Trader Mom @ Home

Definition of Solid Performance In Trading.

1 In a bull market, everyone is a “genius”, including my 90 year old grandmother. A good trader makes money in a bull market and avoids losing money in a bear market. Only great traders can make money in both markets. It is just so much harder to make money in a bear market since bear raids are too fast and furious for most people to react.

2 What does your equity curve look like? Do you have a lot of draw-downs? Do you know why Madoff conned so many people, including fund managers? Madoff was a genius. He offered people an anual return from 8-12% every year. Many novice traders might sniff at this kind of returns. But he did that every year no matter how the market behaved. Key is consistency here. A one year wonder means nothing. My grandma could step into the market at any moment, flip a coin and buy Drys at 5 dollars. It might be up 200% from there when she comes back next year. Is she a good trader? Also if you are up 50% this year and down 30% next year, it is bad performance. Your draw-downs are too big. You are much better off up 10% each year.

Now onto daily analysis of my trading. Day Trading is for my pocket money. My core positions are those swing trades. It was a beautiful day snice my positions moved in the direction I predicted. Thanks to David, he brought TNA to my attention, which is a triple leveraged small cap fund. It has a lot of volatility I like. So I day traded it with a Risk Reward Ratio of 1:4. It was a clean text book set-up. It broke out of a side-way trading range with vol. With a planned exit, it was a beautiful kill. There is no need to trade a lot. You would end up giving back a lot of your profits if you do. One shot and One kill is all it takes. Check it out on my tiwtter updates.

My Swing positions are doing very well too as we can see from My Portfolio. It was a shame that RIMM shook me out of my position and rallied hard. My stop loss for RIMM was perhaps a bit too narrow. I will look into it. Now let’s take a look at my last batch of swing trades, They are RIMM on 1/22/09, MOS on 1/21/2009 and WLT on 1/23/2009. RIMM was out at a loss of 174.99. MOS was out at a profit of 814.02 And I have a 10% paper profit on WLT. My target for WLT is 20% minimum. It is not hard to see the performance is pretty solid.

Click the pictures below to have a better view. 1s are where I opened my swing positions.

Now tell me if anyone entered a swing long in MOS around 2 and 3, thinking you were at less risk than me .

Now tell me if anyone entered a swing long in WLT around 2 and 3, thinking you were at less risk than me .

Now tell me if anyone entered a swing long in RIMM around 2 , 3 and 4, thinking you were at less risk than me .

I know that it takes a lot of courage. But you would make me really proud if you did. BTW, I will increase the size of my swing positions back to 10k each. I would have made 1700 on MOS.

For traders like you and me, stocks are nothing but electronic symbols. I only use volatility and liquidity to choose what stocks I trade. I will talk about why we need volatility and liquidity in the future. They are very easy to understand. The focus of today’s topic is Probability and Risk-Reward-Ratio (R-R-R). These two elements are a very crucial part of our trading career.

First let me use a simple game to illustrate what probability is in trading. We all know that the probability of an outcome of flipping a coin is 50%. If you bet a dollar on head and I bet a dollar on tail. No matter how many times we play the game, we would break even in the end since the probability is 50%. Neither of us has an edge over the other. However, if you somehow increase your probability to 51%, you would beat me in the end. That is how casinos make money. Most people who go to casinos lose eventually. The house is always a winner since the odds are in the house’s favor. That is probability.

Now let’s change the rules of the game. If you win, you make 2 dollars and if you lose, you lose 1 dollar. In other words, you risk a dollar to make 2 dollars. As for me, the rules are still the same. I risk one dollar to make one dollar. Your R-R-R becomes 1:2. Mine is 1:1. Probability is still 50%. It is not hard to see you will take all my money quickly. That is risk-reward-ratio.

Trading is not a zero-sum game since you will have to pay commissions to your broker. Even if your probability is 50% and R-R-R is 1:1, you’d still lose. So trading is a little bit harder than flipping a coin. Now it is quite obvious what we need to improve here. If you can prove that the accuracy of your system is over 55 percent no matter how market behaves and your R-R-R is 1:1, then what a brain surgeon makes would seem like peanuts to you. It seems easy to trade with an R-R-R of 1:1 since you really do not have to wait for a stock to move that much. However, the accuracy of your system is what you need to work on and it is extremely hard.

Another way is to put up with your poor accuracy and increase your R-R-R. As you can see from the day I traded CMA, my accuracy was pathetically low. There were 4 trades. Only one made it. However, I still made some good money (percentage wise 3%). If I had traded 50K for each position, I would have been up $1500 that day. Of course, most of your positions will fail since it is hard for them to move such a large distance. This methdology will test if you have mastered the time and battle proven strategy, which is “cut your losers and let your winners run”. Trust me. Holding onto your winners is much harder than cutting your losers.

