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The general market moved up in May because there was no surprising bad news.   The shorts that needed to cover their positions and the long pent-up bulls all pushed the market higher.  The stock market is all about speculation or anticipation.

I did OK in May too.  If we look at the absolute value (+3612.52) of my gains from May 2009, it is not a big deal.  However here are 2 things I am very happy with

1: There were very little draw-downs in my equity curve because there were very few losing days.
2: The reason that I have made $3612 is because I traded very small positions.   Percentage wise, it is actually not bad at all.

S&P 500 Weekly (courtesy of ThinkorSwim)

Click on the image to have a better view

For me, maintaining a steady rising equity curve is far more important than anything else. If all you do every day is like walking into a casino, then you will never make it as a trader.  You need to make your income predictable.  In March 2009, I made 7000+ due to a single huge winner (+8000) in FAZ.  If we looked back at it, it was just an outlier.  It perhaps really did not have anything to do with my skills. It was just pure luck.  Without that winner, March could have been a losing month.  I was not happy with that kind of performance at all since I do not really know why I made money in March.

Nevertheless, my performance in May is decent because it is predictable.  I am satisfied with the results.  Here is how I did it

1: Focus on executions
2: Keep positions small
3: Be realistic about the stock market
4: Respect risk.

I hope you did well too.  Since I started to post my trades real time in Dec 2008, I have been up every single month.  And I will keep it that way.

I woke up this morning and looked at a few stocks I selected last night.   The only stock I liked was MOS.  It went up a lot in the past few days, which means it is ripe for a good intra-day short.   I like to short into stocks like that.   It looks like dangerous since most people think it is trading against the trend.   They are right if it is swing trading.  But It should not matter for day trading since all stocks pull back at a certain point.  Key is timing.   Some people do not believe in timing. But I do.

I could have made decent money today.  I shorted into MOS twice today.  One trade was botched up since the entry was not good and it was stopped out.  In fact these 2 short positions were very close in terms of their entries, one being 56.30, the other 56.47.  But due to the increase of the overvall position size, I had to use a narrower stop for the second one.  If I had held onto the second short position a bit long, I would have made a total of 600 along with the other short position.   Then I would have stopped trading for the day.

The CNX trade was a rotten trade.  I took it because I wanted to see if I could make money going long on something.  That thought occurred to me because I short stocks way too often.  It is not well balanced. That is still not a good excuse though.  We take a trade based on signals instead of trying to prove something.

A lot of traders can make a few thousands this week and then lose half of it next week. It is actually a common and tough problem. I have been trying very hard to keep my gains, which certainly takes a toll on my performance.

I can day trade anything that moves. I become somewhat picky when I look for swing trading targets. As a matter of fact, I do look at the fundamentals of a possible swing trading target albeit 75% of the decision making is still based on technical analysis.   When it comes to picking a stock for my retirement account, I become extremely picky. I can not or do not want to short the market (buy inverse ETFs) in my retirement account. Naturally, all my stocks are long.

What I look for in this type of investment grade stocks

1: Minimal Risk
2: Growth

To meet the 2 criteria above, I normally look at very large and well known companies such as Apple, Research In Motion, China Mobile and etc..  I will never buy small cap speculative growth stocks.  They are too volatile and risky.  I do not expect crazy returns from these stocks.  A 15-20% annual return with minimal draw-downs will make me very happy.

We had a bull run from 2003 to late 2007. That bull-run was propped by the housing bubble. And here we are at the 2002 level again today.  I believe it is worse than 2002 since we have added so many stocks since then.   Today’s 1800 is definitely not the same as the 1800 7 years ago.   The US market is too mature. There is no manufacturing left in the US thanks to outsourcing.  The banking industry has crumbled too.   There is nothing here left to grow.   Oh one thing that certainly grows fantastically is the money supply.  The Feds just prints it.  What I see in the US market for the next few years is that it is going to be a very boring market that chops around inside a big trading range.  It is actually fine for day trading and short term swing trading. But it will not be good for my retirement account for which I do use the buy and hold strategy.

Currently I am very interested in the Chinese stock market.  The whole country is growing. Their first stock market bubble has burst in 2007.  It crashed all the way from 6000 to 1700 within a year.  This reminds us of NASDAQ in 2001.  Although the crashes are similar I believe their recoveries will be different.  I think the SSEC (Shanghai Stock Exchange Composite) will reach 6000 again in the near future since they have real growth. Anyone who thinks that China is still communism is misinformed.  It is cutting-throat capitalism.  See the SSEC chart below.

 
The Chinese stock market is closed to the foreigners.  But we can still invest in the Chinese stocks listed here on the US market.

Here are the1st tier guys, which are monopolistic, massive, and still growing.  

