Every trader makes mistakes. What separates the traders who make it in this business and the traders who are a statistic is, do you learn from your mistakes? The first step is identifying the mistake. The next step is during your review of the day figuring out what you should have done different. The last step is the toughest, now you have to implement the correction of that mistake in realtime trading. The example I have of this process is from a trade I took in Cameron International(CAM) two weeks ago and a trade I took in CAM today.
As we have talked about beginning last week the volatility and ranges of stocks has increased dramatically. This has caused the management of trades to become more difficult and if you aren’t making the proper adjustments in your trading you are probably getting whipped out of good trades. The best example I have of this was a trade I took in CAM on April 29. I entered the trade on a consolidation pattern after a huge down-move on the open. The stock had been in the news because of the oil spill concerning BP. I entered the trade at a spot with a good risk/reward ratio but because of the increased volatility got whipped out of the trade and took a big loss, more than I expected. The first mistake I made was I panicked when the trade went against me. Then I exited the trade at the worst spot because I should have realized that the idea was still good. I either should have waited to see if CAM was going to hold this price or should have reentered the trade when it headed back down. The stock had and 8 point down-move and I didn’t participate in enough of it because I missed up the ideal entry.
Going into today CAM was on my radar as a very high percentage short. I either wanted to get in the trade at the break of the bottom of the range or test the top of the range. We started to break down in the morning and I took a decent loss on the trade. I put in an alert for 38 with the idea that if the stock showed some weakness up here I would get involved. CAM traded up to 38.50 but then showed some signs of weakness as the SPY traded down from 117. I got short at 38.10 and looked to build a position below 37.70. I took some shares off around 37.50 but really believed that it should break to around 37 even. Well after I covered a piece the stock started to immediately trade up and I was planning my exit. But then I remembered what had happened two weeks ago and decided to trust my idea. I planned to hold my trade to at least my original entry. I added back on at the 37.90 area and got paid off in a big way to end the day.
The key to all of this was identifying a previous mistake and applying it to the here and now. Trust your ideas and preparation of the trade. Don’t let your emotions get the best of you and try to limit your mistakes. If you can limit your mistakes profitability is around the corner. Best of luck with your trading and have a good night.
Kyle
Well, what can I say? What a wild week it was. As a firm we had been noticing some of the signs that the sentiment in the market could be changing, but who could have expected what we got on Thursday and Friday. The volatility was crazy as fear seemed to grip the market, and it seemed that many traders were unloading positions. I know many people are concerned about the news out of Greece and the effect it is going to have on the euro. Whatever the reason, the volatility has spiked with the VIX for the week going up 88%. I had noticed early in the week that I had been trading very sloppy, and after sitting down with Eric on Wednesday realized it was because I wasn’t making the necessary adjustments to this changing trading environment. After going home and going through my trades I found out where I was going wrong in my thought process. Here are some of the adjustments that I am making in my trading.
- Trading with smaller share size. This I think is the biggest adjustment traders need to be making right now. With the larger ranges in most stocks you have to be willing to risk more on each trade. You don’t want to be shaken out of good trades so lowering your share size will enable you to hold trades through some of the noise. Plus there have been more and more opportunities late in the day, so the last thing you want to happen is to have a bad morning and have no chance to make it back later in the day because you have hit your stop out for the day. Personally I have been trading with about 1/2 of my normal positions size but that is up to the individual trader to figure out.
- Entries and exits are based more on momentum. Now this is more of a personal adjustment to my trading. The direction I am trading in is still based on the higher timeframes but scaling into and out of positions is more important with the VIX at these levels. Stocks are not just pausing at support and resistance levels but they are bouncing hard. If you are not properly scaling into and out of positions you are taking on too much risk in this market.
- Wait for a stock to bounce before you short. The fear that grips a weak market causes many stocks to move fast and quick to the downside. Many traders who miss a short tend to chase and get in at the absolute worst time. Many of the programs we are trading against wait for this extreme downmove and buy the second momentum slows. Chasing a stock plays into their hands. Wait for a bounce, be patient for that upside momentum to slow, then establish a short at a good risk/reward level. The worst feeling in the world is at the end of the day a stock is down three points, you have been short all day, and you end the day down because of bad trade management.
This market is beginning to get interesting and I personally can’t wait to get back in the office. Remember preparation for the day is key and be ready for anything. In this volatile market there can be no uncertainty in what you are going to do next. Good luck in your trading and have a good week.
Kyle
As in previous blogs, I have been keeping track of the progression of the Greece bailout. The US markets have been going up as the Euro is strong against the Dollar. Right now not even a spike in jobless claims can keep the US markets from going up, but the collapse of the Euro is still on the table. And since the Fed seems to be content keeping the rates in place until probably after September elections, the only catalyst seems to be the Greece bailout.
