Thursday, August 30, 2007

Trade the Chart and Not the Dollars

Currently Reading an article written by the Market Wizard Linda Bradford Raschke

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I started reading an article that caught my eye when I went to visit Linda Bradford Raschke's (LBR) website.
One thing that I didn't know was that LBR has been in the trading business for 23 years.
Anyways, the article talks about the 3R's to a Positive Mental Approach to trading. But the 3R's were not the interesting part of the article. To me, what I found interesting was the beginning part of the article where she talks in detail about how to develop the positive attitude.

The first step is to know thyself, know thy style. Then focus on the process. She mentions that focusing on the process actually involves a degree of trust. This is similar to what the HET is saying in Habit6 - Confidence.
Some days, I forget about the HET. I must make it a habit to let the HET coach me and guide me to becoming more effective as a trader.

The next revelation was when LBR gave examples of negative self-talk. Her example was "I have to make X dollars per month." Her implied suggestion was to replace such negative self-talk to something more positive, like "I can make X dollars per month." The rationale is that the first sentence creates stress from demanding performance, whereas the second sentence focuses on HET's Habit #6 - trusting in your own ability to perform. Her next suggestion was to change your physical state to help refocus your mental state. This probably explains why many traders get up and go for a walk every so often. This simple exercise really does help to refocus your mental attitude. And sometimes, having that renewed focus provides the catalyst for a turnaround and create some positive momentum.

For myself, I have been creating undue stress recently, because I have imposed some dollar goals for myself. This has distracted me away from what is actually more important - to focus on the setups, and improve on spotting my setups in real-time. I used to have a "View Account" button on IB's bookTrader, but decided to remove it, as it became too distracting to look at my PnL every other second. I believe Zoomie is echoing a similar line of thinking when he says to trade the chart, and not the dollars. Trading the chart to me, is more associated to the win rate, the edge that you have. Trading the dollars, in my opinion, is more associated with position sizing. And in my opinion, win rate is more important than position sizing. Because in the end, if you don't have an edge, money management skills only means you bleed a slow death. You must have an edge, and exploit that edge to the fullest, and your win rate will confirm whether or not you have an edge. Yes, yes, you can still have positive expectancy without having an edge (ie. +50% win rate or better), but that implies that you are swinging for the fences in some of your trades, which also implies higher risk of a losing streak. That is not my style of trading, I much prefer having a high win rate, period.

Going forward, I must focus on my trading process. It is as follows:

Practice spotting my setups in real time. Practice letting go of some good trades and being at peace with it - I don't have to take every trade that comes along.

Focus on win rate first, as a win, no matter how small, adds to the foundation of confidence from which my motivation, desire for improvement, and hunger will be derived.
Once I have the win rate at a level to my satisfaction, then I can move to the next stage of my trading, which is to focus on improving the ratio of average win size to average loss size. This means working on not only to improve the size of each win, but also to reduce further the size of each loss.
Once I have the avg(WinSize)/avg(LossSize) ratio maximized, then I can work on expectancy by refining my position sizing.

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Plan for Pre-Weekend Friday, Aug. 31, 2007


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ES Resistance at 1468-1472, 1480-1484
ES support @ 1433-1436

Open gap @1438
Open gap @1483.5

We had a trend day down on Tuesday, and almost a mirror image of that on Wednesday, so the bulls made their statement right after the bears.
Ok, so tomorrow will be a very light volume day, as most traders will likely take off for the long weekend.
The most volume will occur in the first two hours of trading. I can't see any breaks of the support zone, and a break above the resistance zone might be possible, although with the 50d EMA still trending down, it is also an unlikely scenario. There might be some support @1444-1447, but we might not get a chance to find that out, since the futures are trending up in the overnight session.

Probably tomorrow we might see a range bound day, and if that is the case, I will look for mean reversion plays.

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Trading Results for Thursday

made -5.5 pts yesterday.
made +6.25 pts today.

