Trader Mom @ Home

I made a bit less than 500 dollars today, which is decent by my standards.  My daily goal is actually 300 dollars. Once the goal is reached, my trading is relaxed or becomes conservative. I would scale back to very tiny positions or even stop trading.

 

300 dollar daily target is a lot for my account size. Here is why. We have about 22 trading days a month.  Although my account rarely ends up in red at the end of each day, it does have quite a few flat days. Let’s say I have 8 flat days, 2 down days, 12 up days that have reached the daily target, $300. Then my monthly profit is around 3000.  That is 36000 per year or 72% annual gain relative to my account size.  Do you know what a 72% annual gain with no draw-downs means?   It means that it is unsustainable.  It means even the 300 dollar daily target is a big stretch for me. A more realistic target is $150. Anything more than that is a bonus.

 

Having said that, I must improve my profits somehow. Increasing my account size and my position size seems to be the only way. Technically, you trade a 300k account the same way as you would do with a 50k one provided that you trade liquid stocks. For example, let’s assume that I was a computer which really does not give a damn about fear and greed. I would proportionally scale up my position size. So my profits in 2009 would be over 150k. Based on the way I trade, there is probability that this result could be reproduced year over year regardless how the market behaves.  As I build my account, it would not be long to beat a brain surgeon. To be honest, this is my first goal.

 

However, this will remain as a theory on paper for quite a while until you can build a very strong mental fort.  The bigger your account, the stronger your fort will have to be. For me, the fort relative to my current account szie is almost impregnable. But it will perhaps crumble if I abruptly increase my account size and trade much bigger lots.  So I am taking it one step at a time. As some of you perhaps already noticed, I have slightly increased my position size.

 

 

Ok, here is a quick recap on my trading today, 12/28/2009. It could have been a much better day if I had managed my exits well in the AMZN, MED and X shorts.  Or my profits today could have exceeded 1000. But… alright no buts.  Here is the opening trade, AIG long

 

 

Click on the image to have a better view

 

 

 

 

The entry was around the open of the 4th bar and the exit around the close of the 7th bar.

 

 Safe trading.

 

 

Here are 2 of the trades I took last week. One was the WLT short and the other was the CELG long.

 

WLT(Walter Energy, Inc.) is a very strong stock that you do not want to swing short into. By “swing short”, I mean “open a short position and hold it over night”. Nevertheless, when day trading,  I short anything that moves and shows weakness. Most of the time, when a stock starts weak, it will remain weak for the rest of the day.  Here is the 3 min chart on 12/17/09.

Click on the image to have a better view

A was a good short entry , which I missed.  So I waited a bit.  When WLT rebounded to B, I opened a short position.  Please note that B and A were at the same level.   A was a key point taken out by the bears in the first drop. Hence, it was bound to be ambushed by the bears.  In addition, it was a psychological support for the bulls trapped above A. However, that support became a resistance when it was effectively broken.  These 2 reasons made B a good short entry. In fact, C was another good short entry since it formed the second top with B.  Among all these 3 short entries, I personally think C was the best.  Your millage might vary though.

 

CELG (Celgene Corporation) is just an average stock whose beta is only 0.5.  But it was extremely strong Friday.  I had to give it a try.

Here is the 3 min chart on 12/18/09.

 

I opened a small position of 100 shares around A, which was a support.  It was only 100 shares because it was still consolidating.  when it broke out of the previous range, I added 300 shares immediately.  The breakout was relatively clean.  But it lacked strength because the volume did not follow.

Do you remember the post about my first forex position? Technically, it is a profitable position.

 

The US dollars has been strengthening recently. All major pairs have moved quite a bit except USD/CAD. I think it might try to catch up with the other guys. So I will open a long USD position in this pair. This time, no printed money is involved. It is a real electronic position. I promise :)

 

EUR/USD Daily (Click on the image to have a better view)

 

 

USD/JPY Daily

 

USD/CAD Daily

 

I just started trading Forex.  Let’s learn it together.

Today, the 2 weakest sectors were Financials and Basic Materials. The market gaped down because of Financials. So the direction was obvious. That was to short guys from these 2 sectors.

 

PNC (PNC Financial Services) was the first target.  My entry was nearly perfect. But a good entry alone is only half of a successful trade. You need a decent exit to complete the trade.  It moved down nicely after my entry. So I eagerly moved my stop loss down a bit below my entry to protect my downside. As you can see, if only my stop loss was a bit wider, that position would have turned into a nice winner.  It would have triggered my profit taking when it broke the the previous low.

