Satuki @ Home

It has been a while since I updated my blog and my portfolio last time. Some people asked If I stopped trading. The answer is “No”.  For a housewife like me, I do not see anything else except day trading as a viable livelihood.  If you ask around, most people will perhaps tell you that they hate their day jobs, ,hate their co-workers ,hate their bosses, or the morning rush hour traffic.  I agree with them.

I was semi active in July. As you can see from the performance report generated by TradeStation below, I took a total of 19 trades and lost a bit over 300 dollars, which includes the commissions.  So I did not lose much per say.  A losing month is normal. Therefore, I will not analyze this and that.  Click the image below and a lot of the fields are self explanatory.

I do not post in my portfolio as much as I used to because I found it distracting.  But I will try my best to do it when possible.  However, I do post my sentiment(market directions and watch list)in the forum almost every day.

Alright everyone, good luck and have a better August!

I think a lot of traders are.  Look at the chart below.  If you were long before point C and you are disciplined,  then you would have been stopped out of most of your positions. 70-80% of your portfolio follows the general market.  That is why some people prefer trading E-Mini.

If you were ambitious, you perhaps flipped to the bear side.  It did make sense to short the market at that point since C was a major support.  Nevertheless, the end result is that you are slapped left and right.   Those were textbook set-ups. But they did not work this time.

 
Click on the image to have a better view

That is trading.  You will have to have the stomach for this.  Anyway, the market will probably remain weak for the summer.

Here are a few stocks that have been performing much stronger than the general market.

Click on the image to have a better view

Netflix, Inc. (Public, NASDAQ:NFLX)

I have Netflix’s 2 DVD package.  Service has been great and their competitors are weak. 

Valeant Pharmaceuticals International (Public, NYSE:VRX)
This stock just made an all time high a few days ago.  It seems pretty stable although it is a pharm stock. 

Questcor Pharmaceuticals, Inc (QCOR)
It has just reached an all time high too.  But it seems to be a more speculative pharm stock than VRX.

 
Crocs, Inc. (Public, NASDAQ:CROX)

I believe this stock, just like Drys, has broken many people’s hearts.  But it is crawling out of a multi year bottom.  The recent strength relative to the general market is worth watching.

The general market has been stuck in a range for a while. A short term trend following system will fail miserably in a situation like this.  Oscillators, pivots , support and resistance work better here.

The overall market sentiment is perhaps still slightly bearish mainly due to the problems in Europe. So we can pay attention to how EURO is doing.  EURO has been rebounding from the bottom nicely during the past 3 weeks.  If it continues, it will help the stock market move up too. Or it will at least ease the downward pressure on the stock market.

The stock market is approaching a key support area.  As we can see from the chart below, support A and B were both valid.  If you had gone long on these key points, you would have profited nicely. What about this time?   Would you want to go long from here again?

I took a small long position in EURUSD @ 1.1963 on 6/7/10.  It is only 1 lot (worth 100k), which is considered a small position in Forex.

Now I have over 400+ pips in profits on paper now.  I was aiming for a 500 pip move here.   And the initial stop loss was set @ 1.1877,  which is less then 100 pips.   So the risk reward ratio is very good here.  Now I am trailing it.  So the profits are almost locked since Forex rarely has gap ups/downs.  That is one of the reasons that I only swing trade Forex in a regular account.  

Here is the trade.  

See my post about this trade on StockTwits here.  Look at the time stamp of that post.  It was posted close to real time.

If you do not trade Forex,  a 500 pip move for a 1 lot position is worth about 5k profits in USD.

As I mentioned in my previous post, we would expect to see some range bound moves. It has been the case for the past 2 weeks partially because some bullish news from China provided some balance to the bad ones from the EU. Let’s take a look at the daily chart of the SP 500.

Daily

The SP 500 tested the Feb low twice in the past 2 weeks. The first test on 5/25/10 was effective because of the long leg of the bar.  The second test was not as visible as the first one. One might say that the big green bar on 6/10/2010 was a good indicator.

For day traders and short term swing traders, we might see a better picture by looking at the 60 min chart. As we can see, a range bound market is relatively easy to trade since we could easily go in either direction. In other words, there might be more set-ups than in a trending market, which I personally think is harder to trade. Your mileage might be different though.

60 Minutes

Look at the daily and weekly, we can easily tell that the uptrend has been broken.  The monthly seems OK so far. Will we slide more? Perhaps. Dow might slide to 8500-9000 and SP500 to 1000.  But it is not likely to have a double dip to the March low in 2009 again unless heavy weights like France or Germany start to have issues.

