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.

End of Day Journal (9-29-10)

Summary:

Today was a rough day.

I was about 15 minutes late for trading because I took the time to work thru the complete mediation/visualization routine. By the end of lunch I think NT was registering 39 trades with one 1 profitable trade. At 3:00 I was burned out and decided to place trades with no stops. I was aggravated, ticked off, and just wanted to see what would happen.

It didn't go well. Heh.


So, when it came time to do a blog entry, I decided to take all the charts that were on my watch list, turn the actual trades off, and go thru them all and mark entries from an EOD perspective. Almost nothing worked out this morning and I wanted to figure out what I was doing wrong with my entries. I then enabled entry viewing and reviewed everything for the Detail section.

As it turns out, my entries were dead nuts on. In fact, I have several that were better than EOD analysis (at least until the 3:00 point, which don't count). My exits weren't that great, and there were a few stocks (ADTN for one) that could of gone either way on the entries. But there were several where my stops were just too tight (CRM) and after I missed the initial entry I lost direction.

What to do?

I am going to try and limit the tight stops to fast momo candle changes and let other stops come in like they usually do. I think I may have been too focused on a tight stop rather than letting the price action tell me where to place the stop.


And one more thing. I was discussing with Fozz - the new TI scan setup (new highs/lows sorted by count, 2 windows for all day, 2 windows for periodic clearing) is giving me all kinds of trading options. Sticking to pretty charts and big movers is the way to go. Focus on them, let everything else go. I have a tendency to do this already (e.g., no trades on AAPL, AZO, and JKS today), but I think I could do a better job (e.g., CLF).

In summary - I was ready to give this trading gig up at EOD today, but after reviewing it looks like there is still some hope. And I can see progress from a couple of weeks ago.

Feel free to review, comment, critique, or pat me on the back =)

Trade well.

Details:

AAPL

No trade. Ugly chart.

ADTN

I see two entries.

I kept going long, expecting a return to the great looking morning. EOD I see support being broken on the bottom side for the rest of the day.

What should of been the clue?

The first three longs are all on EMA support and indecision on the 5 minute. There could probably even be an argument made for the 4th attempt as well. When this one failed I went short.

For now, I am going to use the 15 to call the momo in the morning spent (wide bars getting narrow with a top side wick). Not sure if this analysis will hold:

AMGN

EOD: I am calling a short on the 10:20 (before I usually start trading), and then two longs. By the time I get to the first long however, the chart is loosing some of the pretty factor.

Real trades: the long was a mistake, and I turned it around right away. I got stopped on the 12:15 and went long. I got stopped again and went short. And got stopped again.

At this point I am at 4 trades and according to the EOD analysis, I should be at one. The 12:15 long was good - resistance was broken, but the price returned. I was looking for momo and had a tight stop.

Looking at the difference between the 12:15 and the real break thru at 12:30, the 12:30 has a better volume bar - and perhaps that should be the signal - breaking S/R with volume.

Not a pretty later morning and rest of day chart, but I think the first long was viable:

AZO

I was watching it all day but the spread was crazy and the chart was ugly:

BHI

Humdinger. I actually traded this one better than the EOD analysis. Go figure.

Well... except for that last entry. And early on the exit I was too.

Interestingly enough, the support areas are marked by decreasing volumes:

CLF

Not a nice chart at all. I actually traded the last long, but by then I was in the no stop mode and let it come all the way back:

COG

Nice chart, no clear exit signal. There was some big short volume on the 12:15, but nothing came of it. I traded the last long and got bit:

CREE

First long is on lower volume. Next long is holding it's own. Exit on the 15. I went long on the 12:55, seeing some indecision on the 15:

CRL

I don't see much volume distinction on the real versus the failed breakthrus:

CRM

My stop was too tight. The chart lost all attraction by 12...

DD

Not a very nice chart, no movement. I was short at 2:55 but got stopped:

DO

Missed the first breakout, but caught it as it broke to new highs again. Then it came crashing back down.

Not sure how to call this chart. Volume uptick on the breakout and it didn't look back - until the 12:15 (big bump in volume)?

FLS

Ok up until my entries:

FSLR

Ugly & no entries.

FTI

Not a nice chart until late in the day. Pay no attention to the 3:00 on trades:

JKS

Not a nice chart, no trades. I think it caught my attention on the 11:00 momo:

LXK

Very nice. But of course I didn't trade it till the last breakthru. The breakthrus are not distinguished with volume:

MON

Choppy morning, but then registered some smoother action. I am calling the failed breakout a short opportunity, but I would be hard pressed to make that entry:

OIH

Breakouts not marked by volume:

RIG

Hmmm. Mixed bag. I traded the last breakout:

SNDK

Nice looking chart that deteriorated  after the morning session. I traded the 1:55 support - declining volumes again. Breakout on higher volumes - which I also traded  - failed:

SUN

TEN

Traded the short and got stopped before the candle change:

TSL

Nothing makes this chart attractive until it moves. I don't think I would of spotted it in time. Didn't trade it, and can't recall when I listed it:

UPL

Again - ignore the after 3:00 trades. Tight stop took me out of the first long:

URBN

Exit on the even dollar. I know this right?

ZMH

Not enough movement: