Satuki @ Home

I think I am back in the normal production mode.   What I mean by that is that I trade normal stocks now.  I had a lot of excitement trading those leveraged ETFs in the past couple of months.  But excitement is bad for trading.  Good trading is supposed to be boring.

It is very easy to make trading mistakes when you push for performance(trading these leveraged ETFs is one).  Avoiding trading mistakes, or reducing the number of losers is probably as important as every other fundamental trading rules. Assuming you trade 5 days a week and position size is about the same for each position, if you lose 2 days and win 3 days, I am not going to say you only have one winning day since there are some other variables.  But your total profits would be greatly diminished by those 2 losing days, not to mention that time and energy you spend trading, which is your opportunity cost. One of my new rules now is to try to stay green everyday even if I am up 1 cent for the day.  So far I have been green 4 days in a row since I went back trading those good old stocks.

My long time pets are rimm, aapl, gs, fslr and bidu.  I pulled out the charts of Drys I scalped like crazy in 2007.  On one typical trading day, I could go back and forth(short and long) on Drys a dozen times.  And the number of shorts and longs were very even.  I would long Drys at 11:00 and flip to the short side on 11:15.   I tried on AAPL today(shorted it first and flipped to long it later).   I believe this kind of mental flexibility is important. I sometimes sit in a bearish mode even though the market is trending higher.  This is very lethal.

The system opened another trade in SRS.   Now we are long 200 shares of SRS @24.53.  This is the third try.  Let’s see how it plays out.   For people who are not familiar with this experiment,  Here is Planning Day 1 Day 2 Day 3 Day 4

Here is the chart. Click on the image to have a better view

I have been using TradeStation for a while. Overall, it is a great trading platform. It has been rated 4.5 out of 5 by Barrons’ a few years in a row.  This is the highest score.  ThinkorSwim and Interactive Brokers also have 4.5.  A few people asked me to write a review about it. I will start with the software.

TradeStation Platform

Pros

1. I believe TradeStation has the best charting, which is very accurate and smooth.  
2. It has a very deep database to provide you with up to 20+ years of historical data, which is very important for back testing.
3. The platform is pretty stable.   There were only a few short outages last year as far as I remember.
4. There are a lot of convenient features to aid you in rapid order executions such as “exit all”.   For example, it takes me 2-3 seconds to exit all my open positions because I do not have to fill out an order form.   This is very useful for day traders so we can easily close all our positions at 3:59 PM
5. You can automate your trades if you like.
6. The software is written in C++.  So it is slightly faster than ThinkorSwim and Interactive Brokers. 
    
     

Cons: 

1. The learning curve is kind of steep when you need to automate your trades because you need to have some programming skills.  TradeStation does come with some strategies ready for use. But they are useless 
2. Because it is written in C++, I believe the only operating system they support is Windows. Sorry for Mac and Linux users.    ThinkorSwim and Interactive Brokers are written in Java. So they can run on anything.
3. TradeStation does not have a browser based Platform.   So you can not sneak in a few trades at work.   This is one of the reasons that many retail traders do not use TradeStation.  This is where Interactive Brokers and ThinkorSwim shine

Fee structures 

Pros:

1. It has  flexible fee structures.    One is 6.99 per trade regardless how many shares you have, which is what I have.    It is very good for penny stock traders. 
2. The other is 0.01 per share for the first 500 shares and then 0.006 per share for the remaining.  For example, if I have 1000 shares, I pay $5 for the first 500 shares and then pay $3(0.006 X 500).  Therefore, the total is 8.    It is not hard to see if you are a scalper that trades high priced stocks like Bidu,GS or GOOG, this fee structure is in your favor.  For example, you pay only 4 dollars for a round trip of 200 shares of Bidu.  Interactive Brokers is even slightly cheaper.    Of course, if you are a high flyer scalper that trades north of 700 shares of GOOG,GS or anything like that each time, you can always choose option 1

Cons:
 
You need to pay fees for real time data like NASDAQ level2, total views and other stuff.  It can cost 50-60 dollars a month for data subscriptions.  This is the same with Interactive Brokers.   This is another reason why most retail users do not use them.   They go to ThinkorSwim.
 
Customer Service

I am overall happy with TradeStation.  Each time I call them, it takes only 2-3 minutes to reach a customer service rep.   I met one rude person who perhaps did not have enough sleep the night before. However, It does not affect my overall experience with TradeStation.
 
 
In conclusion, TradeStation is a very solid platform for full time traders.  I highly recommend it.   We will talk about ThinkorSwim next time.