Weekly

Monthly

The market experienced some dramatic plunges last week.  The worst was the Dow’s intra day drop of 1000 points on 5/6/2010.   I did not trade that day.  But my TradeStation was open and I saw it.  Initially, I thought it was a technical error from TradeStation.  I immediately opened Interactive Brokers and Yahoo Finance.  They all showed the same thing.  While I was scratching my head, it pulled right back up in just a few minutes.  

Now we know that it was caused by some glitches in the Exchanges’ electronic networks. On top of that, I believe machine trading contributed to it too.  However, the market still lost 300+ points on Thursday, which has never happened since March 2009. What made it worse is that the market continued to drop on Friday(5/7/2010)

Before the crash, the market was in an extended overbought state.  But Dow standing around 11000 does not necessarily mean it was overbought. Then what made it “overbought”?  I think it was the continuous rally from 6000 in March 2009 to 11000 now.  That rally had very few meaningful corrections.  This is not good for the overall health of the market.  The market needs constant corrections to inch higher in a healthy way.  Let’s use 2 stocks as an example. One stock shoots up like a rocket. One moves forward 3 inches and then backward 1 inch.  Which one do you think has more stamina provided the fundamentals are exactly the same?

The first stock will crash when it runs out of steam simply because there are many profitable people. Because people have massive profits on paper,they will sell it @ any price when they look for an exit, which will cause a big crash.

The second stock is a lot more stable than the first one. It moves a bit and takes a rest(consolidation or a small correction) during which it can shake off those who are not determined to tag along.  This process is very important for a stock to continuously move higher without much resistance from the profitable sellers.

It is the same with the general market.  A lot of funds(big money)have made massive profits on paper during this rally. They were just waiting for some kind of signals to unwind some of their large profitable positions. The euro zone crisis and the oil contamination were just triggers.

Personally, I do not think this is the start of a prolonged bear market like we had in 2008 and 2009.  The overall fundamentals just do not support it.  However, we might face a mid term correction here since this drop is big.  We will perhaps see a few violent fluctuations in the next 1-2 weeks.  If it bounces higher, It is a good opportunity to unwind some of your long positions.  The worst at this stage is being fully loaded with net long positions.  Remember you should always close your weakest positions first. Never average down.

Safe Trading

Some people walk into the market as if it were a casino. Trading in a sense is like gambling because luck is somewhat involved in almost every trade. But it differs from gambling because you could beat the house.

In a casino, every game is designed in such a way that the house will always be the winner. For example, I were the house and you were a gambler. We play a game. My odds of winning is 51% and yours is 49%. Mathematically speaking, if you keep playing the game, you will lose in the end. Plus, the house has much more money than you. I can tolerate a string of losses without any problem and you can not. I know that you will give back all your profits plus your own money if you keep playing. If you lose, you will keep playing because you want to get your money back. If you win, you will keep playing because you want more. It is as simple as that.

Most gamblers do not have any gambling plans. Even if they do, their plans will never work because the house always will have an edge over them. But in trading, it is possible to have a system that can consistently beat the house/market). Yes there is manipulation in the market. But a stock will eventually go where it should go. In addition, a stock,even if manipulated, normally gets swept away by the general market. It is not hard to manipulate one stock. But it is close to impossible to manipulate the whole market due to its shear size. So I believe trading is more fair than any game in a casino.

Here are 2 questions to test if you are a gambler or a trader

1. Do you have a trading plan that includes your entry, exit and position size for ever single trade of yours?
2. Does your trading plan above produce a positive expectancy regardless the market cycles?
    

If your answer to the first question is No, then stop the gambling you call “trading”. You might just donate your money to a charity.

if Yes to the first but no to the second, it is fine. You are a losing trader for the time being. If you work hard enough on your system, you might come up with a good one. But you must quantify your expectancy.

If Yes to both, congrats! You are all set for the rest of your life.

Do you think that buying new highs works?  I heard both good and positive answers from other traders. When I back test a theory(system), I tend to spend most of my time looking for holes.  Look at the chart below.

Every time you buy a new high such as A,B and C, you would meet a bad reaction immediately. Those reactions were big enough to knock out most stop losses placed by short term swing traders.  If you took all the trades at A,B and C, your confidence in trading POT would be severely shaken.

Click on the image to have a better view

Another month just passed. The market just kept moving up, which perhaps annoyed a lot of people who like to buy on dips. Some stocks shoot up like a rocket, which is violent, quick an fast. Some zigzag up, which is slow but steady. Some are totally dead such as DRYS and STP. By “dead”, I mean “flat”. They are basically stuck in a range. Regardless how they behave, they have one thing in common. They are all hard to trade.

