mrtopstep's  Instablog

Is there any more hated rally than this one? Oh, I'm sure they are all hated because most tend to miss the boat, the biggest part of the move. It is when the crowd is giddy and they go 'all in' that the markets will ensure a correction is to be had. That is normally at the end of a run, sentiment is wildly bullish, call buying is rampant and the late-comers end up holding the bag. This time around? Maybe so, but there is a HUGE wall of worry up there. How do I know this? While there has not been much give back from the surge this month the support continues to pick up. Friday was a great indication - markets were down sharply yet breadth was good, volatility held in check and certain sectors were strong (banks, financials and tech).

As I wrote about last week the earnings picture has been mixed (as expected). Some great stories and guidance from the likes of IBM, Apple, Caterpillar, McDonalds and Stanley Black/Decker, while some disappointments from Google, Cliffs Natural, Riverbed and Potash. This coming week is the heaviest action yet, we should see some more good/bad/ugly before it's over. The recent GDP shows some steady growth but clearly we need to see more upside. But given the alternatives (Europe, S America), where else other than China are you going to find some growth?

There is no question the market character has changed from just a few months ago. I've mentioned previously about the imploding correlation. We have seen some market rotation these last several weeks - money flowing from one group to another. That can be bullish (if nobody believes it). In any event, the trend seems to be pointing higher but perhaps after a slight pause. There is a positive chart development - an impending 'golden cross' of the SPX 500. That can be a support level eyed closely by institutional investors (chart below). The VIX shows some complacency here so nothing would surprise me. With two days left in the month and some big economic data due this week (and Chinese markets back after a week off) expect some good shuffling.

Bob Lang
Mrtopstep.com LLC

www.mrtopstep.com

The Scene
Its the first trading day of the year and you roll out of bed more than a little groggy and wipe your eyes.  You search blindly for your glasses while knocking everything off your nightstand in an effort to grab your Iphone/Remote/Laptop to check the futures.  You are stunned to see the DOW Futures up +180, and turning up the volume on CNBC you're informed with unmasked glee that the next mega bull market has begun.

An utter feeling of dread begins in your stomach as your discipline from 2011 dictated you didn't hold directional exposure over the Holiday's.

You say a few choice words as your pulse quickens and you leap out of bed.  The  TV volume's turned up real loud now as you half brush your teeth trying to find out if there is global market moving news event or if something else is going on.  The commentators are calling it the January effect, the media guests are predicting a 1,000 point move before the "Sell in May and go away" event and the retailers are saying Santa was just "late" this year. The bears have been put into instant hibernation, and the US Premarket hasen't even begun.

No time for breakfast, you hit the door running, mind racing on what you should do.  The only thing you know for sure is that it's 2012, the Great Performance Race has just begun, and you're already behind the 8 ball.

The Trade
You throw your coat in the general direction of a chair, fire up your trading platform and buy every high beta stock that you can in the premarket. You take chunks of GOOG, AAPL, PCLN, ISRG, AMZN & NFLX with a long kicker of /ES (E-Mini S&P futures) for good measure.  Now sufficiently long the market, you finally take a breath, lean back in the chair and breathe.  You grab a cup of coffee and let out a sigh of relief.  It's ok, you're not going to miss out on the upside.  No harm, no foul - the market is still your mistress.

As always your heart races with the opening bell.  The pleasure is immeasurable as you watch your YTD P&L surge into the green on the very first day.  You're kicked back, already dreaming about having your best year ever.  It feels so good you never want to forget this day.  You take a little snippet of your chart and hang it on your trading wall. It will come in handy for bragging rights when you nailed the first move of the year from the beginning.

After the first hour you're still feeling good.  The commentators are still calling for new highs and you're feeling pretty confident as you've been taught to be long or buy the market that has not made a new low in the first hour.

Rules are rules....as you push the auto buy button +100 again and again.  You know it's irrational exuberance but who cares?  The market is going up, you are long it and all is good.  About time the market finally figured out who da man really was.  Three hours without breakfast and you are starving so you run down to the corner store to grab a snack....

The Outcome


The Postmortem
Where did this trade go wrong?  Why did this trader lose money on this huge trading day?

This trader forced his trades.  He traded when there was no real reason to trade.  He traded on gut feel without a clear cut signal of confirmation that the gap up would hold.  He traded without a defined stop and without a defined profit target.  He wound up being the gunslinger shot in the foot by his own gun.

Different people have different views of what constitutes a forced trade.  I know I am forcing a trade if it is not at my preferred entry point and it is making me crazy to sit and watch it. 

I know it is a forced trade if I let the price get away from me but I still buy it.

I know it is a forced trade if I feel the need to trade something, anything, on a big up day when I'm not as invested as I'd like to be but can't find anything that fits my normal criteria.

I know it is a forced trade if I consider adding to a losing position to be "less wrong".

I know it is a forced trade if I talk myself into a position just because I don't want to feel like I missed the move - which coincidentally almost always marks the top.

The Fix
The way I've overcome this scenario is to simply take a very, very small position on big gap open days. If price then pulls back or better yet hits my preferred entry, I analyze the chart and if it still looks good I add.  If it continues to run up without letting me in, I look to put very tight stops on 3/4 of my position at resistance.  With a retrace I would re-load the position again.  With a sustained uptrend/ breakout at former resistance I would add, and trade using the new average cost as my basis with hard stops right under the former resistance for the entire size of the "add" and a trailing stop on the original position.