 

There is nothing wrong with this trade.  It was just bad luck.  A lot of stocks would shake you out in a situation like this even if you leave a bit more room for the stop loss.

 

Here were 2 short trades I took in PNC today. You can click on the images to have a better view.

 

 

The other trades I took were GES(Guess?, Inc.) and ANF(Abercrombie & Fitch Co). But they were pretty flat. You can see all the trades here.

 

Try a bar-by-bar replay and then feel free to tell me how you would approach this stock.

Different trading styles dictate different stock picking methods. Today, I would like to share mine with you. 

 

If you have been with me for a while, you perhaps already know my trading style. If you are new, then my trading style is High Frequency Trading (HFT). Do not confuse scalping with HFT. They are totally different. I used to think HFT was scalping due to the sheer number of my trades.  After looking deep into my past trading, I found I did try my best to hold onto a winner.

 

I normally select a basket of 50 stocks every month and choose the strongest 5-7 and the weakest 5-7 among them every day for each direction (long and short). How do I select these 50 stocks every month? First, they should be liquid stocks, which include the mid cap and the large cap.  Small cap is fine once in a while.  But micro cap and mega cap are absolutely excluded. 

 

Second, it should have a high beta.  Beta is used to measure the volatility of a stock against S&P 500.  If it is less than 1, it means this stock is pretty flat or less volatile than average stocks. Hence, there are relatively few opportunities in either direction.  You can find the beta of your picks on Google Finance.

For exmaple, OSK (Oshkosh Corporation) has a beta of 2.77,which makes it a solid day trading stock. RIMM(Research In Motion Limited) has a beta of 1.88, which is very nice too.

 

On the other side, WMT(Wal-Mart Stores, Inc.) has a beta of 0.26, which means it moves like a 90 year old most of the time.

 

 

I recommend stocks with a beta > 1 at least.

 

Third is that the prices of my picks are normally more than 30 dollars.  Occasionally, I drift into stocks in 20s. I never touch anything in the teens or below.  It is just a personal taste though.

 

Fourth is that the basket should be broad enough to accommodate a lot of different sectors

 

It is easy to put all these criteria into a scanner. With a click of a button, it will spit out things you want.  There are a few free scanners you can use. There are also good commercial ones too. I will talk about them in the future.

 

Ok, now we have a basket of 50 candidates. Do we need to scan them constantly during our trading sessions? No. It is a common mistake that a lot of traders make. They are so busy scanning the market that they can not even focus on trading. A lot of them constantly chase hot stocks. By the time, they find a stock hot, it is already too late.  For example, the OSK trade I took last Friday.  See the timestamp I posted my entry. It just moved too fast for most people to jump in.

 

Before the market open, some stocks from my basket are already showing activity. So I normally choose 5-7 strongest and 5-7 weakest and then watch them closely throughout the day. Among these 10 or so stocks, one or 2 are bound to make a move every day. My objective is to catch them and keep my losers very small in the meantime. 

 

In addition, these 10 stocks should be from different sectors.  You can not have ABX, GG Or AEM at the same time since they are all gold related stocks.

 

As for how to trade them is a totally different story because there are so many different patterns. To have a pair of egales’ eyes to recognise these patterns requires that you work until your tail falls off.

 

Here is the trade I took in OSK last Friday. Click on the image to have a better view.

 

 

 

 
Here is the recap

Step 1: Select a basket of 50 stocks which should be 

1. Liquid
2. High beta
3. 30 dollar above(optional)
4. A diverisfied basket

You can just copy from my watch list. OSK is sitting right in the list.

 

Step 2:  Select 10-12 out of the 50 every day

1.  A few strong ones for the long side and a few weak ones for the shrot side
2.  Watch these guys only.
3. They should be diversified too.

 

It is my main method. I also trade news related stocks.

I am visiting Atlanta Georgia, which is 6 hours away from where I live.  I bought a citypass online which listed 8 attractions

1. Georgia Aquarium
2. World of Coca-Cola
3. Zoo Atlanta
4. Inside CNN Atlanta Studio Tour
5. Fernbank Museum of Natural History
6. Atlanta Botanical Garden
7. High Museum of Art
8. Atlanta History Center

 

I do not know if I will have enough time to visit all of thes places since I have only  4 days.  The auqarium and the Zoo are 2 must-visit attractions since I love animals . I aslo like history and museums too. I will be back on Tuesday.  So there will be no trading until Wednesday.

