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Here is how I lost only a little bit over 300 on my GS short position. Here is the playback of this swing trade.  I opened a short position on 3/30/09 @ 103.91 and it tanked to around 100.  So there were around 400 paper profits and I ended up losing 300+.  If I had the ability to look ahead in time, I would have covered my GS around 100.  This kind of scenario happens only in my wildest day dreams. To achieve something extraordinary, you will have to be a dreamer, a doer and a calculating risk taker. Here is why…  For example, when you were a kid and your parents always told you that you should …….  I am sorry about digressing.  Back onto trading.

Ok so that was like 700 dollars from +400 to -300.  I am totally fine with this. I was just following my trading plan.  If every time I take a small profit like this, I would never ever catch anything like this (FAZ: 31% Gain (8k+) in 2 Days) or that (How I held onto FAS for a 26% gain for a day trade.). I closed the position this morning when I saw something strange. The market gapped down quite deeply. Yet GS showed all upward strengths.  Within 5-6 minutes, it turned green while the market was still very weak.  Something was not right.   If a stock does not act right, get rid of it.  GS should have gone down with the market.  Yet it did not.  So it did not act right and I got rid of it quickly. I would have been stopped out later anyway. But my quick reaction saved me a couple of hundreds dollars. Here is the chart and my GS trade.

I took a day trade in FAZ and made 400+ and I also opened a small swing long position in FAZ.  Let’s see how it plays out.

Only triple leveraged ETFs can give you that kind of reward.   Of course, the same goes for the risk in trading these leveraged ETFs.  The rally lasted for a few days for a few reasons

1.  FED said something that I do not even remember.
2.  The CEOs of Bank of American and Citi said they were profitable last month.

I still remember clearly that  Dick Fuld, the CEO of now bankrupted investment bank, Lehman Brothers, said “We are not Bear Sterns and We are in a very good standing”  when the price of their stock stood around 44. 

As I indicated in this post http://www.momdaytrader.com/blog/2009/03/18/stock-market-which-hat-are-you-wearing/,  I was going to swing trade FAZ and SRS.    That is exactly what I did.  Well I did not trade SRS because they move in the same direction and FAZ is more volatile.  All my trader friends on Twitter talked about this and knew that I was going to trade them. You can see all my trading thoughts published here http://twitter.com/trader_mom.   It takes 2 minutes to join us on Twitter and it is totally free. 

Here is the FAZ trade.  Click on the picture to have a better view.

If you have been following my portfolio, you know that I did not take the 10% profit in my last FAZ trade.  Had I taken that profit, I would have ended up with only 10% in this trade too. That is why a trading plan is very important. For readers not familiar with these inverse ETFs,  they go up when the market goes down and vice versa.  They are leveraged short funds.  If I think the market is going down, then I will go long on FAZ, which is equivalent to shorting the market.  Here are my thoughts on the FAZ trade above.

1.  Odds were in my favor since my system had had a bunch of small losers in a row. It was about time to hit something. 
2.  It was a 26k worth position.  If we multiple it by 3(triple leveraged fund), it is 78k. I normally outlay 50-60k for one batch of trades.  So I increased the position size, which I explained in this post http://www.momdaytrader.com/blog/2009/02/02/day-trading-fas-one-shot-one-kill/ 
3.  Here is the most important thing. I was up close to 10% on the same day as I opened it. 3X ETFs rarely gap-down more than 15%. If it had gaped down next day by 15%, I would have lost only 5 %( 1300). My target was 40% or around 10000. 1300:10000 was a very good R/R set-up.  My first stop loss was 10% that would make the R/R ratio 1:4 which was not bad at all. 
4.  The Odds was in my favor and it had a solid risk/reward ratio. I had to pull the trigger.

Tactically speaking, here are 2 things

1. I did not try to catch the bottom as you could see from the chart above. 
2. I would have held onto it for the 40% target if it were not for the weekend.   And because I had a specific target in my mind, I did not prematurely exit it. I moved my stop loss to break even after I was up around 10% and never touched it again until I closed it.

The market has seen a bear market rally lately. I was not able to catch this rally since my system did not generate any signals. I am totally fine with it since it is very hard to catch all the moves.  The question is how much longer this rally will last. I am wearing a bear hat now. My bearish view is strictly pertaining to swing trading. Here is why.

From the start of this bear market that started in Nov. 2007, it has been right to short into every single rally. Why is this rally different than every other? We can not rule out the possibility of mid term reversal. But that kind of probability is quite low until I can see some tangible signs indicated by weekly and monthly charts.

