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The market had a strong rally in the AM and gave back half of the gains in the end. There was no apparent news that drove the market down near the market close.

Today’s strongest sector was Financials. The whole sector was once up 6% and finished at up 3% Technology and basic materials followed as you can see from the pictures below. I think the worst news have already been digested by the market. Gigantic drops should be rare. The market is going to chop, which is the trend followers’ worst nightmare. For short term traders like you and me, we can take advantage of it. My swing trading is designed for choppy moves. The flip side, of course, is that I can never catch big fish that could give you returns in excess of 50% or even more. But that is OK. Small fish add up.

Click the pictures to have a better view

As I indicated in my mailing list last night, I was going to go long for day trading. I took a long trade in ERX, a triple leveraged Oil ETF. I did not make much money from this trade. But here are a few things I can list about this trade

1: The entry was good.
2: The exit was OK.
3: Picked the wrong sector

I closed the trade because I found I picked the wrong sector. As you can see from the sector summary chart above, energy was very weak. I am still holding my GS and AMG short positions in my portfolio (http://www.momdaytrader.com/Portf/getPortf.html?showPortf). If you have been following my trades, you know that I was up good on these 2 positions on paper yesterday. But now I am negative on GS and all gains in AMG are gone. That is why the tag-line of my website is “Paper profits are not real and paper losses are!” I hope you did well today.

We have seen a solid rally for the past 3 weeks that almost erased the entire loss of 2009.   Have we hit a major bottom here?  It is possible.  But it is meaningless for day traders and short swing traders like me since our timeframes are very short.  Let’s assume that we have hit a major bottom here.  The market is going to chop after such a big rally.   I firmly believe that 8000 is a formidable resistance for the bulls.  It is equally hard for the bears to bring the general market to a new low.  So we will perhaps see a chopping range for a few weeks before the market chooses a direction to break out.    Since targets for my swing positions are mostly 15%, so the ensuing range-bound moves should be good enough for my set-ups.    Occasionally my target is 12% for big cap stocks like AAPL, GS or RIMM etc. or 20% for volatile mid-cap such as WLT or NOV.  I like breakouts/resistance/support for day trading.   Day trading is like all you can eat buffet for me.   I almost only buy support and short resistance for swing trading.

 
Since I believe it is very hard for the rally to continue beyond the 8000 level.   I have been looking for short set-ups or long set-ups in the inverse ETFs.   The first one is of course the most loved and hated FAZ. Click on the pictures to have a better view

FAZ

From the chart above, we can see a few characters that are quite interesting.

1.  There is a pretty solid double bottom formation, which is one of my favorite patterns

2.  The first dead cat bounce met the resistance around 22.33 or 23.60% of the Fibonacci retracement line.

3.  The volume has slight increased, meaning there was some buying interest at this level.

I hope it does not gap up on Monday so I will have a chance to get in.  My first target will be around 25 (30% from here @ 19.87).  Second target will be around 29, which is 50% of the retracement.  My stop loss will be around 18.

AMG  [Affiliated Managers Group]

1.  It is a text book double top formation.

2   It is very close to the last resistance area which formed around 2/5/09

APOL [Apollo Group, Inc]

1. It has had very sluggish moves in the past few days.

2. It has touched the suppressing trend line



GS [Goldman Sachs Group, Inc]

1. A double top is in the making.

2. The financial sector has seen a very strong rally.  It might require a strong reaction

WLT [ Walter Industries, Inc]

1.  The coal sector was quite strong in the past few weeks.  It might require some reaction

2.  It has sluggish moves in the past few days.

BXP [ Boston Properties, Inc]

1.  it is extremely weak

2.  It seems to have broken the last trading range
This stock is not volatile.  My target will be 12% if I decide to open a short position

 
FLSR [ First Solar, Inc.]

FLSR is actually very interesting.  It has formed a very bullish wedge.  The consolidation seems to be very healthy.  I will not touch it for now.

No matter how convinced I am by my own technical analysis, my risk control will always be in place.

