  Education
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A book review for Brent Penfold’s book “The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets”

This book is excellent for traders that are ready to accept its lessons. You need a foundation in trading to understand the importance of what the book is advising and take the principles seriously with an open mind. Once you are through the rainbow and butterfly phase of trading and realize that you will not be a millionaire in a year, this book will help you get focused and get serious about your trading and what really works.

Here are the six universal principles of successful traders:

1). Preparation

Author Brent Penfold is in the minority believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. His point is that if your risk of ruin is not zero then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin but it also depends on your systems win/loss ratio. But the point is to test any system with a minimum of 30 trades first then determine your risk of ruin. I would advise a larger sample size in multiple market environments a trend following system that looks brilliant in a trending market may result in a 50% draw down in a choppy or range bound market. (more…)

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