The Art of Discipline

Members have been asking me how I remain so disciplined. They want to know how I continue to have confidence in my strategies even when I have had some trades that have not worked. discipline

I have my buy and sell signals and I stick to them like glue. I don't sell a position that has come down 1% if it is still within my buy criteria. So what if my position is down 1%? I am playing for a much bigger move and I have built a winning portfolio that keeps me in gains overall. If I don't have a sell signal, I hold the position.

I also have my rules to keep me trading the signals (not fear) in bold black ink posted on the walls of my office. My rules are derived in order to keep MY emotions in check. I know at what point a loss will trigger an emotional reaction and cause me to stray from my signals. I don't fearfully sell a 1% loss without a sell signal because my position size is such that a 1% loss is not painful to me. Each and every trader needs to make a list of rules that is unique to him/her in order to keep his emotions from triggering and cause him to stray from his signals.

I have confidence in the candlestick signals and patterns. I KNOW that the odds are in my favor. I also KNOW that if I sell everything that is down 1% that is still in a bullish pattern, I will nickel and dime myself out of profits because I am selling out of fear not because the chart tells me to. I look at the overall picture rather than focus too intently on every penny of each individual trade.

And I am NOT hasty to take off a position that has retraced when it is showing signs of rolling over. I don't need to top tick my exits. That is fodder for bigger losses. It matters that I make money not that I top ticked some exit. My job is to catch the middle. I am not going to knife catch and get cut up and I am not going to be stubborn about selling a sell signal. 
I understand why traders have difficulty with this concept because I have been there, but you have to literally change your whole viewpoint.  Most traders go through something very similar and have to figure out how to overcome it.

Think of it this way, if you are a money manager (and you are - with your own money) but let's say you have my money and you are trading it for me.
I give you $100k to trade for me and you take more profits than losses. At the end of  the quarter, you have my money up 5%. Do you think I care if you caught the top on each stock or if it was down mid-month while you were in the positions?                                                                                                                              
Of course not, because it doesn't matter, all that matters is that the P&L at the end of the quarter or year is up nicely...all that matters is that your realized gains are green and not red. If you are sitting in gains overall,  if your account is growing, you are doing what you should.                                                                              
Plenty of traders out there end up with less than they started at the end of each month, or they have gains one month and give them back the next never getting ahead. This is what you want to avoid, it doesn't matter if you don't top tick an exit.                                                                                                                       
Try not to worry about up and down days or the zig and zag of the market and focus on the signals and being disciplined. Markets and stocks don't move in a straight line. They zig and zag, wax and wane, ebb and flow...they trade. As long as you buy the long signals and sell the sell signals and trade small and often, the odds will be in your favor. But you can't over-think it.
If you trade the signals, you will never get out at the top. Because that would not be a signal...you will always get out a little below the top, but you will have ridden the long on the way there....if I am in gains of 10% and I get a sell signal, I end of up with maybe 8% in realized gains.                                                               
Does it matter that I didn't get 10%? Of course not.                                                                                                     
Do I consider this a 2% loss, hell no! It's an 8% gain. I sold that position for an 8% gain. It doesn't matter that it was once up 10%.                                                                                                                                            
If I was afraid to take the trade at all because one day it will pull back 2%, I will never make the 8% profit. If I am afraid to sell it because it pulled back 2% from its peak and is showing a sell signal, it may turn into a loser and I may never get the 8%.                                                                                                                 
I also use the signals to determine the trend in the overall market and I trade with it. If conditions are choppy as they were in June, I say keep it light or stay in cash, because I can see that the environment is not ideal for trend trading. (My options trades work well in that tape.) And I know the trend will eventually show itself again and that I will be able to trade it.                                                                                        
Again, I have confidence in the candlesticks and the signals to tell me what is going on. During this past June, I dipped with small positions and more of them did not work for me, but since I kept the sizing small, it did not ruin my year or even my quarter. Since I knew conditions were not ideal, those losses did not deter me from jumping on board when the trend came back. I recognized when the trend was green again and I went for it.                                                                                                                                                
My goal is to be profitable over the long run and I am succeeding. I hope this helps some of you. Good luck!