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Today's most interesting trade was where I played the double top. It looks like an obvious double top in hindsight, but in real-time, I was sweating it out, and wondering if I made the right decision. I kept nervously watching out for any signs that it would reverse on me - we just had a significant 10pt run-up, and I had no clue about the news about the terrorist alert at the UN building.
But it wasn't just because of the double top formation that led me to short. I also observed that Monday's lows were around 1470-1473 area, so I inferred that the prior support in the 1470-73 zone should now be resistance. The more technical reasons and indicators that you have lining up in your favour, the better.
The other post-mortem on this trade was that I took profits @1465, but at that point, I only needed to risk about 1.25pts of profit in order to achieve my profit target of 1460. The retrace that I had anticipated did not show up at all - which is unusual in itself, this 12pt drop had no retrace at all !! Just a reminder to myself to measure and evaluate the risk-reward of the trade at all times, it will help to extract more profits and less loss from a trade.

Yesterday was discouraging because I succumbed to overtrading again, once I saw that I missed out on the run-up. I was so disgusted that I did not bother making a post to this trading journal. I hate it when I do that, and I continue to search for ways to stop myself from overtrading. Monroe Trout remarked once that he was never able to get rid of his anger whenever he lost big on a trade. But I've also read in another trading book that you can turn the tendency to overtrade into a positive. How would I do that? I will have to find that trading book again to re-read what it had to say.

Today I was much better, since I usually don't overtrade 2 days in a row. Maybe it was because of the full moon yesterday, I don't really know why sometimes I just overtrade, and sometimes I just don't.
The one thing I observed about myself today was that I didn't get down on myself when I incurred the small losses in the morning. Making it back with that one big trade certainly helped to put me in a better state of mind, and the rest of the afternoon, I was picking off 2 or 3 tick low risk scalps.

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Tuesday, August 28, 2007

Plan for Wednesday, Aug. 29, 2007


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ES Resistance at 1456-1460, 1480-1484
ES support @1433-1436, 1420-1425

Open gap @1469
Open gap @1483.5

Sellers could not break the support @1436, so I will look to buy tomorrow at support. Overnight session is starting to trend back up, so tomorrow's session will kind of depend upon how big the opening gap will be. I don't think we will close at 1460 tomorrow, so I will look for signs of a reversal.

The onus is on the bulls to prevent another rout. The sellers showed up in the past two days, drew the line in the sand and made their statement. Now it is time to see what kind of statement the bulls will make. How far up from 1436 we wind up will tell us a lot about the conviction of the buyers.

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Another Turnaround Tuesday


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Characteristics of today's trend:

- The biggest pullback was about 5.5pts, making this trend very catch-able.
- Previous day was a gap down reversal of Friday's attempted breakout, resulting in a IDNR7 day yesterday.
- There were 2 low risk entries: the first was in the first 30min. of trading, and the 2nd opp. was just after 11a, when price put in a double top after spending 2 hours in a 4pt range bound consolidation. The double top at 11a was especially interesting as the market was actually attempting to reverse the morning's drop, but failed decisively as volume spiked up on the break below 1453.
- The best part of the trend occurred after 11a.
- The market dropped 13pts in the first 2 hours, then spent the next 2 hrs retracing 38.2% of that drop, double topped and dropped for the rest of the session.
- Trendlines were broken only during the midday 4pt consolidation.

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Trading Results for Turnaround Tuesday

Made +3.5 pts. today

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In Trade1, the 9bar EMA was acting as resistance, so I shorted when it was unable to break the 9EMA for third time.

In Trade2, I was playing the breakdown of support @1456.

The good news today was that my homework was solid. ES filled the open gap @1450.25 (left from last week) and then promptly bounced up. The last hour drop stopped right around 1435, which I had yesterday (and last week) identified as a support level.

The bad news was that I was unable to take advantage of the homework that I had done. The main problem that I see here is that I am trading two different styles. Today I was thinking "scalp" when I should have been looking at and planning for a big move, esp. given that we had an IDNR7 day yesterday. IDNR7 days don't happen very often at all, and are often the precursor to range expansion, so I should not have been surprised at today's range expansion.