Where it stands now is the Euro-zone leaders have pledged $45 billion package of loans to Greece to keep it from the brink. However, this Tuesday at a meeting of the American Enterprise Institute, the fiscal outlook in Europe was identified as the leading downside risk to global economic recovery.
Nouriel Roubini referred to Greek Crisis as the “canary in the coal mine.” Saying that the fall of Greece could lead to the fall of Spain, Portugal and Ireland. And with this would be collapse of the Euro.
Desmond Lachman, a former IMF official and pictured above, said that in the near term the USD/EUR will likely move towards parity. He compared the Greece bailout to that of Bear Stearns by the Fed. Seven months after they bailed out Bear Stearns, the passed on bailing the Lehman Brothers rescue. Thus triggering the beginning of the global recession.
Can the Euro have that dramatic of an effect on us? That remains to be seen and can be a point of debate, but I certainly think it’s important to keep an eye on this as it recently has had a direct correlation with our markets. A stronger dollar would expectedly take the wind out of the sails of the US markets.
EUR-USD grinding ever lower as dollar stregthens.
Trading is all about preparation and adjusting to the market day in and day out. During the trading day you should be executing your trading plan not trying to come up with trades. If you are coming into the trading day basically saying to yourself, ” I will see what stocks are strong or weak and trade those.” You are trading the shorter term momentum and missing the meat of the move. If you have a plan to buy or sell a stock and only trade that stock if you get a signal that confirms your plan, then you will get in before the trade is over.
The trading play that has been working for us at Keystone lately has been buying strong stocks after they close weak. We are classifying the stock as a strong stock because of the trend on the daily chart. The best risk/reward setup is when the stock closes weak then tests the previous days low. If the stock opens strong and doesn’t test the previous days low then you are waiting for an opening range break in the direction of the higher timeframes direction, which in this case would be to the long side. Your first profit target on this play would be the previous days high. Because you have the higher timeframes confirming your idea, the probabilities are in your favor so a little more size then usual is appropriate.
There were a few stocks that set up for this play on Friday. The three stocks that set up perfectly that were on my list were JP Morgan Chase(JPM), Hartford Financial Group(HIG) and Las Vegas Sands(LVS). The main thing for this play is just because we sold off the day before only look to go long these stocks. You will get chopped up trading short-term momentum in this market. We are in a bull market until told otherwise and buying strong stocks on dips is the higher probability play and the easier money.
With JPM going into the day I was a little hesitant. The stock had been strong but the selloff on Thursday was pretty aggressive. But you have to know what the play for the day is. Look to buy weak stocks and have a list of them going into the day. When a play presents itself do what you are supposed to do without question. Trust your preparation and you will be rewarded.
The trade in HIG was probably the best setup of the morning. There is no question that HIG has been strong and the stock tested the previous days low to the penny. Basically the risk/ reward on this trade was around 9 to 1.
The stock that has been on my radar the past few weeks has been LVS. The stock has plenty of volume so getting out where you want isn’t a problem. Plus the buying in this stock has been pretty aggressive and the moves are very clean. I tend not to get whipped out of very many trades in this stock because of the high volume. And looking at my PnL for the last few weeks doesn’t lie it is my most profitable stock by a mile.
As traders you don’t have to trade every setup. Find a setup you know works and are familiar with. When that setup presents itself you need to crush it and get paid in a big way. Hope you have a good weekend and best of luck in your trading.
Kyle
As traders we are always looking for situations with great risk/reward setups. When these setups present themselves it is your responsibility as a trader to “hammer” these setups and trade them with some size to take the most advantage of them. Setups like the one in Las Vegas Sands(LVS) today should be stored in your memory bank so that the next time they present themselves in a stock you make the most out of them.
The first thing that put LVS on my radar this morning was the 3-day consolidation pattern on the daily chart. Now my initial bias was to long LVS above this range but I also knew if we broke down from this range that it was a good play. We opened below Fridays range so my bias changed to the short side. I didn’t take the trade right away because we had support at the 2-day low of 19.10 so I was waiting for this level to drop before I put a trade on. This level dropped so I put a small piece on around the 19.10 area.
LVS proceeded to trade down to 18.72 so I took half of my position off. They key here is not exiting the position and moving on to another stock. Never leave a stock if it is doing what it is supposed to do. We pushed up from here to the 18.90 level and every time we got there LVS immediately pushed back down to test the lows. I identified this 18.90 level as a spot to add some size to this trade as a few checks were in my favor. The first check is that we were below a range, the next was the stock had made the move with volume, and the third was I had identified a good risk/reward level. I put on full size the next time LVS got to 18.90 and LVS consolidated for another 20 minutes before breaking down another .40. I scaled 3/4 of the position off into this momentum move and held the rest until LVS broke 18.50 on the upside.
Plays like this should be on every traders radar because any spot that you can limit your risk to a few cents in a stock that is following through should be a trade that you take every time they present themselves. Best of luck in your trading and have a good night.
Kyle
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