The Morning Report - Treading the Choppy Waters

It has been a rough couple of weeks in the stock markets with big head fake swings in either direction. Traders have heard the adage "sell in May and go away" and wonder if they can make it through a summer that may be difficult to navigate.  While summers have been known to chop these last few years, trends can still be found reading candlesticks and other methods of trading can be profitable in a choppy market. 

While there are several ways to tread these waters, there are a few important things to consider for newer traders trying to make their living in the markets first.

Traders should have at least a year's worth of living expenses for when times get tough. At any given time, no matter how good you are as a trader or how many strategies you have to employ in various types of markets, there will be times when going to cash is the best move. If you can't afford to take a few weeks (or months) off each year and be in cash, don't quit your day job. If you already have and you are counting on trading to provide your income on a month to month basis, you are setting yourself up for a difficult time. That pressure to perform will not help you to keep your emotions at bay. That said, there are ways to navigate various markets. 

If you are getting frustrated over losing money these past couple of weeks, stop trading. All traders should take the time re-evaluate what is or is not working during a given market. When losses start to pile up, the best move is to stop trading with real money. Preserving capital becomes your priority when you are in a slump. Paper trading is a great way to get back on the right side of the tape without risking capital along the way. All traders lose at some point. I have had an epic year but these past couple of weeks have vexed me with some losses. For months, followers have been teasing me that my results seem unbelievable, but as soon as I have a couple of weeks of losses, those same followers start criticizing my analysis. Overall, my results for the year are still quite good and my rules and risk management skills have kept my losses small.

My analysis these past weeks of the overall market has been based on a couple of factors. One is, of course, the candlesticks and their patterns. But with huge swings in both directions from one day to the next, those patterns become difficult to read. I can only read the market as I see what it is doing. I do not have a crystal ball and cannot tell you what the market will do today or tomorrow. I can only look at what it did yesterday and in the previous days, weeks, months etc. The strong run in the bull market of 2013 has had very mild corrections along the way. Each time, I stopped trading and got ready to take a bearish stance, and each time, the market came back to rally with a continued zeal. This time however, the correction has doubled back after touching the 50 day moving avg and current up-trend line.

Yesterday's morning report included a cute photo of a girl in a skimpy bear suit. I thought it would be fun for the idea that a bearish summer would require a skimpier tuft of fur. But I did NOT say that I was bearish on the market currently which some seem to have intuited. I laid out what it would take for me to become bearish on the market and to believe that we are in for a deeper correction. I said that if the market closed below the 50 day sma and the up-trending line, AND then went lower the next day as confirmation (because every candlestick signal requires confirmation) THEN and only then, would I get on board with the idea that this market is in for a heavier downside this summer.

As it turns out, bulls showed up in full force yesterday nearly completely negating the previous day's very heavy red marubozu candle with a strong even larger green one that nearly engulfed the previous day's in all the indices funds (SPY, IWM , DIA, QQQ) and SPX and DJI actually had engulfing bullish candles. Talk about a head fake!

For all intents and purposes, yesterday's action turned my trade timer back to green but with caution as we have seen the quick turn around this market can make. I also note that a descending triangle is forming in SPY with the flat support line at the first fib retracement line. (Hat tip to Victor in the chat room for pointing this out.) This triangle falls within the symmetrical triangle which uses the uptrend line as its support line. It is impossible to know which condition will win out and which team will take control - Bulls or Bears. Again, all I can do is watch the tape and trade what I see. 

It's not the first time we have seen this kind of action. In fact it has become somewhat typical of the past few summers. Day trading is possible if you are on the right side of the trend but swing trading becomes more difficult. There are two ways to go here. Either you have a mix of longs and shorts in a lighter portfolio, or you stay out of common equities until a definite trend can be defined.