For me, it is a mediocre month. I made a bit over 2k, which is enough to cover our monthly expenses. One reason is that I took a few days off near the month end. My trading is actually getting to a very boring point, where I do not have windfall profits or big losses anymore. It is a good thing though. As I mentioned many times before, if you want to trade for a living, you need to eliminate your draw-downs. Otherwise, you will NEVER make it.

My ideal monthly target is 3500 to 4000 or about 50k a year. I think it is slightly higher than the average salary in the US. And it is certainly not a low income in where I live, Durham, NC, which is a small town. This is one good thing about trading for a living. You do not have to live in NYC, Tokyo, or Paris. Instead, you can live somewhere in Texas where 200k buys you a 5 bed room single family house. I know some of my readers reside in India and China. Imagine what you guys could buy with 50k USD in your countries, which I think have a purchasing power of 150k-200k in the US.  Think about it. It is not fair for us, :(.

3 months into 2010, I still have issues using up all my capital. It looks like that all I need is 50k in my account for now because I normally have positions worth 40k-50k at one time. If I need to buy a bit more, I could tap into the leverage. With my risk control, I should not have any issues. Daily leverage from Tradestation bears no interest. So I will use it at will.

I have pulled 100k out and put it in my account with Interactive Brokers, in which I swing trade Forex.

The solar sector seems to have been active lately. It has been pretty weak for most of the time during this big rally. Let’s take a look at some active ones.

Trina Solar Limited (TSL)

It is a Chinese company.  The recent move was caused by the upgrade from Credit Sussie, which is based on a price reduction of about 10% in the third quarter 2010 due to the German feed-in tariff reductions, and a revenue increase for 2010 to over $1.3 billion for Trina. You can see the source here

Click on the images to have a better view

Technically speaking, I believe it will face a tremendous amount of selling pressure from the bulls trapped in the previous rally.

 
CSIQ(Canadian Solar Inc)

This company is actually based in China.  Nowadays, stocks with some Chinese background still perform slightly better than others.  The chart is basically pretty much like TSLs’.

FSLR(First Solar, Inc)

The is perhaps one of the most depressed solar stocks.  But it has been kind of firming up lately.

 
Among these 3 guys, FSLR perhaps is the weakest.  Both TSL and CSIQ have better weekly than FSLR.   All these guys are active stocks and good for short term swing trading in either directions.  Both bulls and bears can make some money from here.   Bulls might still get a few legs up from here.  Bears might short into the weakness when they run out of steam.  I believe they are actually very good short candidates.  Anyway, I am slightly biased toward shorting in general.

I have been filing my tax returns as an active stock trader  for a couple of years.  I can tell you that there are a lot of advantages to file as an active trader than a regular investor. This post is not to teach you how but why. Once you understand why it is much better to file as an active trader, you should consult with a qualified tax preparer who has good knowledge of active trader taxes. 

As an investor, you are faced with a lot of restrictions when filing your taxes.  Here are a few serious ones

1. $3000 annual cap on losses
2. limited deductions in investment/trading related expenses
3. wash sale rules

The first one is perhaps a big headache for a lot of new traders or investors.  When one just starts out, he is bound to have a couple of losing years, which tend to be quite big.  Let’s say if you lost 30k in 2009 and you filed your taxes as an investor. You also have a regular job from which you pull in about 60k annually.  Due to the $3000 cap, you can only deduct $3000 from your 60k.  In other words, your taxable income in 2009 is 57k. I do not know why the IRS has this 3000 cap rule for the investors. But it certainly sucks for 2 reasons. First, you have only 30k in your pocket due to the loss in 2009 and yet you have to pay taxes for 57k.  Second is that it will take you 10 years to finish the  deduction if you do not recover in your losses from the market in the following years.  I am not kidding you.  More people than you think will quit after a few consecutive years of losing.

The second is that you are limited in deductions of your investment related expenses as an investor. Can you deduct the cost of all your trading equipment such as your computer, 2 24 inch LCD monitors and a Herman Miller chair?  Can you also deduct your expenses on a trading/investing monthly subscription, books, seminars, high speed Internet?  Can you claim a deduction on a portion of your home if you operate from your basement or just a room? 

The third is the wash sale rules. A lot of people perhaps already know what it is.  It is a pain in the neck.  You can not buy/short the same or similar stock within 30 days before or after you sold it for a tax loss treatment. That is a span of 60 days.  What if there is a very good set-up in that window?

As an active trader with mark to market accounting method elected, the 3 rules above do not apply to you. That is

1. There is no loss cap
2. You can claim a deduction on any expense related to trading
3. No more wash sales rules

Now you see the disadvantages of filing as an investor. But before you rush to file as an active trader, do you qualify?  The IRS has a loose set of rules for the Trader Status(business trader).  You can download the IRS publication 550 here http://www.irs.gov/pub/irs-pdf/p550.pdf .   Find the section “Special Rules for Traders in Securities”.