I do not know about you. I just like to short stocks.  I did very well in 2007 scalping the market   ,averaging 40-50 round trip trades per day.   Most of year 2007 saw a bull market.  However, half of my profits were from the short trades.  As far as I know, we do not have to pay interests for short positions as long as they are day trades. 

I think that a scalping system is like a BB gun. BB guns are known for its accuracy and rapid firing due to its small caliber.  Nevertheless you can shoot only flies with a BB gun for the same reason. Do not look down on the effects of a super accurate BB gun though. If your marksmanship is good, flies will pile up in front of you in no time.  Swing trading is like a canon, very powerful yet less accurate.   My marksmanship has deteriorated a lot since 2008.  I had greased and put away my BB in a very secret place until a few weeks ago.  Now,I have taken it out and re-greased it. It is still shiny as new. What it needs is a good shooter.

As ususal, I was looking for a short position today.  And I found shld (Sears Holdings Corporation), which would have made a good short position if only I could short it.  I also had a few other candidates. But Shld would have worked out the best.  I left out one task this morning.  That is to check with Tradestation what stocks are shortable.   I remember I checked with TS last night and I saw that SHLD was shortable and It was not today though.  Either my eyes lied to me or TS pulled shld off the list this morning.  The shortable list changes every day. 

Speaking of the shortable list, Tradstation has a staggering 8000 stocks that are shortable every day.  We have around 17000 stocks listed on the US market.  Some brokers are jokes when it comes to shorting.  You need to check with your broker if it even publishes a shortable list every day.  TradeStation,ThinkorSwim and Interactive Brokers all do.

Day 4 Of the automated trading experiment

The computer sent in a buy order right after the market open.  SRS churned all day long.  And it was stopped in the afternoon.  So we have 2 losers in a row now.  See the chart below.

Click on the image to have a better view

A BB Gun works best used in a choppy enviroement.

The market moved in a choppy way today.  Wells Fargo led the Finical sector in the AM and ran out of steam in the PM.  The sell-off near the market close was really hard and fast, which is one of the reasons why it is hard for people to profit from shorting.

As we can see from the picture below, the weakest sector was Financial today partly because of Morgan Stanley (MS).  That is why I took a short position in it.  The entire move from my entry was about 6%.  I captured half of it, which was not too bad. The market has many opportunities everyday from either side.  Trading is not like any kind of 5-9 jobs.  Your success can only be limited by yourself.

There is no entry yet in the automated trading experiment.  The last 60 minute bar is an engulfing bar.  However, the system is programmed to wait until the bar is closed. Once the engulfing bar is closed, it will send in a buy order right at the open of the next bar.  In other words, we will have an entry tomorrow morning no matter where SRS stands (gap-down/up).  Let’s see what will happen.

Today is the second day of the experiment. The computer closed both of them.  The FAZ trade was up 30% and the SRS trade lost 5%. 

When I woke up this morning, FAZ was up 15% in pre market.  And the computer sent a sell order right after the opening bell rang.  It kept checking the gain/loss of these 2 positions tick by tick.  In terms of the FAZ position, if the gain was = or > 25% and a sell order would be executed. Due to the gap up, it was 5% more than the targeted 25%.  That was a bonus.  Of course, that would be extra risk if it were in the different direction than my trade. For the SRS position, the gain never reached 25%, and it hit the stop loss, 5% and it was out.

The FAZ exit was perfect.  It was almost the high of the day.   Question is whether it should be considered luck or discipline.  The computer knew it captured a giant return (30% in 2 days) and it was neither afraid nor greedy.   Greed and fear are the biggest enemies of traders.  The computer has none of those issues.  So It held onto the FAZ position and closed it according to the plan.  It never flinched in any order executions.  I have no problem closing a position when it hits its target.  If you have been reading my blog for while, you know that.  But I still have issues pulling the trigger when there is entry signals  The computer also showed rock solid discipline in the execution of the SRS trade because it followed the trading plan religiously.  The experiment will carry on with SRS.   Let’s see if SRS will show us the darkest side of machine trading.  That is 5 losers in a row. 

Here are the 2 trades closed today.  Click on the pictures to have a better view

What do you think?

Today is the first day of the experiment.  The market dropped really hard today and my inverse leveraged ETFs did pretty well. There was not any meaningful retracement during the whole session.  This means the bears were in total control. So we might see further weakness in the next few days.  As I mentioned a week ago that 8000 is a very strong resistance.  And it is.  The market has been chopping around 8000 for a while.   It is way overdue for a correction.   The economy is not going to get any better just because the accounting method was relaxed.

Bank of American released their first quarter earnings that is 10 times what most analysts expected.  And it tanked hard. Some people must be perplexed.  Do not be.  Most traders/investors think their earnings are just fluff.  Price action triumphs over anything.  Capital One and C also tanked hard.