As a successful trader, you and I always choose the path of the least resistance. That path is of course on the bear side because we are in a very big bear market. You should always try to short 70% of the time and long 30%. In other words, follow the trend aka Path of the least resistance. Ok, so we know what the general direction is. Shorting is my strategy.  We need tactics also.

The first is timing. That is I will not short into this rally blindly. I will wait for my indictors to show signs of weakness. Of course we all know technical indicators will be off the mark quite often. But that is OK. I will get out of my short positions as quickly as possible to keep my losers small.  As you could see from my WLT, FAZ and GS, I had 10% paper profits from both FAZ and WLT. I had to close them since I don’t allow such positions turn into losers once they have a 5-7% paper profits before they hit their targets. People who have been following my portfolio for a while know this. GS was a completely loser. It just hit my stop loss.

The second is that I will keep shorting into the rally until my system tells that we are possibly going to see a major reversal. I will not hesitate to short into it just because my first attempt failed.

The third is that I will hold onto my winners once they start to move in my direction.

All these 3 are very important. If any one of these 3 is missing, it will greatly increase my risk.

Which direction do you think SRS and FAZ will give us the best Risk/Reward set-ups?   I will go long on these on any signs of weakness in the general market and my profit target for FAZ will be at least 40% and 30% for SRS.  When they were high up over 100 dollars, I could not short them.   Now I should have no issues going long on them

Click the photos to enlarge them

 FAZ

 SRS

The stock market had a big rally today. This is actually pretty predictable. I have been talking about shorting FAZ since last Thursday night on Twitter. I mentioned that we might have some opportunities to short FAZ for really fat profits (20-30% in a matter of 2-3 days). Let’s take a look at the daily charts of FAZ

As we can see that it approached the previous high on last Thursday and rose from 40-80 in a matter of a few days . Forget about the fundamentals and forget about that we are a in a big recession. Technical analysis says you do not have good set-ups on the long side of FAZ and your risk-reward-ratio would be totally out of proportion if you do.

 My first attempt to short FAZ was on Friday. I had a relatively big position (50k worth). But it did not hit my target. Percentage wise, it was a small winner compared with today’s. Now let’s take a look at my FAS trade today since FAZ was not shortable. I only took one trade and it was up 26%. You do not see this kind of big day trading movers everyday. How on earth did I have the willpower to hold on it? We will come to that part later. Let’s take a look at the entry. A good entry is half a battle.

For frequent readers of my blog, you know I like this kind of entries very much. That is to short double tops and long double bottoms. Of course, I also like wedges, pennants, flags, and cup-and-handles. My entry was after a W bottom formed at 2. That entry was fine. However, if you entered around 3, that would make your entry perfect since that bottom completed the famous header and shoulder pattern if you include the bottom yesterday, which is 1. If you did not include 1, then bottom 3 and bottom 2 formed a double bottom on today’s chart. No matter how you slice it, there were very strong entry signals.

How on earth could I hold onto it for so long?

Normally, I have 6-7% profit targets for day trades. But it was not the case for this one. I aimed for a much bigger profit. I have been talking about big profits in shorting FAZ since last Thursday night. Why would I barge for a 6-7% gain? How did I cope with my emotions? LOL, I went to nap after I moved my stop loss to break even and when I woke up. Voilà! it was up big nice. It never had meaningful retraces, which made it easy to hold onto it. Had it gone down, I would have been stopped out break-even. That is my stop loss would do its job. It was also attributed to my small position (around 13k). I would have made 10k if my FAS position today was worth 50k like the FAZ trade I took last Friday. But I might not have been able to control my emotions well.

Here is the summary.

1: followed my plan
2: total conviction. When a trade is in motion, I never listen to anyone or anything including any news.
3: a small position.

My only swing long SOHU is doing great. Here is my portfolio and my real time stocktwits

It is good to respect risk in trading. However, if you are overly cautious, it is equally detrimental to your trading as you will see from my today’s FAZ trading.

Today, I went long on FAZ the first time. The entry was almost perfect. But I left so much money on the table. Why? I chickened out. Here is the chart. What makes trading hard is that we will have to make almost everything aligned for a successful trade.

1: a good entry.
2: a good exit
3: luck
4: willpower to stick to your plan(emotion control)

It was a text book set-up(a wedge) again. There are just so many patterns to trade. Check out the “Candle Sticks” and “Comprehensive” sections of my libray.

Here is the 5 min chart.

My entry was good, but not perfect. If I had waited a bit more, I would not have bought it on the head of that candle(upper shadow). Since this guy moves big and fast, we really do not have to fuss over a small spread like that. So the entry was very solid.