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Monday, August 27, 2007

Plan for Turnaround Tuesday, Aug 28/07

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ES Resistance at 1471-1474, 1480-1484
ES support @1433-1436, 1456-1460

Open gap @1450.25
Open gap @1483.5

NR7 day

ES failed to fill the gap down from the open. Once it could not break above resistance @1480-ish, it proceeded to break down, starting from 1474. That breakdown in the last 20min. of trading was ominous, as it also broke the 1-week uptrend. My plan is to short the retrace of that breakdown.

It's not clear how much support is at 1466, but we should find that out in the next 1 or 2 sessions.

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Trading Results for Monday, Aug 27/07

Much ado about nothing - lost 1.0pts.

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The theme today was to play the reversal since I had missed out on the gap down and subsequent 9pt drop.
However, the reversal was not smooth, and at many points, it seemed the reversal was about to stall out and drop back down to the LoD's.
In today's low volume trading, what I saw a lot of was how ES would just hover within a 1pt range until some buyer/seller came out of nowhere to push it into the next trading range. It was hard to gauge direction of the push until these buyers/sellers showed up, and by then I was either stopped out, or exited altogether.

I think in order to capture the general direction of the trend, wider stops should be employed. However, since I started off my first trade with a loss, I got a bit overly risk averse, and did not have the will power to give a couple of my trades enough time to work itself out.

Since I think we are going to see this low volume environment for the rest of the week, I will need to adjust my strategy accordingly.

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Friday, August 24, 2007

Another Trend Following Friday


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Probably what enabled this trend day to occur was the fact that there were plenty of sellers to fuel short covering rallies when price broke above various resistance levels.

Notable characteristics of this trend:
- Previous two days were range bound days, ranging between 1456 and 1482.
- The time window of entry without suffering through any retracements in your position was in the first 15minutes of trading. After that, you would have to suffer through retracements of up to 7points if you were long.
- There were 2 low risk entries: the first was in the first 15min. of trading, and the 2nd opp. was just after 915a, when price broke above an ascending triangle pattern.
- The best part of the trend occurred after 1130a.
- There were no noticeable gaps to open the session. The market dropped 4pts in the first 10min of the session, then rallied 8pts to 1472. The break above this opening range confirmed the trend day.
- Trendlines were crossed, but the down moves were never sustained. At certain points (like the 7am reversal), sellers looked like they were going to gain control, but buyers came out of nowhere to perserve the trend.
- If you had bought the open, and sold at the close, you would have made 18pts.

There were two economic reports (Durable Goods @530a, Housing Sales @7a) which may or may not have played a role in today's trend day.

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Trading Results for Friday

lost 5pts today

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Trade2: short 1476.0, lost 2pts
Trade3: short 1477.75, lost 2pts

Yellow arrow highlights a trade that I was not able to spot in time. I was away from my desk, and it happened right around the time I got back to my desk.

Trade1 was a play of reversal in the mid-1470's as I had described yesterday. The setup was good, but because of the low volume, it took a real long time to play out. I lost patience, and sold too soon. Price dropped pretty much to my target soon after I had sold.

Trade2 was a play of the reversal at the 1478-1480 resistance area. The setup was not that great. Technically, my indicators gave me the signal (MACD turned -ve, TTM Trend changed colour, price dropped below MA's), but had I been alert enough, I would have known that 1473.50-1476 was actually a resistance turned support zone that ES had fought through in the previous hour. The lower risk play would have been to wait for price to break below 1473 before shorting. The reversal was met with a sudden surge of buyers from out of nowhere, and before I knew it I was stopped out.

Trade3 was an impulse trade (probably also still mad at losing the previous two trades), the setup was poor and I should not have taken it.

I think the biggest mistake of all today was not that I took the last two trades, but that I lost patience with my first trade. Trend was intact, and there was no reason to sell despite the brief price spike up to 1470. Had I been patient enough with the first trade, I probably wouldn't even have taken any more trades for the remainder of the day, since I had the one win under my belt, and would not have felt the urge to recover my loss, and would also have been in a better frame of mind.

I was disciplined for 90% of the session, it was the last 10% of the session that killed me.
I still haven't learned Dan Fitzpatrick's lesson. Now I have the whole weekend to ponder today's disappointing performance.

