Trader Mom @ Home

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.

Here is the list of 25 best paying jobs in the US .  Almost half of the list is physicians of different types.  Their average income is about 200k+ benefits.  Let’s make it 230k a year.

After 4 years of pre-med, which is like a standard 4 year undergraduate degree, a person could spend about 40k (tuition + all other fees) per year attending a medical school. That will make the total costs around 160k before he/she can become a physician.

After 4 years of college education, with 160k as the trading stake, a person might be able to develop a system or perfect her trading skills before she burns all of the 160k.  Even if she is close to burning the entire trading stake, as long as she can statistically prove she has a winning system (not a mechanical system), she will be on her merry way to beat any physician’s in the world.  If you can make 30% a year with a 100k account consistently year over year no matter how the market behaves, you can do that easily with a million dollar account provided you trade liquid stocks.

Here is a list of things that day traders might beat physicians

1.  Day traders have more earning potentials than physicians
2.  Day traders have much more flexible working hours than physicians(odd hours)
3.  Day traders have a much better working environment than physicians(blood, broken bones, dying people..)
4.  Day traders have no bosses.

Here is a list of things that physicians might beat day traders

1.  After spending 160k in a medical school, a person is almost on her sure way to becoming a physician.  Nevertheless, the aspiring day trader might never be able to develop or perfect her trading skills before she burns all the money
2. Physician sounds like a more respectable profession than day trader since most people consider day traders as gamblers or people who just want easy money.
3.  Physician’s income is very stable.  No matter how good a day trader you think you are, your earnings fluctuate.
4. Day traders have more stress than physicians.  No matter how experienced you are when a position moves against you, the fear sinks in.   Experienced traders might shake it off more quickly than less experienced.  But the stress is there.

If you ask me, the barrier of entry to becoming a successful day trader who can beat a physician is very high. That is why you can have an enormous reward if you can make it.  But when we look around, there might be more physicians than successful day traders because day trading is just that hard.

But you really do not have to beat a physician to become a successful day trader.  If you can produce an income that is comparable to what you can make now from your day job(lets say 50k), you should be proud of yourself.  You are already a very successful day trader considering there are so many perks you can earn as a day trader.

I was talking about flipping to the long side last night on the mailing list because I really like to practice my mental flexibility.   Let me explain what mental flexibility is.  When you are in a bullish mode, you tend to keep buying even if the market is trending lower.  Naturally, most of your trades will die. After some real hard work, you might learn how to stay on the sideline in a situation like this.  This is already a huge step for most traders.  In other words, you never go long in a bear market.  That requires you to have a very strong will power to sit out the bear market, which a lot of traders/investors just can not because they always want to catch that elusive bottom. If you have passed that, here comes the final stage.

It is that you can long a stock now, close it and immediately flip to the short side if there are signals to do so.  In other words, you try your best to capture movements in both directions.  Both you and I know how hard it is.  It is our trader psychology.  It is just that hard to switch between being bullish and being bearish in such a short period of time.  We might get slapped by both sides.

As for today’s trading, I shorted CS and SPG.   It was a trending market and very hard for me to go long on anything.  As someone said last night, trade what you see, not what you think.  This is a very important rule. Please recite it every day so it becomes a reflex. Trading will become some kind of reflex once you have placed thousands of good trades every year.  I am referring to day trading here.

The SPG was not a very good trade, which reminded me of this post Chicken Little Says “Good Entry+Bad Exit” = Bad Trade!.  Nowadays, I watch a stock for a while and make a plan on the fly.   I took this trade near the market close.  My profit target was only 1.5% since the market already went down a lot.   It actually hit my target (50.69). But I hesitated. I was hoping for a bit more.  It quickly reversed before I even had time to react.  That is the price I pay for not sticking to my plan. The only thing comforting me is that the entry was perfect. See the chart below.

Click on the picture to have a better view

It is a felony not to short WYNN today considering its recent run-up.   I shorted 3 stocks out of 4 I mentioned on the mailing list last night.  They were WYNN, FSLR, MHK, and ROK.  

WYNN was the worst offender.  So I naturally targeted this one.  Nevertheless, I missed the first and second big drops and only caught a small one in the end.  WYNN gave us so many opportunities to short into today and it was truly very hard not to make any money shorting it. When the signals were there in the morning, I lacked a strong conviction. I knew I needed to act but… No buts…  I just chickened out. If the first one was forgivable, then the second one was absolutely not. I need to take some notes about these 2 missed opportunities.