The other strategy I like in this type of market that always works really well for me is trading options for credit. I have a few trades on that I put on this month that are working well and I will be looking for more of these trades until a trend ensues again.

Here is the SPY chart. Good luck everyone! 

Click on chart to pop out.




Tough Day - Keeping Emotions at Bay

I took some losses this morning. It happens. Overall my gains for the year are still near 25%.  I consider this to be fairly decent results.

No matter how often I say it, some traders have difficult with the concept that stock picking is only 10% of the game. If I can show you how to get better than 50/50 results in stock picking, then we are doing better than most traders on Wall St. But more importantly, my greatest value to traders who wish to learn from me is in helping them to manage their emotions so that they can remain disciplined.

Baby emotions


Each and every trader must come up with a set of rules that is unique to him or herself. These rules should keep the trader's emotions at bay. Everyone has a unique risk tolerance and trades should reflect that. Position sizing and stops should be set such that the loss will not trigger an emotional response. My rules are in bold lettering and posted on the wall in my office. 

One of my rules is to stay away from a particular stock after taking heavy losses. Another is to walk away when feeling emotional.

Now I know plenty of traders who stay away from pharmas because of their volatility, but my more recent experience is that I win more often than not in Bios when I stick to the signals. None the less, after this morning's sell-offs bit me pretty hard, I told my followers that I am putting drugs into the penalty box for now. This is not because the sector is losing ground overall, although sometimes when I swear off a sector this may be the case. This time it is to keep my emotions in check. I don't want to risk making any emotional trades in pharma after taking those losses. 

Not long after this, I received news that a friend is ill. The prognosis is good with treatment but I reacted strongly to this sad news. I told the members in my room that I was feeling emotional and needed to step away from trading. I put hard stops on current positions and decided not to consider any trades until I felt the emotions had passed. 

The old adage comes to mind, I can sell a person a fish so he can eat tonight or I can teach him how to fish so that he can eat for a lifetime. Traders can follow me in and out of trades and they may be profitable doing so, but they won't learn how to trade.

I hope that my followers learn from me that it is ok to step away when emotions creep in. We are emotional beings after all. We were built with emotions to keep us safe...so that we run from danger or care for our loved ones. Emotions have helped humans to survive over thousands of years, but when it comes to trading, emotions are pesky bits of nastiness that must be kept away. 

Here is a basic example of the four basic emotions and their related states.




Counting My Blessing $EGLE

Well Good Morning Traders!


I don't stay in a position into earnings unless I have already taken some good profits in the position. I do play volatility with options and earnings but that is a different ball game all together. Long and short is, I would not have stayed in EGLE had I realized they had earnings. I am not pleased with myself for having missed this fact but I am counting my blessings as the stock is up 18% in pre-market on the good earnings. Please enjoy this Bing Crosby tune that comes to mind.

On my radar are $DQ, $CHCI, $HIMX, $FBC $OPTR, YOKU, $AT, $HRB, $CTRP, $AWAY, $AL and the refiners - $WNR, $VLO, $TSO ... and of course, $EGLE.



A Touch of Wife's Psychology and The Hack Crash

Head psychology logo

I spend so much time in the chat room discussing the psychology of trading that I don't realize that I am not putting those thoughts into very many posts.

Yesterday's "Hack" crash in the market left many traders feeling stung because their stops were taken out. They felt cheated because a big swing like this in the market was not in their plan. (Hopefully they had a plan.)

Those traders put on their positions, possibly with too large of a size and maybe too short of a stop to make up for the size and did not plan for the possibility of a big swing that may go against them then recover. I am not talking about the kind of flash crash that happened on May 6, 2010. Those numbers were impossible to have avoided but fortunately, that kind of glitch in the system is very rare. Moves like yesterday, while quicker than normal, are pretty common so it may be best to consider them when sizing positions so that you can place your stop far enough out of the way.

