Weekend Edition (11-20-2010)

I have noticed that I have at least two bad entry habits that consistently eat into the daily profits:

• Entering on a non-moving stock
• Exiting early on a big trend and trying to reverse

I decided to spend part of the weekend trying to come up with an approach that would reduce my tendency to trade those types of price environments. While realizing the problem over the last week or so, and trying to figure out a solution, it became painfully obvious that my current simple/naive approach to establishing entries/exits doesn't offer much in the way of discretionary tools.

I thought about it. And thought about it some more. And then I decided that I really needed to come up with  an objective and quantifiable 'something or other' as an indicator of the current price environment. Something to give me the 'green light' to look for an entry.

So I came up with two ideas - one addressing my psychological framework, and one addressing my technical framework.

As to the psychological framework

This is the most important thought of the weekend.

I feel that I need to be ready to admit that I cannot trade like Scott; as much as I would like to be able to, and hopefully eventually will be able to, it is way beyond my current skill level. Scott has an amazing sense for the trade, honed by years of experience and an ability to focus. Sometimes I do very well reading momo, but there are enough times (as evidenced over the last few weeks of live trading) where I fall pretty flat and rapidly cut into my profits

After I stopped to think about some of this, I was surprised at how often 'pretending to be as good as Scott' gives me permission to make some entries. What I mean to say is he is able to time exits and reversals so un-canningly perfect at times that I think I should be able to as well: 'This looks right, I am just going to go for it and see what happens.' In a way, admitting this is about giving myself permission to slow down, lowering some immediate expectations, and taking more time and thought to analyze/observe price environments.

As to the technical framework

I wanted to keep this as simple and naive as possible. In a nutshell - I decided to go with the trend and the big movers. I am going to limit trades to big movers and use the color of the MA's on both the short and longer ranges as the quantifiable measure of the trend.


Entries

• Do not trade prior to 10:00 a.m. ET.
• Limit trades to the 5 stocks with the highest ATR values.
• Only trade in the color direction of both the short and long range charts (blue is long, red is short)
• Enter when the price crosses the short range MA, with the color of the short range MA matching the long range MA
• Watch for end of trend signals:
• Extremely high/low volumes, wave count (5/3 wave)
• Place stops on the closest prior S/R

Exits

• Draw lines from the start of the move to the top/bottom of the first correction for exits
• Draw a new line if the slope of the trend changes
• Exit when a bar on the dominating chart closes below the line 
• Watch for end of trend signals:
• Extremely high/low volumes, wave count (5/3 wave)

Here is an example of a legitimate trade on AAPL: 

Yellow lines are the wave count, red lines are exit lines, red diamond is entry, red dot is exit. Here is the setup on the 20 range (which, in my current setup is the shorter of the two range bars):

Entry:

Exit:

For a quick comparison - here are my trades on the 45 for the same day:

The same initial entry, but only one rather than 6 - only 3 of which did not get stopped out.


Reversals (i.e., trading against color on the larger range)

• Only trade against color on the larger range when there is extreme high/low volume changes on the shorter range, and after the shorter range crosses the MA.

Here is a legitimate reversal on AAPL (11-16-2010)

Entry (note extreme volume at LOD):

Exit:

How This Compares

I picked two days worth of trades over that last couple of weeks: 11-10-2010 (i.e., the biggest losing day) and 11-16-2010 9the biggest winning day). I assumed that I would of been watching the same stocks and entered accordingly.

11/10/2010

There were no trades on TNA, RIMM, BIDU, SOHU,  PEGA, or GS using the probability criteria.

AAPL:

This was probably the most problematic of the bunch - especially with respect tot he 5/3 wave configuration. I kept the basic rules - and decided that the start of the new wave had to have at least 2 candles closing below the low of the peaking candle (of course it would be the opposite in a down trend).

The entry is at the start of wave 4 on the 45.

AIZ

CF

CMG

FFIV

NFLX

Two trades on NFLX.

Trade 1:

Trade 2 entry:

Trade 2 exit:

 PCP

2 stops on 8 trades, 6 trades were very profitable; compared to what NT calls 53 entries and exits.Of course this is no guarantee of what I would of actually done, but it is about as close as I can get.

11/16/2010

AAPL

Two trades on AAPL.

Again the 5/3 wave definition was a little problematic - but the fuscia line holds as wave 3 cannot be the shortest. Two of the corrective waves are on the verge of not being corrective at all, so it could of gone either way.

Trade 1:

Trade 2:

BIDU

CMG

Two trades on CMG.

Trade 1:

Trade 2 - stopped:

FCX

6 trades with 3 stops - but well over double the actual profit.

Final Thoughts

So far so good.

The bad thing? Well, perhaps not bad, but it was a little frustrating to realize that this is going to keep me out of some relatively big moves. For sure I have to be ok with this - I am coming to realize that missing big moves is likely and is not the end of the world. For now I have decided to accept that those moves and potential entry points are less probable.

Another question that comes to mind - what does this mean for my future as a trader? Am I limiting myself? Am I relying too much on indicators? Will this keep me from nurturing and relying upon my instinct?

I am not really sure. My hope is that this approach will make it 'safe enough' to continue to observe and learn. For the most part, the ability to grow my intuitive skills will have more to do with my attitude and how I see the 'technical framework': is this about safety and defining probabilities or is this about a rigid and conclusive methodology?

I have decided to 'test' this approach by trading live. As is evident from the two day review and the sometimes identical entries, this framework is a 'narrowing' of my current approach rather than a completely new ball of wax. The 'test' will mostly be about me and my ability to implement the trades with some degree of efficiency; i.e., trading the plan without exception. This will be the hardest part - and why I needed to address the psychological framework as well. Though it might sound a little silly, giving myself permission to be safe, lower my current expectations, and to continue to grow and learn, is a big step in the right direction.

Feedback appreciated.

Trade well.

Practice plan - Step 2. The trading process; Part 3: Determine the required trigger behavior (Summary - revisited, yet again)

This is the re-visited version, I changed the entry S/R definition per yesterday's discussion. Helps to have my thoughts laid out and as simplified (yes/no) as possible. This defines my edge.


Determine the required trade triggers


The Finger

Entry:

Is the available price close enough to S/R? (visually definitive)
Is the market breaking thru S/R?


Exit: Is the stock still moving in the expected direction?

Have the candles changed size (from larger candles to smaller candles)?
Has the candle closed on the opposite side of the 7-period EMA?
Is this the largest candle of the day? Has it retraced more than a third of the way?


The Outbreak


Prior to Entry (alert setting): Does the stock show clear lines of support or resistance?


Entry:

Is there visual S/R? (A visually defined anchor or about 3 tests of the S/R over some time frame)
Is the entry price close enough to the S/R?
Is the market breaking thru S/R?


Exit: Is the stock still moving in the expected direction?

Have the candles changed size (from larger candles to smaller candles)?
Has the candle closed on the opposite side of the 7-period EMA?
Is this the largest candle of the day? Has it retraced more than a third of the way?

Summary:

Day 3 of practice.

Bit of a lazy day, trading was interspersed with the USA v. Algeria game, and a nap afterwards. I wasn't expecting this, but I find this approach somewhat boring, first time that I have been bored while trading, and I caught myself wanting to avoid the exercise. I think this is telling, but I am not sure what to make of it; it might be the reason behind the numerous entries on prior weeks. Learning something about myself - progress!

Another thing that I noted today, my intuition might not be that great at picking out S/R. The problem with not having a clear idealized model is that I can tend to get hazardous with visual inspection: 'Ah yeah, that works.' and move onto the next. I want to take a little time to make the S/R concepts more specific, using an example from today.

Mr. Faith references 'anchor points' in his book (Trading from Your Gut: How to Use Right Brain Instinct & Left Brain Smarts to Become a Master Trader) (and a lot of other great things, really, you should check the book out... err... of course, it hasn't exactly worked for me yet... so maybe you should save your $25 until you see a difference in my trading; e.g. making money): to be an anchor point, the primary criterion is that it be visually distinct and separate. PXD offered a great example today:

(The 9:55 close is a perfect spot for an entry using his rebound strategy anchor violated with a retrace, stopping out all the early shorts.)

I want to adopt this as part of the S/R definition.

I also think that it would be good to setup a consolidation S/R definition. Again, PXD offers a great example:

I want to avoid bringing numbers into this game, but consolidation S/R could be defined as some price level that has been tested about 3 times over some length of time. You will notice that the S/R is actually violated on both ends - key for entry timing in this case is the market. You can see on the background plot (Q's) that all the breakouts are re-enforced by market action. I think I am going to add that little tidbit to the market visualization check.

For a better visual, I highlighted the bars on the Q's that match the breakouts. Interestingly enough, in the case of PXD, the Q's also highlight the anchor (the first highlight) (The horizontal dotted lines are what I drew as the market was unfolding today; it might be hard to understand some of them, but it is easier and faster to draw extending horizontal rather than trying to get a straight line segment, just remember they are not valid for both directions):

So - another post sometime before trading tomorrow: update on the S/R definition and market signals.

On the profit side of things - after an update on the exit definitions, I fully expected and anticipated making money today (on paper). Heh, not to be. But still, I traded well and according to plan. I think the extra definitions will help. The 9:40 breakout would of been the ticket, but I was eating breakfast...