As for ROK, It was a loser but a good trade since I lost a tiny bit in that position.   It was the same with the AAPL short trade.  I should have flipped to the long side of AAPL right after I closed my short position. I really thought about it.  I am still wondering now why I did not pull the trigger.  Where is my mental flexibility?   I had 100% short positions today and that was not too normal.   Shorts and longs should be even in a choppy market.  I also took 2 short positions in MHK.  Both were small winners.   Here is my portfolio in which I post my day trades real time.

Market has moved up so much.  The only question I asked myself this morning was how far it would continue like that.   Without seeing too much possibility of a further rally, I decided to short something again.  Well I think that was just an excuse for my bias toward shorting.  Right now there is too much bubble in the market.  I always try my best to contribute my part to reducing the size of the bubble. As a result, the market rewarded me for my selfless and endless contribution to the overall health of the market.

So what stocks should I short?   I kept asking myself this morning.   While I was looking for a target, PCX jumped out. It basically screamed at me.    “Me Me Me, pick me” screamed she.  I then asked her why?  She gave me 2 reasons

1. I went up over 150% in the last week.  It is just crazy that people pushed me up so high in such a short period of time.
2. I am no different than my brothers and sisters like MEE, WLT and others.  Why am I the only one up when they are down so much?

I pondered over it and thought what she said indeed made sense.  Then I asked her what I should pay attention to when I take a short position in it since I normally do not trade low priced stocks like that. She said

1. Keep your position size small due to the wide spread
2. Hold onto it when it moves

That is exactly what I did.   Because I kept my position size small, I could afford a wide stop loss.   Because I kept my position small, I held onto it for an 8% winner.  My position size was ridiculously small (less than 5000 dollars).  But it worked out perfectly just because of that.

There was another very good short target AMSC this morning, which I talked about it a few times on Twitter. See the picture below.  AMSC could have made a killer short too.  But it was not shortable with TradeStation. 

After that trade in the morning, I decided to call it a day, have a nap and watch 2 DVDs in a row in the afternoon.   Would you give up this kind of life style for anything else?

The market moved higher relentlessly and totally disappointed the bears, including me.  I have also been waiting for some kind of signals for a short term correction. No luck so far.  Therefore I have not had any swing trades lately.  Can you believe our beloved FAZ is almost a penny stock?

S&P has erased all the losses for 2009 and it actually has a tiny gain. The news behind today’s rally is from the housing sector.   And of course short squeeze also helped pushing the market higher.

80% of the trades I took today were shorts.  I shorted AAPL once and flipped to the long side right after I closed it.  If you followed my portfolio in which I post my day trades real time, you knew it.  This kind of flexibility is essential.  Of course, you will have to be careful not to get slapped by both sides.

The trades I took in RIMM and AAPL today were scalp trades.  I have no fixed targets for this type of trades.  Once they move in my direction, I will never allow them to retrace.    The first short I took in CYOU had a bad entry.  The second was fine. Since it was not a scalp trade I waited a little bit before I took profit.   CYOU was one of the stocks I mentioned on my mailing list yesterday.

April has passed. And we are almost 2 months past the low made in early March.  And the old bulls are happy about the run from 6500 to 8000+ .  New bulls and short term bears (including me)are waiting for a correction.   Basically everyone has been waiting for a correction.  However, the market never behaves in the way that most people anticipate.   It always holds true that only a handful of people can make money in the market. So we need to think what the majority can not think of.   

I believe we have hit a major bottom (6500) because the market just does not want to go down on any bad news.  The state of our economy is still in shambles.  Unemployment rate might even climb in the next few months. But the stock market is never an indicator of the present .  People buy into potentials, not the current face value. 

All that being said, it is hard for short term traders to make money.  If you go long now, you might see a quick correction, if you short, it just never goes down.   The market just moves sideways. I think short term swing traders should be very patient and wait for strong signals.   That is why I have been exclusively day trading lately.  I almost never care about the trend when I day trade.  As you can see from my closed trades, at least half of them were shorts.   This is the beauty of day trading.

For swing trading,I think we can pay attention to the coal sector, which is lagging behind all other sectors.  Sectors rotate. So it is about time that they catch up with the others. A few coal stocks are BTU, CNX, JRCC, MEE and WLT

BTW, the trading automation experiment is still going on.   I will disclose the results once it is done.