China Mobile (CHL)
China Life Insurance (LFC)
Aluminum Corp of China (ACH)
China Petro and Chem Corp (SNP)
Baidu Inc(Bidu)

Here are the 2nd tier guys, who are smaller but with better growth.

Sohu.com (sohu)
Shanda Interactive Entertainment (SNDA)
Oriental Educ and Tech Group (EDU)
SunTech Power Holdings (STP)

STP is a little bit distressed now.  But it is the best solar company in China.

Here is the 60 minute chart of S&P 500 index. It is a promising double top and it has broken the short term trend line.   Will it materialize?  A lot of people actually talked about S&P touching 1000 before a meaningful retreat would happen.  It is a dangerous sign when a lot of people are expecting the same thing from the stock market. The stock market never behaves as the majority would like it to.  We see a lot of sudden moves in individual stocks because people are caught off guard.   Have you noticed that the stocks you watch like a hawk almost never move?

We might not see wild 500-600 point swing days like those we experienced early this year.  General volatility will dwindle and the general market might bounce around in a big trading range for the next few months.  

Day trading is bread and butter.  If you are skilled enough, it is your ATM. If you are not, you will be the ATM.

I need to take some time off to do some serious meditation.   Today’s trading was horrible, especially the short trade I took in RIMM near the market close.   I shorted 200 shares of RIMM around 3.  And I covered it RIGHT BEFORE it dropped hard big time. If you were tracking my portfolio today, you know how bad that trade was.  I do not know what I was thinking.   I was not even thinking or I was thinking too much.   When you are in thick action, you are sometimes blind to very obvious things.

Funny thing is that I kept telling myself “do not cover it. it will drop right after you do that.”    Then I asked myself “Midori, if you were right, why the hell did the short positions you took in the noon all go bad?”   Without further ado, I covered it right before it dropped.  What I did not ask myself was “Is the probability of this trade getting higher due to the fact that I already had a few losers in a row before this?”  If I had thought about this, I would have toughed it out on that trade.

Click on the images to have a better view

See the bad trade below.  Tradestation marks all my trades on their charts.  I turned that feature off because there are quite a few other RIMM trades I took before this one, which might distract you. 

There was almost no resistance from the bears today.  The market moved up.  I tried to help them by shorting a few stocks. But all of them died as you can see from my portfolio .  My only swing trade MOS behaved as expected in a strong market. It went up and hit my target.  The exit was very clean. In other words, I never hesitated. Yeah there might be some more legs up. But I do not care anymore.

MOS and POT have been extremely strong lately as we can see from the charts.  Most other stocks had a pull-back before today.   If you look at their candle sticks today, they finished at the high of the day.   In other words, there is no weakness yet.  They are in a beautiful uptrend. If you have profitable positions, hold onto them. If you do not have any long positions in it, do not chase it.  The train has left the station. If you chase it, you will likely take it on your chin.  From this point on, no one knows how much buying power is left for these 2 guys in the short term.  They might move up a little more or have a quick pull back.

Stocks always pull back.  Most of them do at least.   Good swing long/short opportunities with best risk/reward ratio are few. If you can catch 1 or 2 every month, you should pat yourself on the back.  As you can see from my MOS trade, I had such a tiny position. Yet the return is very solid.  What if I had 1500 shares?  Then I could have made over 10k and then I could stop trading for the month right?

The first bar out of a consolidation area is the best bar to buy/short a position.

Here are the final results of the trading automation experiment I conducted about 3 weeks ago.  The two stocks I chose for the experiment is FAZ and SRS.  Both are leveraged ETFs.    FAZ ended up making 30% on the first try.  However, SRS ended up having 5 losers in a row.  So the net is up 2.5%.   Here is the whole series 1 2 3 4 5

Here is what I learned so far from this experiment.  100% machine trading is probably not feasible.  If I had turned on the machine when FAZ and SRS were close to 100, then I would have lost my shirt trading this reversal pattern.  Nevertheless it does not mean that this reversal pattern is bad or not even tradable.  We need to find out WHEN we can turn on the machine. Preferably, it should be close to when a true reversal will happen.  It does not have to be very precious.  Using this experiment as an example, if a true reversal started now and the machine opened a trade, it would hit the 25% target.  This would cancel out all the 5 previous losers, which would result in a break-even in SRS.   That would leave us with a net 30% profit in the FAZ position.  So it is my next major project to find out when I can start to automate the trading of this reversal pattern.

Here is SRS’s chart with 5 losers on it.   Click on the image to have a better view

Machines can beat a lot of traders out there since machines do not have 4 very lethal problems that human traders have

1:  hold onto losers
2:  cut winners
3:  fear
4:  greed

However machines are susceptible to the following.