In order of severity

1: Hold onto losers and cut winners
2: Confuse stock with its company– keep pets
3. No trading plan– random exits and entries
4. No idea how important position sizing is
5. No risk management (daily/weekly/monthly loss cap)
6. Over trading
7. Revenge trading
8  Immobilized even when Mr. opportunity knocks on the door(fear)
9. Push for performance(greed)
10. Look for the magic indicators(Holy Grail)

I think we have hit a massive resistance. As we can see from the Dow’s Daily Chart, the last trading range was very thick and a lot of people went long thinking that was a bottom are eager to get out.  So there will be massive selling in that range. It will take some time for the market to wear out those trapped bulls.  Once some of them are out, we might see upward moves with the help of some good news.

Click the pictures to have a better view

I am still bearish. That is why I have FAZ.  Now I am up 10% in FAZ again. So I will move my stop to break-even. My target is 30%.  I think 30% is very conservative here.

Where do you think FAZ will stand 3 days from now?

Only triple leveraged ETFs can give you that kind of reward.   Of course, the same goes for the risk in trading these leveraged ETFs.  The rally lasted for a few days for a few reasons

1.  FED said something that I do not even remember.
2.  The CEOs of Bank of American and Citi said they were profitable last month.

I still remember clearly that  Dick Fuld, the CEO of now bankrupted investment bank, Lehman Brothers, said “We are not Bear Sterns and We are in a very good standing”  when the price of their stock stood around 44. 

As I indicated in this post http://www.momdaytrader.com/blog/2009/03/18/stock-market-which-hat-are-you-wearing/,  I was going to swing trade FAZ and SRS.    That is exactly what I did.  Well I did not trade SRS because they move in the same direction and FAZ is more volatile.  All my trader friends on Twitter talked about this and knew that I was going to trade them. You can see all my trading thoughts published here http://twitter.com/trader_mom.   It takes 2 minutes to join us on Twitter and it is totally free. 

Here is the FAZ trade.  Click on the picture to have a better view.

If you have been following my portfolio, you know that I did not take the 10% profit in my last FAZ trade.  Had I taken that profit, I would have ended up with only 10% in this trade too. That is why a trading plan is very important. For readers not familiar with these inverse ETFs,  they go up when the market goes down and vice versa.  They are leveraged short funds.  If I think the market is going down, then I will go long on FAZ, which is equivalent to shorting the market.  Here are my thoughts on the FAZ trade above.

1.  Odds were in my favor since my system had had a bunch of small losers in a row. It was about time to hit something. 
2.  It was a 26k worth position.  If we multiple it by 3(triple leveraged fund), it is 78k. I normally outlay 50-60k for one batch of trades.  So I increased the position size, which I explained in this post http://www.momdaytrader.com/blog/2009/02/02/day-trading-fas-one-shot-one-kill/ 
3.  Here is the most important thing. I was up close to 10% on the same day as I opened it. 3X ETFs rarely gap-down more than 15%. If it had gaped down next day by 15%, I would have lost only 5 %( 1300). My target was 40% or around 10000. 1300:10000 was a very good R/R set-up.  My first stop loss was 10% that would make the R/R ratio 1:4 which was not bad at all. 
4.  The Odds was in my favor and it had a solid risk/reward ratio. I had to pull the trigger.

Tactically speaking, here are 2 things

1. I did not try to catch the bottom as you could see from the chart above. 
2. I would have held onto it for the 40% target if it were not for the weekend.   And because I had a specific target in my mind, I did not prematurely exit it. I moved my stop loss to break even after I was up around 10% and never touched it again until I closed it.

The market has seen a bear market rally lately. I was not able to catch this rally since my system did not generate any signals. I am totally fine with it since it is very hard to catch all the moves.  The question is how much longer this rally will last. I am wearing a bear hat now. My bearish view is strictly pertaining to swing trading. Here is why.

From the start of this bear market that started in Nov. 2007, it has been right to short into every single rally. Why is this rally different than every other? We can not rule out the possibility of mid term reversal. But that kind of probability is quite low until I can see some tangible signs indicated by weekly and monthly charts.

As a successful trader, you and I always choose the path of the least resistance. That path is of course on the bear side because we are in a very big bear market. You should always try to short 70% of the time and long 30%. In other words, follow the trend aka Path of the least resistance. Ok, so we know what the general direction is. Shorting is my strategy.  We need tactics also.

The first is timing. That is I will not short into this rally blindly. I will wait for my indictors to show signs of weakness. Of course we all know technical indicators will be off the mark quite often. But that is OK. I will get out of my short positions as quickly as possible to keep my losers small.  As you could see from my WLT, FAZ and GS, I had 10% paper profits from both FAZ and WLT. I had to close them since I don’t allow such positions turn into losers once they have a 5-7% paper profits before they hit their targets. People who have been following my portfolio for a while know this. GS was a completely loser. It just hit my stop loss.

The second is that I will keep shorting into the rally until my system tells that we are possibly going to see a major reversal. I will not hesitate to short into it just because my first attempt failed.

The third is that I will hold onto my winners once they start to move in my direction.

All these 3 are very important. If any one of these 3 is missing, it will greatly increase my risk.

Which direction do you think SRS and FAZ will give us the best Risk/Reward set-ups?   I will go long on these on any signs of weakness in the general market and my profit target for FAZ will be at least 40% and 30% for SRS.  When they were high up over 100 dollars, I could not short them.   Now I should have no issues going long on them

Click the photos to enlarge them

 FAZ

 SRS

In trading, shorting stocks is referring to try to profit from falling stocks. From day one in school, you were taught all kind of wonderful investment strategies such as buy low and sell high or buy higher and sell higher (my strategy).   It sounds very unnatural to profit from falling stocks.   Nevertheless, Shorting is a genius idea.   If you ask me, nothing in the financial world comes close to allowing short selling.   It simply is a splendid idea for speculators like you and me. 

This will never happen in any places other than trading. When you buy a piece of real estate and hold onto it for a few years, you sell it for a profit if it has appreciated over the years.   It is all sound and good.   What if you go tell a housing developer to lend you a piece of real estate and sell it in 2007, buy it back in 2009, give him back the real estate and you keep the difference?     He would think you are just out of your mind.  He also must think you are one crook because you profit from his pains.   So in real life, you can not ask someone to lend you something and short sell it for a profit even if it is a technically sound idea.

However, you can enjoy shorting here in the stock market.  In order to short stocks, you will have to borrow stocks from your broker.  Your broker normally keeps a constant ratio between the number of shares shorted and the total number of shares in his inventory.   Let’s say that number is 40%.   Then it will be hard to borrow the stock to short once the number reaches that level.  That is why you can not short some stocks sometimes.  And you can short them again after a little while.  If a broker loans you any shares to short without any inventory, it is called “naked shorting”, which is illegal.

Here are a few unique characteristics about shorting

1. When a stock drops, it tends to move much faster than when it goes up. Here is why. In reality, the bulls far outnumber the bears since people are taught that shorts are unethical and you should be investing instead of speculating, blah, blah…  Therefore, when a stock goes down, there are a lot of panicked bulls that trample each other, thus cause a stock to drop very fast.
2. Stocks can drop on their own weight.  Have you seen stocks that drop a little bit every day without any volume for a long time?   Sellers (shorts and panicked bulls) just gradually pile on each other every day.   However, stocks seldom go up without any significant buying power and volume. Only cornered stocks would move withou any volume.
3. If you short a penny stock, it might gap up 500% tomorrow morning, which is very rare.  In addition, you should be fine if you keep your positions small   However, the most you can lose in a long position is 100%, which is also very rare.

Shorting is not for everyone.  As I said many times, you do not have to know how to short stocks to be a great trader.  You can be a great net long trader as long as you know when to stay out of the market when it is getting ugly.