After yesterday’s big rally, the general market dipped a bit today due to some bad news from Microsoft. But there were opportunities on both sides.

FAZ, a triple leverage Financial Short Fund is my new pet now since it jumps up and down very fast. As I repeated many times, I like volatility. Only volatility can give me big movers. Stocks like Microsoft, IBM or Walmart are for investors who like to study reports and throw around PE or PEG numbers. I used to do that.

So how did we do today? Day trading was fantastic. Swing trading was also superb since all the losers were cut. Let’s go thought all my trades today. Look to your right. You will find Twitter Updates. If you flip through all the notes I posted today, you will see that FAZ was my first trade. My profit target for this stock is 7-8%. So right after I shorted it, it tanked quickly to 62.05. There was a quick paper profit of 4%. So I quickly moved my stop loss to the break even point. It reversed quickly and took out my stop. Some people might say you could scale out when you have a profitable position. I agree that scale-out is a good exit strategy. But I do not use it. I use “all or nothing” exit. According to my experience and testing, these 2 strategies are the same. There is no scientific evidence to prove which one is better.

FAZ

There is nothing about GS and MOS. They never spiked after I took the trades. They were both losers. So after 2 losers and 1 break-even(a small loser if you count in the commission and slippage), I called it a day. I can not take revenge trades. The market does not owe me anything. But in the afternoon, a perfect chart formed right in front of me. I just could not let it go. That was CMA. The chart formed 2 very round bottoms. So I took the trade. It worked out perfectly. I caught the top. But it was a planed exit + some luck. I never know how high/low a stock can go. But I do know what my risk-reward-ratio is. For my day trades, it is 1:3. So my stop loss for CMA was 2% and the target exit was 6%. I use OCO(order cancel order) right after an entry.

CMA

So I lost 2% on MOS, 0.5% on GS, 0% FAZ, and gained 6% on CMA. Minus Slippage & commissions, I was Net Up 3% for the day just because of that one winner. To sum it up:

1. cut your losers
2. hold onto your winners
3. never hesitate when Mr. oppertunity presents himself.

Since I opened my portfolio, I have had a few hundred visitors every day, who come here to check out my trading. I hope it can help both you and me become a better trader/investor. Here are a few pointers about how to properly use my portfolio to your advantage.

First and foremost, please read this disclaimer before you check out my portfolio. You should absolutely not base your investment and trading decisions on my portfolio. You can use it only as a benchmark to measure your own performance.

This portfolio consists of both my day trading positions and swing trading positions. I normally try my best to post my trades in real time in my portfolio.  Here are a few more things about my postings

1. I do not list my stop losses or profit targets explicitly. However, here is a guideline. Profit targets for most of my swing positions are normally 15%-20% . My stop loss orders are normally 4-7% depending on the volatility of a position.   For day trading,  both stop loss and profit targets are very flexible. In other words, I have no fixed rules for my day trades.
2. If your entry is better than mine, then you are at less risk than me and Vice Verse.

Today is the inauguration day for President Barack Obama. The stock market slaughtered the bulls without mercy. I have full confidence that our economy will recover in a year or 2. Nevertheless, I only care about if I am on the right side as far as trading is concerned. It would be a beautiful day if you were on the bear side. So there is no such a thing as “The market is brutal”. The correct way to say is “The market is brutal for traders on the wrong side”.

As I mentioned in the past, 8 out of 10 stocks move with the general market. So you need to pay attention to it. I use SPY to analyze the market, which is a proxy to the S&P 500. Left is a 3 minute chart that shows today’s down-trending market clearly. As we can see that each bull attempt was very feeble. There were lower highes one after another. Your attempt to go long should be limited. So you could protect your trading stake by sitting on the side line at least. Or if you went short, then it woud be even better.

As I said on Twitter yesterday, I would day trade Drys and a few other stocks. I did trade Drys once on the long side. I lost a little bit,which was basically the commission. As we can see from the 3 minute chart below. I went long @ 13.56 as I mentioned it today on twitter before I entered this position.

The entry was perfect. Take a look at the volume and the pattern. Tell me what you see here in the comments. It was a text book set-up. I will talk about what a good entry is in the future. Immiedately it spiked to 14.05. That was around 3.6%. But I did not make any money on this one,since it did not hit my target(6%). So I had to let it go. Of course, I moved up my stop loss to the break-even point right after the spike. So 2 things here. 1: rock solid descipline (No Randam Exit). 2 Never turn a winner into a loser. I had some 260 paper profits right off the bat. But when it hit my stop loss. I wasn’t thinking like “Oh, I need to remove my stop loss since I had a chance to make 260 early.Now it is almost red. I can not take it.”