I did not take any day trades. I was basically just monitoring the automated executions of SRS and FAZ.   Sometimes Tradestaion malfunctions although the software is very stable for my regular trading. Monitoring  is a piece of cake since all I have to do is to make sure it takes/exits the trades as planed, the Internet connection is on, and the trading windows are not jammed.  I did not have to make any trading decisions,which made my life a lot easier.

Probably you are more interested in seeing the trades than hearing me babbling. OK without further ado, here you are.  I will do a thorough analysis of the trades after the experiment is finished. The significant bars are marked with white arrows. Please note this is a variant of the engulfing pattern I showed you.  Fill the gap with some green play doh, you have a big green engulfing bar. In real life, it is rare to see text book set-ups.

Click on the pictures below to have a better view. 

SRS opened @ 30.16

FAZ opened @ 10.18

I am going to have an experiment here to test out automation of trading SRS and FAZ.  I do not know if it works.  It just might. I will open 2 small positions, 5k each in SRS and FAZ.

The set-up is simple.  I am looking for an engulfing bar using the 60 min charts.   The engulfing bar must be big enough to engulf(cover) the last significant red bar. A market order will be sent right after the close of the engulfing bar.   Here is the illustration of the engulfing pattern.   

Here is the Set-Up

• Go long right after the close of the 60 min engulfing bar
• Stop Loss will be 5%. If it gaps down by 10% and it will be considered 2 losers in row. 
• And the risk/reward ratio will be 1:5.   That makes it 5%:25% 

A good outcome will be anything that I do not have 5 losers in a row. The experiment will finish either when one hits the target before sustaining 5 losers in a row or when it loses 5 times in a row. It will start from Monday.  The computer will totally take emotion control out of my hand.  Let’s see how it works. I think it is going to beat me.  The trades will be excluded from my portfolio.   Feel free to ask me questions.

Here are the 60 min charts of SRS and FAZ at the end of 4/17/2008.

Here is the ongoing experiment:  Day 1 Day 2

The market moved higher today  led by the technology sector.  Technology heavy weights such as RIMM, APPL and MSFT all moved higher significantly.  Due to their mega-market caps, a 3-5% move is huge.  One reason that the market moved up today is that people were betting that Google would give good numbers.  Google’s numbers are out.  The market’s reaction is kind of tepid as we can see from the price action after the market hours.

It was another boring day for me. I am kind of flat after 2 trades.  I went long on FAZ and shorted GS as you can see from my portfolio.  I was on the wrong side of the fence today. But I managed to stay flat, which is very important. My monthly goal is that I have 3-4 solid trades a month and the others cancel each other.  Therefore, a good number of my trades will either be closed without hitting their targets or at a small loss.

Poor FAZ has almost become a penny stock. It was over 100 in March.  Relaxing of the mark to market accounting method killed our beloved FAZ. Now the crooks at those banks can write whatever value they think their rotting assets are worth.  You and I are not going to fight them because we will not win.  Instead, we will join them to take the path of the least resistance. SRS has bee experiencing the death spiral too.  We will have to face a possible reality that they might never return to half of what they used to be. These fallen soldiers deserve a proper burial.  They might be resurrected in the future and rumble on the Wall Street again. But for now, may they rest in peace.

I will be day trading them only

I took only one trade in SRS today, which is an inverse ETF that corresponds to twice (200%) the inverse of the daily performance of the Dow Jones U.S. Real Estate Index.   In other words, I shorted the market by going long on SRS today.

Reflecting back on the trades I took yesterday, I think I was a bit slow to cut the losers , which resulted in a big loss of 1300.  Nevertheless, the trade I took today was impeccable as you can see from my portfolio.  I thought about buying only 300 shares of SRS today because I talked about my position size being too big yesterday on the mailing list.  But I changed my mind and bought 650 shares.  This was still a bit smaller than what I had yesterday since SRS is a double leveraged ETF unlike the triple leveraged FAZ.   The reason I bought 650 shares is because I should be somewhat consistent in my position size.  And I normally increase my position size slightly when I have a few losers in a row.  Some people might frown upon this strategy.  I wrote another post the other day to explain why this makes sense.

Here is the chart.  You can also see the timeline on http://www.stocktwits.com/u/trader_mom

Here are a few good things about this trade

1: I did not try to catch the bottom.
2: I did not second guess myself.
3: I used the same position size as I did yesterday.
4: I held onto it until the market close as I did yesterday.