These were once almighty bull stocks that a lot of people salivated over.  Now look at them.  They are basically a dime a dozen.  You have no idea how many hearts they have broken.   I can tell you a lot of people are still deeply buried in these doodoo stocks. 

Some of them have already left the stock market.  But it does not matter.  New people are entering the market everyday to take up those vacancies.  Pro traders are smirking.  After all, trading is a zero sum game. 

Anyone averaged down on the following guys?

Energy Conversion Devices

DryShips

LDK Solar

 
Suntech Power Holdings

Traders are hunters. Hunting can be very exhaustive sometimes. After a few failed attempts, you are not only exhausted but hungry as well.  When you are not in your tip top shape, you tend to make more mistakes.

Let me show you one mistake I made today when I was “hungry”.  I picked my prey this morning and ambushed it. It was all good. The prey never struggled. It looked as if it was totally dead after a while. While I was preparing for the nice food, it jumped up and ran away. I was too “hungry” to remember pinning it down( moving down my stop loss).  Once it started running, I kept telling myself that it was wounded and it would fall on its own. It never happened. It just kept running and running until it totally disappeared.

That was a fat one.  If I had moved down my stop loss, I would have had 300 at least. You see I was so “hungry” that everything looked like a buffalo to me. Why? it was because I wanted one badly after being hugry for so long. It was hallucination.  A smaller one such as a deer, a goat or a gazelle would do just fine.

Anyways, I caught a gazelle in the afternoon.

Short BID [Sotheby's].  Click on the image to have a better view

I do not remember when I had a negative week last time. It was perhaps some time in early 2009. Now here it comes again. I am down more than 400 dollars last week.

Having looked at all the trades from the the last week, I found 2 issues.

1. Not a single  winner
2. Bad judgement about the general direction

Not a single winner

I normally aim for a 1.5% -2% move, which gives me 300$-400$ in profits because my position size is worth about 20k on average. Only one move was needed to cover all the losses. But I caught none. These small losers were the direct results of whipsawing.

For example, I shorted CF(CF Industries Holdings) and CLF(Cliffs Natural Resources ) on last Friday.   They never really moved in my direction that much.  I could have had a small profit in my CF short(200 dollars). But it was not my plan.  My thinking was “OK move 1% more, I would break even this week”. It was a wishful thinking and that position ended up flat.

Click on the image to have a better view

Bad judgement about the general direction.

We had a nice rally last week.  But 50% of my positions were on the short(wrong) side. Trading against the general trend is like an uphill battle, which is totally opposite of choosing the path of least resistance.

There is at least one shinning spot in my trading last week. That is my risk control. A loss of 400$ in a week is perhaps nothing because I only need one winner to cover that.

By the way, although there is 150k sitting in my account, I rarely use more than 50k at one time. But knowing that I have enough capital to cover the rainy days(a long losing streak) makes me sleep better.

Our first swing trading competition started on 2/16/2010 and ended on 2/19/2010.  People coould enter/exit their trades during that time frame. We try to make it as close to real time as possible. However, people can still enter trades off hours. But their entries are calculated using the last close.  For people who enter their trades during the market hours, we use real time prices determined by the time stamps generated by the forum. 

OK here are the 3 best performing trades.

Let’s take a look at these 3 trades.

ARUN [Aruba Networks, Inc.]

IEM_Chris was expecting good EPS after it bounced off a recent support.  There is a maximum 3% stop loss in place.  His entry was 11.09.  The stop loss was 10.75.  The stock touched a low of 10.80 after his entry. It was close to being stopped out.  But it turned and popped almost 12% on last Friday. 

 Click on the image to have a better view

SNDK (SanDisk Corporation) by jaybee216, who is an old hand in stock options. Here is his logic behind his pick

1. Forming nice triangle for break
2. Sitting below 34 EMA break-out above 27.14.
3. CCI, which is indicator I use, moving up strong here. (We need to get him to talk more about his CCI)

SNDK never retraced after his entry.  So this was a very smooth trade.

Third is my own pick, LZ(Lubrizol Corporation)  My logic was

1. It is a very strong stock
2. It is still in a uptrend
3. It has stories.
4. It bounced at a very strong support

So the prize (25 dollar Amazon gift card) winner is IEM_Chris. Of course, the best prize is participating in the game and honing one’s trading skills. I will also keep a log of who are consistent winners because winning over a long period means a lot more than anything else.