Members have a "yes dear" attitude when it comes to me and my "trader's psychology". I talk about rules daily and remind my followers that each trader should have his or her own set of rules that are unique to them. Those rules are unique because each trader comes to the game with their own experiences, fears and ensuing emotions that lay out their risk profile.

If you don't know your risk profile, it is a good idea to spend some time plotting it out. Think about how much money you are willing to lose out of your portfolio overall before your emotions trigger and you get upset. Then divide that into the number of positions you generally trade to learn how much you can lose on any individual position before you get upset. In this way, you can discover how your position sizing works with your risk profile as well as how far you can set stops and how tightly you want to place your entries and exits.

You want to find a good balance here. You can get overwhelmed by having too many small positions as it gets too hard to manage more than 12 or 15 and you can get waylaid by having too few larger positions sizes as your stops may be too short. Be careful not to nickel and dime yourself with very short stops because you are afraid to lose that dime or this nickel. And be careful not to sell too soon because you are afraid not to make this nickel or that dime.

One trader I knew set tight stops because his risk profile did not allow him to risk more than a few dollars. He was afraid to lose a dime and not to make a nickel. He wasn't giving himself enough room for the trade to work and was often getting stopped out for small losses which eventually added up. Conversely, whenever he had a winning position, he moved his stop to break even, so that he was taking small losses on the losing positions and stopping out for break even on the winning positions. When you do the math, this just doesn't work. It's all an odds game so you need to figure out if your fear (emotions) are keeping you from taking profits on the right side of the tape.

I suggested to this trader that he was better off to take smaller positions, set reasonable stops that were far enough out of the way, then move stops up only when it locked in gains. And that he should write down rules that help him to be disciplined in this sense.

A few rules might read: *My position size will be no bigger than xxx. *My stop will be between 5-7% away from my  entry. *I will move stop up only when it locks in gains and is still 2-3% away from current price to allow for movement in stock price.

Be careful not to give your rules a negative bent. Don't start a rule with the word "don't". Psychologically, giving yourself a taboo can backfire so try to keep your rules positive. Create rules that tell you what you should do. Say "Take losses fewer than 6%" rather than "Don't take losses more than 6%"; or say "Remain calm" rather than "Don't get upset". 

The trader I know followed suit. This not only allowed his portfolio to start growing, but it also eliminated much of the emotion that was being triggered by the compounding small losses. Also, the trader gained confidence. He had thought he was only trading losing stocks but it was his management of the positions that was causing the losses not his stock picking. When he started winning by adding some rules to keep his emotions from triggering, he realized his stock picking skills were pretty good. Psychology will define how you manage your positions and this my friends is 90% of winning in this game. 

So remember to: keep-calm-and-study-psychology-5


Can I Take An Emotional Day? (Grieving $PWER)

My followers know that I tout the importance of my rules. I talk about having them in bold black print posted on the walls of my office. They are in no particular order but without a doubt, the number one rule is, "If You Get Emotional, Walk Away."             death_dollar_tombstone

Every rule that follows, is aimed at keeping my emotions from triggering. From position sizing to max loss to adhering to the signals, every rule comes back to the same thing, keeping emotions in check. But sometimes, there are no rules to stave off emotional events. This morning I find myself quite emotional. As such, I will set hard stops on the two positions in my portfolio and will not trade unless I am sure that I am beyond the frustration that I feel as a result of this event.

$ABB (ABB Ltd.) bought $PWER (Power One).

For several years I have been pounding the table about $PWER. I have talked about the fact that this is the only company that makes the inverters that all solar companies need for their batteries. I have talked about it's strong fundamentals; I have talked about the extraordinary low price of the stock compared to the amount of cash the company holds. I have made a lot of money trading this stock. At one point in 2009-2010, I held it from under $2.00 to $12.00, taking huge profits. I have on many occasions made large percentage gains in the stock so perhaps I have had my share and it simply was no longer my time. None the less, I find myself grieving. 