This is a very interesting interview.  In part 3, you will hear Cramer say “these CEOs of the big banks came to me and constantly lied to me”.   That is why he told people to buy them.   Book cooking is one of the biggest problems of fundamental analysis, which advocates  thorough studies of a company’s financial statements, which could be easily cooked.  As I detailed in Trading VS. Investing , technical analysis(TA) always triumphs over fundamental analysis(FA).   For day trading, there is absolutely no need for fundamental analysis.  For swing trading, it might be OK to use a little bit FA.  

The videos also show CNBC’s Mad Money is nothing but an entertainment channel.  We can all watch it just for fun, nothing but just for some laughs.  

March 12, 2009: Jim Cramer Unedited Interview Pt. 1

  Read the rest of this entry »

Perhaps a lot of us already know how important it is to let our winners run.  However, scalping is totally the opposite of that idiom.  And it works for day traders.

Almost every stock can move a few percentage points every day. The stock market consolidates 60-70% of the time, during which most stocks chop around.  Choppy moves are the biggest enemy of the traders who like to ride winners. However, scalpers love choppy moves since they try to capture very small moves only. For example, it is very easy for AAPL or BIDU to move up/down 1% during any time frame.   A good scalper might capture a 0.5% move within a few minutes and then repeat it over and over again. Not only are smaller moves easy to capture, but they are a lot more frequent than bigger moves as well.  For example, AAPL might chop around 5-6 times a day and each chop moves 1-2%.  But it might have only one big move of 3-4% during the whole day.  Small profits add up very quickly.

A good scalping trade is profitable right after your entry.  So you will be closing your position in the next few minutes.   This kind of rapid firing makes your trading stake less exposed to risk. This also solves one problem for some people who can never hold onto winners

There are 2 hurdles in scalping though.  One is the accuracy of your day trading rifle assuming your marksmanship is a constant.  The other is that it is a bit of exhausting since you might need to aim and shoot more than 20 times a day.

As for me, I used to be a scalper (strictly day trader) before 2008. I did pretty well back then.  I averaged 6k-7k per month in profits for 7 moths in a row in 2007 running a 50k account.  And it started to go down hill from Jan 2008. I lost 10k in that month alone and stopped scalping immediately after that.  That quick and solid damage control really saved me.  

One single best thing about scalping is that you can trade any stock you want since all of them have multiple small moves of 1-2% every day.  Now I am determined to pick up scalping for day trading again. I will need to look at my previous trades again to see why I made those good solid scalping trades and why I failed in Jan 2008. 

See the daily charts of my glorious days of scalping  DRYS, RIMM, FSLR and VMW.  Of cousre, there were many other more stocks I day traded.    Each dot is a trade I took back in 2007.

Click on them to have a better view

VMW

DRYS

 FSLR

 RIMM

Of course my swing trading is all about “let winners run”.  I hope you are all doing well.

Day Trading is tough because it requires you to have a very accurate system.  This is attributed to the fact that your stop loss is normally very narrow and you can be easily shaken out of your positions.  Because intra day moves are very small and if you have too many failed entries you will not be able to catch up before the market closes.

Accuracy required 33.33%

If your Risk-Reward-Ratio is 1:3  you can have 2 losers and 1 winner on average.  That would result in a net 1% profit.  If you can keep making 1% everyday, you would be the king/queen of the Wall Street.  Most experienced trader will never try to catch a bottom or a top.  If they want to catch a 3% mover, they might require a position to move 5-6% from bottom to top, which is not easy at all. 

Accuracy required 50%

Now let’s reduce the Risk-Reward-Ratio to 1:2. If you want to have a 1% profit, you need to have 1 loser and 1 winner on average.  One more loser, you will play the catch-up game all day long.   

Accuracy required 66.67%

Now let’s reduce the Risk-Reward-Ratio to 1:1. If you want to have a 1% profit, you need to have 1 loser and 2 winners on average.  This kind of accuracy is very hard to achieve. 

From now on, I will start to track the accuracy of my day trades.   For the 4 trades I took last Friday, my accuracy was pretty good.  I had 2 winners, 1 break-even and 1 loser.  If I could have this kind of accuracy on average, I would choose a R-R-R of 1:1 or 1:2 at most since these 2 require relatively smaller moves, which are easy to come by.