All these are attributed to a well prepared trading plan.  So I do not second guess myself or panic over the unexpected.  SRS can stop me out a few times.  But when it moves, I will have to make sure I am on it.  That is one of my missions.  The other is that I will try my best to reduce the number of times that SRS (any stock) shakes me out before it moves

BTW, I chose SRS over FAZ today just because I prefer high priced stocks.  I hope you did well today.

The market was very choppy today and I took a beating(-1300).  I took 3 trades that were 1 small winner(bidu) and 2 big losers(SRS and FAZ).   You can see the trades in my portfolio.
 

I guess this had something to do with  the Somali pirates that were shot dead by the Navy snipers.  What were these pirates thinking?  They had a horrible set-up(asking the massive warship to tow them) with a horrible risk/reward ratio of 3:1. How did they come up with this kind of set-up? This question bugged me all day long and totally distracted me. These Damn Pirates!  However, I still had a tiny winner and they were all losers.  So I beat them by a very small margin today.

Here are the 2 big losers. 2 pictures are worth 2 thousand words.

Tell me whether I have beaten the pirates…….

Next week, we will have a few heavy weights that report their earnings for Q1.  They are

• Johnson & Johnson,
• Intel Corp.
• General Electric Co.
• Citigroup Inc.
• Sherwin-Williams Co
• CSX Corp. 

The market is going to jitter. I do not think that market has effectively broken the strong resistance around 8000 just because it is sitting slightly above it.  I would like to see it break 8300 and stay there or with some moderate healthy reactions.   Until then I will still wear the bear hat and look for possible short entries.  I will be a little bit more aggressive in day trading and cautious in swing trading.  

Day trading targets: SRS, FAZ, GS, BAC

SRS

FAZ

If I go long on FAZ then I will not short GS or BAC since they are the same.  SRS is real estate related.   Therefore, it is not coupled with BAC or GS.   SRS and FAZ might give me the best returns.  I will be looking for a reversal pattern with a tentative 1:5 risk/reward ratio.  Due to the steep drop of FAZ and SRS lately, we might see a huge daily jump in the range of 25-30% or even more.  My mission is to make sure I am on the train when it moves.  It might take me a few tries.

Here is a list of swing trading targets I am watching closely.

NOV
SGR
CRM
LEAP
PWR
ICE
BG
BIDU
FSLR

Do you have a plan for the next week?  You better have.  Good luck!

A lot of people love FAZ because they can make a killing quickly when their bet is right on the target and they hate it because they are killed when their bet is off. It is all attributed to its volatility. Volatility is the nickname of all these triple leveraged ETFs. Analyzing or back testing stocks is the homework I do every night to better myself. I have already passed the stage of losing money due to my solid risk control. But I still need to work very hard to improve my emotional control.

How do I improve my emotional control? If I am very confident in my system, I would never hesitate to pull the trigger when there are signals for an entry.  So let us analyze FAZ. The chart below is the daily chart of FAZ.

Here is the trading plan that we use to run the back test. It is 100% TA driven.

1.  I am a swing trader. So no day trading is involved in this test.
2.  I run a 100k account for the sake of easy calculations
3.  My risk/reward ratio is 1:3.5
4.  Buy major support and short major resistance

For condition 3, my risk/reward ratio normally is 1:3 or 5% : 15% for regular stocks.  But for FAZ, let’s raise it slightly to 1:3.5 due to it is volatility. So percentage wise, it will be 15% : 53%. Why 15? It is because it is a triple leveraged fund. We need to multiple our regular 5% by 3.

Assuming I run a 100k account and I am conformable with a 20k swing position in a regular stock. For FAZ, I need to reduce the position size to 7K per trade because it is triple-leveraged. OK let us trade…..

When the first bottom labeled “1″(a major support) was formed, I took a trade and held onto it until it hit the target, assuming I had been desensitized. As we can see, the 15% stop loss gave me quite some room to wiggle.  It resulted in a successful hit, a 3500 profit. Let’s move on.

When the second bottom labeled “2″(another major support) was formed, I took another trade and held onto it until it hit the target, assuming I had been desensitized again. It gave me another successful hit, a 3500 profit, totaling 7000 after 2 trades.

When the third bottom labeled “3″(another major support) was formed, I took another trade and it was stopped. So I lost 1050. Since the major support was cracked after this trade, I would not touch until another major support is formed.

So I would have totaled 6000 in profits after 3 trades.  Of course I would make 60k if I increased my position size to 70K. And if I had the “courage” to bet 70% of my total stake on such a volatile stock and hold onto it overnight, I would NOT last long in this market.