My exit was horrible. It was beyond the words. After it spiked by 2 percent, I started my trailing stop which took out of my stop. It was like a thief who stole my money and ran faster than anyone. See how big and fast it moved after shaking me out. The reason I started my trailing stop was because I chickened out. It was simple as that.

I think following is a strategy to trade all these leveraged ETFs. This strategy is contributed by a trader friend. With his consent, I post it here so others can benefit from it too.

When you’re trading ETFS, find out what the components are and watch those and the news as indicators on your entries and exits. A lot of ETFs are administered by http://www.proshares.com/, it’s easy enough to find which stocks they are comprised of and what % those play. It changes a bit every so often but it’s a really helpful indicator.

If you’re trading SRS, watch SPG in particular but also know that:

Simon Property Group Inc. 6.82%
Public Storage 5.87%
Vornado Realty Trust 4.99%
Annaly Capital Management Inc. 4.90%
Equity Residential 4.64%
HCP Inc. 4.03%

To effectively trade SRS, open two level two boxes, one with SRS the other with SPG. Study the T/S, watch what each do in relation to the other. Open a chart and overlay SRS and SPG. Finally, if your trading platform allows you to follow spreads, create a spread between SRS and SPG and watch those. It takes a day or two of a somewhat intense study, but once you’ve figured out the relationship between the two, you can makes piles of money trading SRS.

The same stands true for FAZ, although it’s not a proshare and it’s harder to find information on it. I’ve watched it for a while and find that following JPM is the most accurate way of understanding what FAZ will do.

Do not swing these and make sure you have tight stop losses in place and honour those stops. I’ve watched SRS move $20 in a day, you really don’t want to be on the losing side of that. It’s much better to lose an opportunity than lose the money.

Of course, you still need to combine this strategy with your risk control and exit strategies .

I lost 400+ on 2 long FAS trades today. I broke one of my rules on the first trade ,which I did not realize. So I took the second trade. Both of them died. After the second loser, I realised that the first trade was lost because I traded a “pattern” that I never saw before. That “pattern” was no pattern at all. In other words, it was a forced trade. The second trade was fine even if it was a loser. As a self-imposed punishment for breaking my rules, I stopped day trading for the day right after the second trade and I will not day trade tomorrow either. Only Swing trades are allowed for now.

As for swing trading, I am long on POT. LEAP, and HES. HES and Pot are my pets. And LEAP is new. Here is my portfolio. Let’s see how they play out.

Are you a trade-holic? Do you feel excited or high when you place a trade? If your answer is “Yes”, then it is detrimental to your trading. Today was another smooth day for my day trading. I took only one trade. It was one solid run from the beginning. I stop right there if my opening trade is good. There is no need to push my luck. Here is why.

If you are religiously following your trading plan based on probability, you should scale back when you are on a winning streak, and you should be aggressive when you are on a losing streak. This might be totally opposite of anther school of traders. They think people should be bolder when they are on a winning streak and conservative when they are on a losing streak. Although that theory makes sense,it is just not for me. Let me use a simple example to illustrate my strategy. And you decide which one is for yourself

Assuming I could follow my system to the letter, that is I take every signal it generates and I know its probability and my risk/reward ratio, I placed 3 trades and lost all them in a row. Now my system generates another signal, I take it and slightly increase the size of that trade because I know the probability of a successful hit is around the corner. By “aggressive”, I mean that you take every trade you system feeds you and you also slightly increase the size of your trade as long as you do not to exceed your maximum daily/weekly/monthly risk threshold. For example If you reached your daily loss cap(say 1000), you must stop no matter what your system tells you.

Let’s reverse it. Now I am on a winning streak. I placed 3 trades and won all them in a row. Now my system generates another signal, I ignore that signal or slightly reduce the size of that trade because I know the probability of a successful hit has greatly diminished. Therefore, it is not hard to see why I use this strategy.

OK let’s move onto my daily trading analysis. Major indices have been chopping around the previous lows. The bears wanted to crack the support quite a few times. But it has been very trying for them. We are at a very strong support here. The odds of profitable trades are on the bull side. However, it does not mean the strong support can be cracked. Once it is cracked, we could possibly see a quick drop to 7500 and even lower. This only matters to my swing positions which are my core trading. As for day trading, who cares?

FAZ,FAS,TNA and TZA are permentely on my day trading list. Under normal circumstance, I will only day trade these 4 stocks. Today I went long on FAS. And It was a 4+% gainer. I posted my FAS entry in real time on Twitter/StockTwits.

I am closely watching the following stocks for possible swing longs if the bears do not crack the support. RIMM, FSLR, MOS, POT, X, GOOG, AAPL, HES, RIG, NOV, AMG