 

Good luck trading and trade safely.

Do you have a blog? Would you like to attract more traffic to your blog?  Writing a guest post for another blog is an excellent way to expand your readership.  My blog has quite a few thousand readers and generates 50k+ page views every month.  You can see the stats here.  Some people already asked me if guest posts are accepted here.  The answer is “Yes“. 

 

Since your post will be judged by many readers/traders/investors, it is in your interest to submit the best of your work. If they like your writing, they will likely visit your blog too.  Blatant Product or self promotion posts will be rejected.

 

Here are the guidelines.

1. Your post must be original and has not been posted anywhere including on your own blog.
2. Once your post is accepted and posted here, you can not post it anywhere else.
3. Your post should be related to trading and investing.  Any trading instrument, such as stocks, Forex,futures and options is fine.
4. War stories are welcome too.
5. Check your spelling and grammars.

 

In return, I will give you a back link to your blog on the top of your post.  We all know how important backlinks are to Google when it calculates your page rank. You can also have 2-3 lines of bio at the bottom of your post.

 

Once again, it is in your best interest to submit your best work and think how it can benefit the readers.  Not all guest posts will be accepted. I will let you know If I  accept your post within 48 hours.  If you do not hear form me within 48 hours, you can safely assume that the post is not accepted and you can post it anywhere you want.

 

If you are intersted , please send your post to satuki (AT) momdaytrader.com .

If you google High Frequency Trading (HFT), you will find a few definitions. One is that big traders use high powered computers to gain advantages that retail guys like you and me do not have. I have a 2 year old computer, which is 10 thousand miles away from being high powered.

 

Another definition is that HFT is a scam since it uses flash orders to have hidden bids or asks exposed. If this is true, then this is a huge loophole in our system.

 

HFT gained its notoriety in 2008 because it was wildly successful.  But for retail foxes like you and me (look at the stock market as a jungle. Mutual funds are elpehants or lions. You and I are foxes and there are a lot of other creatures between them and us.), we certainly do not have a super computer. But we are super nimble. Thus we can have our own version of HFT.

 

All traders are hunters including foxes.  We hunt things that are smaller than us. But we are being hunted at the same time. By employing HFT and our nimbleness, we could rapidly get out of harm’s way and yet still have a good chance to catch our prey.  Here are  the main characteristics of HFT.

1. Very high frequency of order executions
2. Pounce on every possible moving target you perceive as your prey.
3. Run for your life the first moment the prey smells like your predator.

 

HFT is a strategy.  To implement your strategy, you need to have some tactics that are suitable for HFT. I recommend tape reading. Your HFT tactics should be as simple as possible. If you are using more than 3 indictors at the same time, you will have a hard time implementing this strategy because they will confuse the living thing out of you.

 
One very important point to bear in mind is that you do not have time to think in HFT. Your thinking is done when you are not trading. After a lot of practice and zillions of trades (exaggerated), it becomes an instinct.

 

One shortcoming of HFT is that it will rack up your commission as we can see from my monthly report in Dec 2007 below.  The commssion for that month was about 1500. But again, $6986.11 was the net profit for that month. Some people are worried about commissions.  It is understandable if all the money you make goes to your broker.  However, if your system brings home a net monthly profit of 5000 and also generates 5001 in commission, you would not stop trading just because your broker is making so much by piggybacking your hard work, right?

 

Click on the image to have a better view

 

As we can see from the report above, I took a total of 424 round trip trades that month, 271 longs and 153 shorts. The profit for that month is $6986.11,  $3459.11 from the long side and $3527 from the short side. The profit factor was 1.41, meaning that for every dollar I lost, I made 1.41 dollars.

 

One reason that I adopted high frequency trading is to minimize draw-downs. The other is to make the best use of my money because I was running a tiny account of 50k and I never used leverage.

 

I had that kind of performance throughout 2007 until I hit a big snag in Jan, 2008 and lost my touch/mojo/instinct ever since. My trading is not fundamentally flawed. However there were a few small issues I needed to fix. That is why I reduced my trading to very small positions.

 

I had a flat year in 2008.  But looking at the performance of my 2009, I think I am on the right track to restore my instinct.  It is a lot of work, tenacity and time.  As you can see in my case, the gap would be 2 years if I could manage a come-back in 2010. Or maybe I will need another year.

 

Foxes might be tiny. But they can be mean too…