-$634

Details:

BEN: hitting new lows as the market broke support (-$127):

CXO: stopped, then closed on the stronger volume and some green. The third trade was a discretionary exit as the market was trying to make up it's mind, I don't think I could of played that much better (-$2):

DO: Ok... I am trying to make sense of this one. I think what happened was that DO broke resistance on the candle prior to entry, and then reversed; I shorted as it broke thru the same line.  The next entry was good on all accounts (+$5):

FTI: Looks like this was based on the same theme as DO, albeit the entry was much later, I think it was thru what I was calling support (+$72):

GG: (-$41):

LULU: Here you can see the DO and FTI concept a little clearer. The stop on the second entry on should have been just above the support, but the market was doing some crazy things and I felt better about being closer to the prior candle close. I think I was getting into analysis mode on this one (-$171):

PXD: A little early on the entry, but I felt the market justified the decision (-$94):

RL: Out on the 1/3 retrace. A little harder than expected - it is hard to know what a third of the candle is before it is finished (+$59):

UPL: After realizing how tight the range was, I attempted to move the stop down a tick or two below the support, wasn't fast enough; thinking about it now, that is not a good practice (-$37):

V: Direction in both of the first two entries, but the market was all over the place. The third entry was based on the price breaking thru new 'support' (-$298):

Practice plan - Step 2. The trading process; Part 3: Determine the required trigger behavior (Summary - revisited)

This is the re-visited version, I changed the exit strategy per yesterday's discussion. Helps to have my thoughts laid out and as simplified (yes/no) as possible. This defines my edge.

Determine the required trade triggers

The Finger

Entry: Is the available price close enough to the stop? Does the market support the expected direction?

Exit: Is the stock still moving in the expected direction?

• Have the candles changed size (from larger candles to smaller candles)?
• Has the candle closed on the opposite side of the 7-period EMA?
• Is this the largest candle of the day? Has it retraced more than a third of the way?

The Outbreak

Prior to Entry (alert setting): Does the stock show clear lines of support or resistance?

Entry: Is the entry price close enough to the stop? Does the market support the expected direction?

Exit: Is the stock still moving in the expected direction?

• Have the candles changed size (from larger candles to smaller candles)?
• Has the candle closed on the opposite side of the 7-period EMA?
• Is this the largest candle of the day? Has it retraced more than a third of the way?

End of Day Journal (6-22-2010) (and a review of the exit plan)

Summary:

Day 2 of practice.

Interesting day - after starting this morning, I realized the sim account was messed up so I had to re-set about an hour into the morning. Then I felt a nap coming on, so I took an early break.

This style of trading is different. Keeps me busy, and being busy seems to keep me focused. The alarm system worked fine today - unexpectedly the alarm triggers on every line on the chart (cross-hairs if active, EMAs, order lines - and alert lines), so received more alerts than I was counting on.

Overall, the rely on the intuition game is pretty easy and fast. It was something of a challenge staying away from trades that I normally would of entered. This will be good practice.

My exits left something to be desired. A lot to be desired - while taking profits I was out too early nearly every time. The one glaring exception being WHR where I got out too late (and despite losing half of the unrealized, it was still the most profitable trade of the day). In an effort to remedy this I think I need to setup an 'idealized' exit, my intuition doesn't have enough experience yet for those uncanny abstract exits.

Reviewing the early exits today it looks like the 7-period EMA (orange on my charts) may serve as a decent reference point (Fozz mentioned/noticed this today as well).

I think a couple of approaches might be called for here. On slow trending stocks, a cross and close over the 7-period EMA works great. On big momo stocks however, a retrace to the EMA can wipe out all the profits, so for the big momo stocks I will exit if it retraces more than a third of the candle. Big momo will be defined as biggest bar (thus far) of the day.

This won't keep me from leaving money on the table, but I think I can live with the consequences. Both criteria are readily verified visually. Again, the goal here is to get myself used to making an intuition based exit decision, for now I need something I can visually and quickly identify to keep that analysis bit out of my head. While I learn to trust my intuition, I will be gaining a better background for my intuition.

Hullabaloo and balderdash. This blog post is more about convincing myself every day than anyone else. But I like what is happening after day 2.

To recap:

I will exit a trade when the stock has stopped moving in the expected direction, or after a big move in the expected direction. This will be visually determined by:

1. A change in candle size, from larger candles to small candles
2. A close on the opposite side of the 7-period EMA
3. A retrace of 1/3 or more on the candle if it is the largest candle of the day 

Ok - now for the un-important stuff. I closed +$50 (w/o commissions, all on paper):

Far fewer trades, not that I didn't want to jump in several times, but I stuck to the plan. And as I mentioned earlier, I left a lot of money on the table today... I would of made bank following the exit rules above.

Feel free to comment/encourage/criticize.

Trade well.

Note: I am going to create a new exit and summary of strategy post with the re-vamped exit rules.

Details:

AVB: Go figure on that first exit... didn't give it any time. Set up again after the stop (+$14):

CRM (-$55):

DNDN (+$51):

DO: the oils shot up today, didn't have an alert set on any of them (-$142):

RIG (-$81):

UFS: out early (+$25):

V: out early on the big move - discretionary (-$86):

VNO: set up again - the close was a discretionary... (-$24):

WHR: out late (+$303):

XEC: Out early (+$45):