A year ago, I made a bold statement. I said that $PWER was not only a candidate for buy-out, but would be acquired by the end of 2012. As such I held a position of common in my long term account as well as out of the money calls. When 2013 rolled around and $PWER had not yet been acquired, I wrote this piece, Ideas for 2013, where I said I would let my calls exercise even though they were still out of the money because I believed it would be bought in 2013.  Through many ups and downs early in the year, I held on.

On March 18, I sold out of my $PWER. I did not sell it because I had a sell signal. In fact, I had held on through several sell signals letting it sit at whatever price, because of my strong fundamental conviction. I held it for fundamental reasons and I sold it for fundamental reasons.

I did it in light of the debacle in Cyprus. I knew that $PWER held most of its cash in Italian banks and I was concerned about the domino effect from the Cyprus banking system. This effect never came to fruition but waiting it out, I never got back into my $PWER position.

The event that I was so sure about has now happened. $PWER has been acquired and it happened without me.

Fundamental analysis is inherently more emotional than charting. I have always said this. Fundy guys get married to their conviction and whine when a stock does not do what they think it should, allowing positions to move against them to the tune of 20, 30, 40% or more...all the while adding to a snowball that is rolling down hill trying to lower their cost basis. Dangerous and risky, this style is not something I adhere to because I prefer to be safe. But I held on to $PWER through ups and downs because I believed so strongly. And so I give myself a reprieve for being emotional here. I just need to get over it and get on with my work. But I will take a couple of hours, and maybe even the whole day, to grieve.

RIP Power One. I will miss you!


$LVLT Volume Pocket (Volume at Price)

One indicator I use is Volume at Price (or volume by price). These are the horizontal bars on the left side of the chart. The longer bars represent more volume at a certain price. When volume drops between prices, so do the volume bars shorten or withdraw. The volume pocket exists between the longer bars on the volume at price indicator. They represent a place of support and resistance because this is where the buyers and sellers come in.



Mental Accounting by Dr. Doug

From my friend and colleague Dr. Doug Hirshhorn. This video on "mental accounting" is something that all traders need reminding.



There is No Point Wishing...

Some of you know that I just returned from vacationing in the Florida Keys with my family. We had a wonderful time.

Upon my return, I found myself eager to get back to work and started babbling in the chat room about the markets.

So I was babbling in the chat room one day, yesterday in fact, and it occurred to me that my ramblings might make a post.

There is no point wishing for an ideal market.

The momentum of 2009 was a dream - you could throw a dart and get a winner- we ALL made money, but that is a rare market of many. Few markets move in a straight line.  If you began trading in 2009, your expectations were likely falsely inflated. 
The following years had more "mean reversion" sentiment as the initial momentum off the bottom slowed, consolidated and churned before moving higher toward the 2007 S&P record highs.

It follows that we are near the peak of the boom of the fed inflation and we are heading for the bust that we saw with the boom and bust of the housing market and the dot.com era before that.
It's not surprising that we would slow down as we get closer to it but the question becomes, can we get through it? or are we setting up to pull back to a longer up-trend?
On the monthly chart, there is an area of resistance that we are churning through that is between the 2000 high and the '07 high.


The more recent up-trend can easily take $SPX down to 1410.
The overall long term up-trend that started in 1982 ...is where the '09 bottom reverted to.
To have another year like '09 - we would likely need another drop like '08 to that trend line - which would take us back below 900 on the S&P
but of course there are many levels of support between here and there.

It would make sense to at least consolidate before breaking higher, but either way, it looks like some down to sideways action is in our future.

The more up scenario is a complete break out to the upside through all time highs and call it a break out of a monthly ascending triangle.
I think this  would only happen if the economy remains strong, but I digress. There are many reasons for the economy to struggle.
Another thing that I notice is that volume in the $SPX is just starting to stabilize -it has stopped going down - so will be interesting to see what happens with that.



The point is, don't wish for a market that is not there. Figure out how to trade the market you have or know when to stay on the sidelines if the market environment doesn't suit your strategy. Because cash is a position and delayed gains cost less than losses.

Good Luck!

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