Options/Futures/Stocks - they all trade the same.  If you always buy and sell in stages you don't feel as if you have missed the entire move, AND you won't feel like you are taking a big risk and chasing price if you are wrong.

Suz

@SuzyQ76022
Suzie@OptionMarketMentor.com
Info@MrTopStep.com

 

The first sentiment imparted to me as I struggled being an under-funded trader: "Your account size has not caught up to your trading ability".  That one sentence has carried me through the dark periods of my trading career.

We have all struggled.  Just when we think we've learned the lesson Mr. Market was intending to teach us, he sends his brother in to do it again and again and again until we finally realize there is a common denominator and fix the true problem.

Until I went to work for the Mentor team in December, I traded full time and worked full time all while being a single mom.  It was HARD, and I often missed moves, got stopped out at the worst possible point and several times thought I must just be crazy to work as hard as I was on this thing called trading only to have it chucked back in my face.  I gave the market my time, my energy, and my money almost to the point of obsession.   I'll tell you straight up that I was hooked on trading from the very first trade.  I knew this was the way I was going to alter my life course into a more positive direction.  Too bad my beginning trades didn't share the same feelings  

I was the girl who traded futures for a private Canadian investment team, provided charts and market calls to another fund, went to bed after watching the DAX open then up in the mornings to see the US premarket.  I worked a full time Accounting job in between and tried to be the best parent I could.  End result was I made a ton of money for others but my own trading seemed to crap out.  I thank the LORD for the quality traders who took me under their wing and taught me their methodology.

I love technical analysis - I pretty much view life from its placement in my bollinger bands - if we're in deviation bouncing along the bottom band, its time to take a long hard look at what the problem might be.  Things that throw you off life course - a sickness or death, divorce, layoff, no grocery money...these stresses suck the energy right out of you and cast a pall on positive changes to your financial future.

 I found a happy medium with credit spreads.  Way, way, way out of the money spreads, well under a major moving average or support - my question before I enter a credit spread is "does this stand a chance in hell of being hit"?  If the answer is no, and the premium is reasonable it gets an entry into my stable of stocks.  Once in my stable, I use them over and over and over again.  The best stocks for spreads are "channel stocks".  Just like the SPX traded in a 100 point range for months, stocks do that too.  AAPL is one I do every month & if we get good price movement I do them on the weeklies as well.

I spread my personal trades due to account size and typically don't hold naked puts because it eats up all of my buying power. You have to find your good combination of risk/reward.  I don't mind putting on a $5 spread because I will use a $1 stop so the risk/reward comes inline a little more.    I quickly learned to match risk profiles to trades.  Things appropriate for me are not appropriate for my managed accounts as those investors have a different tolerance than I do.  You are the only one who truly knows the point where investing becomes fearful.  Take the time to truly think about your goals and a max loss on each trade then stick to it.  If, in the end you feel worse about the loss then your loss needs to be adjusted upward.  I believe some say "sell it until you can sleep".

Bad streaks happen to us all.  2011 was brutal making a 3 year difficult trading period.  Hindsight is always 20/20.  Even the big houses didn't know which way the market was going to go from day to day, week to week.  There was and is a whole herd of pit and floor traders that don't know which way to go because there is no volume and the bigger players are not showing their hands.

I am a FIRM believer that you can master this job we call trading.  With the positions I use, I usually put them on and don't look at them again until the week of expiry.  While I've never blown out an account, I have had to restart several times thanks to a little thing called community property.  I call my current portfolio the "Ramen Noodle" portfolio as my boys and I lived very frugally for months and months in order to put up enough money to get trading restarted, with just a tiny bit over the minimal amount required to open. I have a healthy emotional attachment to my money and will never place myself into a situation that might mark the end of my ability to trade.  By using credit spreads while limiting directional options for the past year I have really started to see  growth in my account.

 When I released the ideal that I could control the market, and started looking at everything as "how much could I lose if I am wrong", I started having pretty reliable growth.  It might be a little growth, but little profits add up to big profits.  Warren Buffet coined the concept of "take care of your pennies and the dollars will follow".  My secretary once gave me a tin full of pennies because she was tired of them being on her desk.  I'll take that money all day long.  That's my concept of trading - just go after up the money that's been forgotten.  I don't mind taking your  seconds because you are eating my risk.

 Let's get you back on your feet.  First things first, we need to face the mirror, growl and make the ugliest face you can and do it until you laugh.  Turn on your favorite music and turn off the TV.  Let go of any negativity you have from past performance.

Try striking this pose!  Better yet do it in front of your spouse or even your dog.  The look on their face is bound to put a smile on yours.

Today is a new day, and today we are going to be successful by creating a stream of profitable trades one at a time.  Pick one stock/index/etf, determine a logical entry/exit strategy and then put it out there for others to comment on.  I value the MrTopStep IM Chat and the OptionMarketMentor forums as there are always veteran traders ready willing and able to help off track or fledgling traders refine their strategies.

Picked your stock and comfortable with your strategy?  Then you can trade it but there is a catch.  You can only trade 1 contract if it is a directional option or 3 credit spreads.  While we are rebuilding your self esteem and portfolio you have to trade small.  After the first few good trades (and even some little losers), we will step it up and trade 2 contracts.  Then 5, and by the end of this process you will have strung together a winning performance one trade at a time.  That's how my mentor fixed me.

Above all else, remember that trading does not define you as a person.  Please continue to reach out as trading can be a very solitary endeavor and you get all balled up inside….been there, done that.  Reach out for help.

Suz
@suzyq76022
Suzie@OptionMarketMentor.com
Info@MrTopStep.com