For my swing positions in My Portfolio, RIMM hit the target and I was out. And all others except FSLR are gone. I am actually doing fine even if all my trades were on the wrong side. The Profits from RIMM easily cancelled the losses from the losers. I would have lost more if I had not cut them. So when NASDAQ tanked 80 some points, I did not lose any money as a bull. That is not too shabby.

 Tubusa (flying wing in Japanese) is actually a big bird that comes to our little pond for meals everyday. There are a lot of fish in the little pond. She is a very shy bird. No one can get close to her. In fact, I do not know if it is a she or he. That is not important though. What is important is that she is a very patient and focused hunter. She can stand still for hours and hours before making a move. She is a very skinny bird as you can see. So she wastes no energy flying up and down looking for any possible fish movements. She just disguises herself by standing still. She waits, waits and waits….. Once a perfect opportunity presents itself, she makes a decisive move. …

I have been warning since yesterday on Twitter that a sharp snap-back might occur anytime. If you are following my blog, you know where and when I shorted a few stocks. Old shorts had hefty gains. They needed to book their profits. Today, the market swung like crazy. Nadz swung from -30ish to +20ish. That was a 60 point move. This was exactly the kind of volatility we needed. I wish we had this kind of volatility everyday. But the market is very dull 70% of the time. So Tubusa is here to remind us from time to time that patience is truly a virtual. You do not need to trade everyday, period!. But once there is an opportunity. You take a shot at it aggressively.

It is very obvious that why I would choose to go long here. The market is oversold and it approached a very strong support 8000. All the shorts and the longs(like me) were watching on the sideline. Any signs of strength would cause the longs to jump in and the shorts to get out. FSLR and RIMM were super strong all day long as I mentioned quite a few times on Twitter. So it is not too hard to see why I bought them. MON is the strongest fertilizer stock. MOS and NOV are not bad and very volatile, which is exactly what I like about them. Now the wheel is motion. Exit and stop loss orders have been placed. I can not touch them at all no matter what. My minimum target for each one of them is 15-20%. if one of them hit the target and the other ones die, I’d almost break even. If 2 make it, I’d very happy. If all of them die, it is just a part of the game. No big deal.. We will try again.

I have no trades today. I am waiting for perfect set-ups. Most of the time, we wait, wait and wait…. As you can see from My Portfolio , it is kind of rare to have big winners. Most of the time, I work very hard to keep my head above the water.

FSLR dropped like a rock since some analyst downgraded it. I tried to short this quy quite a few times before. All went belly up. This time it went down without me. I would not short FSLR from here since the best short entry has passed. Your risk to short FSLR now is too much. So let it go.

I found twitter to be very useful to communicate with my readers. I can publish my trading thoughts easily to my blog and people who follow me on twitter. It takes 2 minutes to sign up and it is totally free. I might not be able to chat on Twitter too much during the market hours. You know how crazy it is if you have to watch 15-20 stocks at the same time. It takes a lot of concentration power. However,I will be more active on Twitter after the market is closed.

BTW, if anyone tells you that trading is easy or you can get triple digit returns every year using some kind of trading system or robot, that is a hideous lie. I can tell you that trading is harder than getting any bachelor’s or even a master’s degree in STEM. You will make it only after a tremendouse amount of hard work.

Good Luck!

First and foremost, there is nothing bad about shorting stocks. Shorts are just as patriotic as longs. The valuation of stocks in the dot.com era was 100 times more disgusting than what we have today. No one thinks that those guys who pumped technology stocks left and right, day and night were as “despicable” as shorts. Shorts can balance the market by busting bubbles and holding up the market by short covering. Of course naked shorting is totally prohibited. OK,let’s get over this morale obstacle about being a shorty. Onto stocks…… Read the rest of this entry »

Do you think your family and friends(assume they are not traders like you) will understand you when you tell them that the first thing a trader learns is how to lose money. aka cutting losers? Would they confiscate your trading stake if you tell them something like “Sweety, I am so happy today because I just lost 500 dollars by selling Stock XYZ 10 minutes ago.” They perhaps would! They would also think you are nuts and a saboteur sent by some evil spirit to destroy the family financial order. The next thing they think is that you need to see a shrink.

Yeah, Yeah I know it is painful to watch a stop loss order kick in , take out your position and show a red number in your account. You can twitch,squirm,whine or bang your head against the wall or anything but remove your stop loss orders. And this rule is THE most important since one big loser will totally knock you out cold and you will perhaps NEVER recover from that one single big loss. It is more important than ridding winners, which is second most important in trading/investing. Ridding winners is much harder than cutting losers. We will talk about it in the future. Here are 2 real world examples that might help imprint this rule in your head permanently.

