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Archive for May, 2010

The Difference Between a Bias and an Opinion

The current market environment has been filled with opportunities, the last hour of yesterday and the last 30 minutes of Friday being the best example.  The money has been there but only to the flexible trader who is able to look at the market with an open mind.  Many traders have been frustrated that they have been missing some of these moves (myself included), and I think the reason behind it is they are looking at the market with an opinion about what it should be doing. 

When you are game planning coming into the day you should be forming a bias about what you think the market is going to do and what stocks you will trade if the market unfolds the way you planned.  Forming this gamelan will allow you to trade more size and having a higher conviction about what you are seeing.  The danger is forming this bias and being able to see nothing else in the market except for what confirms your initial bias.  This is what is called having an opinion.  When you form an opinion you are only seeing what you want to see.  With the increased volatility in this market traders who are trading with an opinion are getting crushed, and will end up being a statistic. 

When you game plan for the day you need to make sure you are planning for everything.  Plan on what you will do if the market opens 200 points down and then starts to rally.  This plan may just be to do nothing but write it down, make yourself accountable.  The important thing is to be flexible in your planning and pay attention to what is happening in the market.  If what you planned on happening is not happening reevaluate your ideas, don’t just keep trading your bias that is when it becomes an opinion.

It is human nature when you are bombarded with information to try to make sense out of it.  The key is to make sure you are looking at everything you have available and not just see what you want to see.  Best of luck for the rest of the day and happy trading.

Kyle

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Go Where the Market Takes You!

May 25, 2010 Leave a comment

This morning was a tough read. Myself coming into today had a short bias thinking that we were going to test the lows of last Friday and possible break lower. We opened around 250 points below yesterdays close in the SPY near the lows of Friday, which gave me a bit more conviction to go short if SPY sell off further . But as you see in the first 30 – 45 min. we did not continue to sell off with any strong momentum. What also helped switch my thinking from the short side was the positive market reaction to the 10:00am economic data that came out. This prompt me to take a long position in Macy(M) above the 15 min. ORB (Open Range Break) but only as a momentum trade because it was opposite of my short bias game plan coming into the day. (which means lower share size, not adding to the position and exiting into momentum at the next resistant level).

As the market made its first pullback creating a swing high and me still wanting to short due to the large opening gap to the downside, I turned to Halliburton (HAL) for my short. I took the short below 24.60 which was its 15 min ORB to the downside. Wanting to hold short position longer than I should have I did create a small loss in this position as it traded back above into its 15 min open range.

But the afternoon price action was solely dedicated the long side and was lead by the Goldman Sach (GS) rally breaking above the 140.00 level. Now some might asks was the short covering or real buying, as we always say it does not matter; we are day trade and might and always trade what we see. As GS rallied and (now this is key) the VIX broke the lunch time range of 39.20 to the downside creating lower lows, the markets started to make new highs and close the morning gap; longs played out in a big way. As long as the VIX continued to make lows while the markets made new highs, this should have giving us a bit more conviction to hold our long position a little longer to try and get the most out of them.

Market Update

Once again, just like last Friday this market is proving to be resilient.  Going into today we were looking to the short side after the news that was coming out of Europe.  We opened on the Dow Jones down around 220 and it seems that the fear was once again going to be the theme of the day.  My plan coming into the day was to wait a bit on the open to let the market settle in and then look to the short side. 

Well just like last Friday this plan was proven wrong by the market and its participants.  We opened below the 105 level in the SPY and I was looking for it to hold under this level as 104.50 was the February lows and I figured that if this level broke we would go down at least another 100-150 points.  Once we got above this level of resistance I lowered my expectations but was still looking to the short side as long as the next resistance level of 105.60 held. 

We pushed to that level and it held so I went short LVS, BBY, and HIG around this time, which was about 10-10:15.  The SPY’s traded down to around 105 and once again this area of support held.  Honestly this was kind of unexpected and I didn’t cover my shorts quick enough, because I let my emotions get the best of my and was not managing my risk well enough.  I should have taken some of my risk off when the SPY held this level.  I lost a bit in LVS and HIG but made a good trade in BBY when it followed through. 

Going into this afternoon as long as we hold 106 in the SPY I’m expecting the market to potentially fill the gap .  The fear seems to be gone from the market right now and the bad news is being digested right now.  I have very low expectations for either side but am adjusting my plan for what the market is giving me.  Watch the financials for the market to tip its hand.  Right now they are all positive from the open, which is leading this market higher.  Best of luck for the rest of the day. 

Kyle

Are You Giving Your Ideas Time to Play Out??

When you go home at night and do your homework, what is your thought process?  Are you coming up with a well thought out game plan?  Are you letting that game plan play itself out during the day.  How are you adjusting that game plan based on pre-market trading and how the market is opening.  In this market environment not having a plan for the stocks you are trading and basically chasing momentum will get yourself killed, and todays trading was a perfect example of how not having a plan for the day can hurt you. 

Going into today I had two scenarios for the market.  We had closed strong so I was watching 115 in the SPY as my inflection point.  We looked like we were going to open in that area so that is where I started to develop my plan.  By doing my late night studying of charts and by being in the market day after day, I have started to lean-to the short side in my trading.  I have come to this conclusion by simple technical analysis, which has showed us trending lower, and by watching the price action in the stocks I have been trading.  The daily ranges in most stocks has increased in addition to the volatility.  Basically stocks have been moving faster and been more volatile especially to the downside. 

Now obviously we are shorter term traders so you may be asking why I’m coming into the day with a bias?  The reason for this is that many of the bigger moves you will capture are going to be based on your overall plan for the market.  I did not treat todays gap up as a long opportunity I looked at it as an area to get short.  I would have changed that bias if the SPY could have gotten above the 2-day high of  115.33 but on the open we proved that we could not get above this level.  Even though on the open we started to trade lower I still waited for the market to prove to me that we were going to trade lower so I remained patient.  I started to look at the financials and also some of the retail stocks and picked JP Morgan and Best Buy as the stocks I was looking to short. 

The last part of this scenario was the Euro/Dollar relationship.  As the euro trended lower I knew that we have generally also trended lower.  I got short JPM around 10:30 and BBY around 11, and knowing that many of the checks in my plan were in my favor, held these through lunch and they ended up working out.  I had real conviction in these trades and held out for bigger gains because I had classified these trades as high probability trades according to my game plan. 

Hopefully all of you traders out there are putting in the necessary work everyday.  The money is there to be made in this market but only to the traders who are working hard.  This market has been providing opportunity but if you have no plan and chase momentum you are going to be left on the sidelines wondering what happened.  Best of luck tomorrow and make sure you are coming into the day with a game plan. 

Kyle

Catalyst in the Market

With the uncertainty that has been coming out of Europe the need to watch the markets overseas has increased dramatically.  Participants in the market seem to be buying and selling stock based completely on the relationship between the Euro and the U.S. dollar.  This has caused some volatile sessions in our market as currency markets are driven by many factors and order flow can change in minutes. 

In todays trading we rallied about 200 points in the Dow to finish flat on the day.  This move was completely driven by the currency market as the lows in the Dow coincided with the lows in the Euro/Dollar for the afternoon session.  I have started to pay attention to the Euro very closely so as to keep track of where the money in this market is moving.  I may not know why the market is changing direction but I will not get caught off guard. 

During the day I have been using Freestockcharts to give me information on the currency markets.  They are a very good charting service that is free and very easy to us.  Best of luck with your trading and have a good night. 

Kyle

Learning From Your Mistakes

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

Are You Making the Necessary Adjustments??

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