So from this back testing, we can say that these would be very solid trades if I actually took them. And these trades would be successful only if I religiously followed my plan.  One key element besides “cut the losers and let the winners run” is never second guess your system. That is you need to take all the signals it feeds you.   Would you have a lot more confidence when you have a good understanding of your system?  Random shooting is absolutely a no-no. Let me know what you think.

I did not take any trades in the past 2 days since I was not prepared for the long side. Have a nice long weekend ,everybody!

As I said on Twitter and in this post last night, I would focus on shorting MGM and RIMM today. I did short RIMM. But it would be much nicer if I could have shorted MGM(-19%) since it had a much bigger move than RIMM. Bigger moves are relatively easy to catch. But I could not borrow any shares of MGM to short from TradeStation, which is not known for lending penny stocks. I normally do not trade penny stocks. But MGM is very liquid. I believe that ThinkorSwim and Interactive Brokers are really good for shorting penny stocks.

Anyway, If we pull out the 5 min charts of both MGM and RIMM, it is not hard to see that MGM was a much easier play. It did not gap down too much and had a very big dead cat bounce immediately. It also had 2 break-downs subsequently.   1, 2, 3 were all good short entries.  I hope some of you out there caught some of the moves.

Here is the chart 

If you followed me on Twitter, you knew that I shorted RIMM and went long on SRS today.  Those 2 were winners. I left 2 dollars on the table for the SRS trade. But I am already content with the profit (1000) on SRS.  Check out the timeline of my 2 trades today on StockTwits, whose timestamps is in sync with the US Stock market.  I did publish my thoughts last night on Twitter albeit brief.  I was going to send the message to the people on the mailing list.  But I was distracted by something else. I am sorry about that. There will be many more opportunities like this though.

Sign up for my mailing list if you are intersted.   It is totally free.

BTW, when I publish my day trades in real time, I always update Tiwtter first, then my portfolio.

Tomorrow I will focus on these 2 stocks, MGM and RIMM. These 2 stocks shot up too fast and too much. They are due for a serious reaction.   What I mean by a serious reaction is a 4-5% drop or even more.  They are definitely good for day trading.  I will not swing short them though, especially RIMM since it has been very strong lately.  I might go swing long on FAZ again tomorrow if it shows signs of strength.

Click on the pictures to have a better view

MGM has a long upper shadow with huge volume on its daily chart, which is a tpyical sign of weakness.

RIMM has not showed any signs of weakness yet.  I will be patient.

The primary goal to invest/trade in the stock markets is to make money.  However, we will never achieve this goal if we do not know why and how to manage risk.

Why risk management has top priority

In trading, risk management is far more important than anything else.  To make money, we need a trading stake.  How could we make  money if our trading accounts are wiped out or our capital is tied in some rotting positions?  It is absolutely  OK to have losers. But it is NOT OK to hold onto them once Mr. Market has warned us to get out.  Here is a post about how to treat losers and another about how to set stop loss orders.  

How to control your risk

So the first thing is to cut the losers.  Nevertheless. It is not enough to just cut the losers. If we have many losers to cut in a very short period of time, they can add up quickly.  We will have to set our overall loss cap and adjust our position size accordingly.  For day trading, our loss per trade should not exceed 0.5% of our total capital and our daily loss cap should be no more than 1.5% of our trading capital.  In other words, we stop trading after 3 losers in a row. A daily loss cap is not enough; we need to set a weekly cap too. My weekly cap is 5%.  If I have lost 5% by Wednesday, I will stop trading for the rest of the week.  And my monthly cap is 10%.

We will also have to pay attention to our position size. Position size should be reduced to a level where we can feel comfortable without looking at it or thinking about it constantly. If we are constantly worried about our positions, then they are too big and our judgment will be impaired.

In order to control position size, we will have to pay attention to what sectors our positions are in. If we have MOS and POT at the same time, then they are considered one position since they move together most of the time. We should only have one of them or at least split our capital between them.  For example, after careful studies, you feel comfortable with 10k per trade.  You normally choose whatever is the strongest in a sector. Let’s say MOS. You put 10k into MOS and have nothing in POT. If you really like POT, then do a 50/50 or 60/40 split between MOS and POT.  You just can not have 10k in each since that would be equivalent to 20k on a fertilizer stock.

Another advantage about reducing the size of our positions is that we can use a wider stop loss and still stay within our risk threshold. If our risk for each trade is 200, then our stop loss would be 2% of a 10K position or 4% of a 5k position.  With the same amount of risk, a wider stop loss works better than a narrow one.  Of course, our profits will drop due to the reduced size.  But once again, I will put risk control before anything else in trading.

Here is the recap

1. Cut losers
2. Set a daily/weekly/monthly loss cap
3. Control position size
4. Pay attention to sectors