If my machine is based on trend following, it might be whipsawed to death without even knowing it being in a range-bound market.  Because it has no fear, it will keep taking fake signals.

If my machine is range-bound based (mostly using some type of oscillators), it might trade against a trend when it keeps shorting a overbought signal in a bull run. Because it has no fear, it will keep doing that until it has no money left.

It has been quite a while since I took a swing trade last time.  One reason is that I focused too much on the short side.  Consequently I found almost no good opportunities for swing trading.  Another reason is that I wanted to hone my day trading skills, expescailly scalping.

I have been watching MOS and POT lately for a possible swing long position.  These 2 are the leaders of the fertilizer stocks.   I talked exclusively about MOS and POT on the mailing listing last night.  The fertilizer stocks lagged behind the other sectors during the rally that started in March.   Sectors rotate.  I also mentioned about the coal sector about a week ago. But I was too slow to join the rally in those coal stocks such as MEE, WLT and PCX.

From the daily charts of MOS and POT, we can see that the first pop came about 2 days ago.  If I had been quick enough, I should have bought into them that day, instead of today.   Another sign that they demonstrated was that they were extremely strong in a very weak general market yesterday.  POT was up 2% and MOS was sligtly down 2%.  They performed much better than most other stocks.  These strong stocks will be the first to move up once the general market is stabilized ,as we all saw how they performed today, MOS(+8%), POT(+5%).

POT performed slightly better than MOS yesterday.   And  I figrued that MOS would try to catch up with its brother later on. That is the reason I chose MOS today.  I kept my postion very small due to the risk of holding it overnight.  I am always prepared for the worst in case anything like Lehmen Brrothers or Bear Sterns happens to me.

Once I have identified a possible opportunity for swing trading,  I will use my day trading techniques to open a position.  So basically I open a position once my mid-term and short-time time frames are aligned. This greatly reduces the possibility of being whipsawed.  Normally day trading entries are much more accurate than swing trading due to the much higher requirements for accuracy.  With the accuracy of day trading and a wide stop loss of swing trading, you can greatly improve the success rate of your trades.  See the 5 minute chart below. If you use TradeStation, you know that it marks every entry and exit of yours on the chart.  My entry was a text-book wedge breakout.  

Click the pciture below to have a better view.  You can see a white lable saying (150 limit).

 
Of course, paper profits are nothing more than illusion.   Let’s see if my MOS can hit the target.

Yes the market tanked today. But it was an uneventful day since we had a quick drop in the morning and that was it.  There were no moves in the stocks that I was watching. I tried to short OSG and it just did not want to go down.  I scalped my perennial pet RIMM a few times.  Nothing substantial came out of them.

Yesterday, I bumped up my position size a bit and I lost around 450.   It was actually nothing because I outlaid more than 60k (500 shares of RIMM and 300 Shares of APPL) at a time.  If my positions had moved in my direction by 2%, it would have been a nice profit of 1200.  I will have to step out of my comfort zone or people would start to call me “One Lot Mom”.  Hahaha.  If I stay in my comfort zone (20000 dollars per batch), I could set a OCO (order cancel order) for each position and go to nap.    I will adjust my trading psychology so that I will feel comfortable with the new size.  Of course, I will only slightly increase the size.

I hope everyone is doing well.   It does not matter if the market goes down or up.  What matters is that you are synchronized with the market. Always put risk control before anything else.  Without risk control, it is just a matter of time your account will be wiped out. Profits will forever be secondary to your risk control.

I have changed to TradeStation’s per-share commissions since I am in a semi-scalping mode now and paying too much with the fixed commissions (6.99 per trade).  Today,I executed 6 round-trip trades and paid 83.88 for the commissions.   If I had the per share commissions, I would have paid only 18 dollars in total.  That is a huge difference. So starting from tomorrow, I will pay 0.01 per share.

Today’s trading was Ok.  But I can use some improvements.   My plan was scalping.  But in hindsight, the exits in my WFC and GS short positions were not optimal.  By optimal, I mean I should at least catch half of a big move.  Nope.  I caught 1/4th at most.   The only thing I can do when I look back at them is to sigh, or shake my head a little bit.   Here is the dilemma. My plan was to scalp them.  And I executed my plan to the letter.   But the results were not too impressive.   If I do not follow my plan, why did I waste time making a plan in the first place?   So I think I did partially OK today by sticking to my plan.  

NILE, RKT, ISRG, PRU were the 4 stocks I mentioned on my mailing list last night.  You perhaps could have made some money shorting PRU and Nile.  I was staring at PRU right after the market open. Yet this guy dropped so fast that I chickened out.  I was going to short into the first dead cat bounce which never really happened.  So I had to let it go. 

Here is today’s chart of PRU.