Example 1:

A friend of my husbands’ bought CROX @ 39.32 sometime in Nov. 2007. It is around point 1 in the picture below. He thought it was cheap (another trading sin,aka catching a falling knife). Then It dropped another 10% all the way through the previous low. I did not know why it dropped. But I know it was very dangerous since it cracked a very important support. I told him to get out. But he said it would come back since it was this good and that solid company. As we can see from the picture, it kept tanking util it hit around 28. Then there was a dead cat bounce very possibly caused by the shorts covering. That friend of my husbands called me 3 times in one day and told me how strong his willpower was to hold onto that loser. What I told him was that strong willpower was much needed in holding onto a winner not a loser. Of course he did not budge. What he felt back then must be like what Tom Hanks felt when he saw a boat after he talked to volleyball named “Wilson” for years in the movie Cast Away. So tanking it kept… When it hit 10, his first reaction was “it is already 10, how much lower can it go?”. As we can see from the picture, how much lower it went.

Example 2:

I went long @54.83 on SIGM, which formed a small doji star after a pullback in a big uptrend(around point 1). It was a high probability set-up. But it died the second day. I lost 8% on that one. If it were you, would you be happy to cut it? I know I am. So I think you really should give yourself a round of applause each time you cut a loser. As I said in the past, losers are like tumors. You must cut them as soon as possible. If you still can not do it, you can put a picture of a disgusting tumor on your trading desk to help you remember that. I tried to look for some tumor pictures. But they are so disgusting that I do not want to ruin your appetite for dinner tonight.

Safe trading.

The husband wrecked his car today due to the faulty weather. He is actually a very good driver. He does not have a single ticket and never had an accident in the past. Thank God that none of the people involved in the accident was hurt. The car was not totaled. But it will cost a few thousand to have it fixed since he only has liability. He is still mentally stunned as I am writing this. Errrrrr… X dropped 7% today.. now onto stocks.

I added 2 in My Portfolio as you can see. FSLR and HES were stronger then I thought. They did not perform(drop) well today. My trailing stops for FSLR and HES have kicked in. So if they do not gap up significantly, these 2 guys will not become losers. X actually performed much better than all those in my portfolio. In fact, along with X, MOS,FSLR and GS, I was also watching PCX, DRYS and WLT. As you can see PCX, DRYS and WLT dropped spectacularly. PCX -15% ,DRYS -16% and WLT -11%. So FSLR and HES were like peanuts. I have a preference for high-priced stocks. But I am really starting to think about balancing my portfolio a little bit. In fact, I should have shorted all them and used smaller positions such as $5000 per position. I am seriously thinking about this strategy now. It is like casting a fishing-net. The bigger your net is, the more fish you will catch.

I miss my biking days in Japan. BTW, I grew up in Japan and I rode a bike to school and work everyday. It is good for health, environment, no maintenance cost and just good for everything. It is so dangerous to ride a bike where I live now.

Safe Driving, everyone.

I learned a painful lesson today, which I like to share with everyone here. I have been following X and MOS for a few days. I knew MOS would have a volatile day today since it just released its quarterly earnings, which is not bad, but not stellar either. So I decided that MOS was good for day trading. And I was not sure about whether I should day trade or Swing trade X. This hesitation bugged me all day long. And it finally took a toll on my performance . Here is how it went.

X gaped up without heavy volume, I knew it was not sustainable . So I faded the gap-up @40.85 right after the market open. It quickly tanked to 38.36. It was a solid big move(6%) by any day trading standard. Looking at the profit(600$), I started to think about swing trading it for a much bigger profit. At the same time I was looking at MOS for a day trading entry. So it kind of messed up my thought process.

Read the rest of this entry »

AAPL is a very solid company. Almost every single line of its products is solid. I believe long term investors will benefit from holding onto their positions.

On the contrary, as a short term speculator, I closed my AAPL position today. Check out My Portfolio . Why did I do that? One of my rules is that I get out when a stock hits its target. There are no buts, ifs, this and that. No thinking is allowed once a trade is opened. Thinking is done before I place a trade.

My target for aapl was actually pretty low (8-10%) and stop loss was 3%. It had a pretty good risk-reward ratio (1:3) with high probability. The low target was due to the sheer size of appl, which takes a tremendous amount of money to move it.

I have no open positions as of now. I am closely watching a few stocks for possible short entries. Pay attention to FSLR, POT, MOS, X, GS and SHLD

I lost 300+ from shorting Goldman Sachs again as you can see from My Portfolio . Before the market opened, we all knew that all other oversea markets had good rallies. My instinct told me not to short. But mystem generated a short signal. My experience told me that my system always beats my instincts hands down. So I did not hesitate to take the trade. Well, the result is that my instinct was correct and my system just generated a false signal. This one example does not invalidate my system at all.

A good system might generate false signals 50-60% of the time. But when it generates a good signal, it will give you a winner that is multiples of a loser. That is how we make money here. It is OK to be wrong.

I opened a long position in AAPL. I am closely watching X for a short entry. BTW, GS is not a loser for the longs.

Have a good weekend!