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"I Want to be Like Mike" is soooo Last Decade


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I want to be like Yukiko

The only problem is that I haven't found any kimonos that fit me.

Watching the charts all the time can get a little monotonous, so I want to watch Spider-Man.

I also want a talking clock that uses Angelina Jolie's sexy voice. (Thanks goes to Market Monk of Wallstreak for the link).

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Thursday, August 23, 2007

Plan for Trend Following Friday, August 24, 2007


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ES Resistance at 1479-1484
ES support @1433-1436, 1456-1460

Open gap @1450.5

ES got rejected at resistance just as expected, and I tried to catch that. But ES also bounced off the 1456-1460 support area that I had previously described. I even identified it in real-time. So why did I not take action? I don't know, it could be that I just had a brain freeze, and/or was overly risk-averse.

Anyways, here's something interesting that I noticed on the hourly chart of ES:

After a week of disorganized movement in the overnight market, yesterday's overnight market was unusually organized, organized enough to display a nice looking rounded top.
The 1456-1460 zone is quickly becoming a key "make it or break it" area. The bulls worked hard all week to break above that price level. If we break below that zone, and stay below that for any significant amount of time, we will likely see a few more days of downside.
I think we will see another test of the 1456-1460 support zone tomorrow. I'm not sure how far up it will climb before the drop back down, so I will be looking for a reversal somewhere between 1470 and 1480 and hopefully have enough courage to ride it down to the support level.

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Trading Results for Thursday

made +1.50pts today.

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Trade1: short 1475.75, 1pt. loss

Trade1 was a pre-market play of the gap fill that I had described yesterday. ES filled the gap according to my expectations. Unfortunately, I traded with bigger size in my first trade, and was unprepared to take the heat of a 1.5point retrace. I was so sure of the gap being filled that I put on large size which made me lose my objectivity. I got scared out of my position.

After losing that point in the pre-market session, I scalped my way back to breakeven with some uninteresting 2-tick and 3-tick plays with a single contract.

The yellow arrows highlight setups for trades that I was not able to spot in time.
The orange arrow highlights the setup for a trade that I did spot in real-time, but at that moment the phone rang, and that caused me to hesitate long enough for the window of opportunity to pass.

Trade2 was a play of reversal at the mini-intraday resistance @1467. That subsequent drop down to 1460 came out of nowhere. The only warning was highlighted by the third yellow candle. The window of opportunity lasted only a few seconds, and by the time I said, "Whoosh!", ES whooshed down 3pts.

I'm not sure if the additional size that I put on my trades today made me more risk averse than before, but I certainly did not feel as aggressive as previous sessions. This is good in the sense that I don't force things, but bad in the sense that it causes me to miss out on good setups. It could be just me, or it could be that today's low volume session was uninspiring to make any trades.
One thing that I did notice with today's session was that the price action spiked more than before. The price spikes were unusual, and it never retraced those price spikes far enough to put on a trade in the direction of the trend.

Things I did right today:
- sat on my rump roast, and did not force any trades, even after I missed out on my setups.
- waited. And waited. And then waited some more.

Room for Improvement:
- mentally prepare myself before trading bigger size.

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Wednesday, August 22, 2007

Plan for Thursday, Aug. 23, 2007

"Don't get overly excited about winning trades, and don't get overly despondent about losing trades."
- Tom Bierovic

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ES Resistance at 1479-1484
ES support @1433-1436, 1456-1460

Open gap @1450.5

Yesterday's NR5 day resulted in a gap up today which never filled. That is a bullish sign.
Today's action is technically considered an FTD to last thursday's rally out of the hole. Of course, volume in SPY today was just barely above yesterday's volume, so the FTD was not that convincing. But the ascending triangle was resolved to the upside, and as AlphaTrends has noted, price is what pays.

So, the past 4 days have shown some constructive price action led by the buyers. There has been some quiet accumulation by the bulls in the last hour of the past 4 sessions. I'm surprised that the sellers have not challenged any of this current run-up.
ES is up +10 in the overnight session (thanks to CFC's announcement of a liquidity injection by BAC), so I will be looking to play the attempt to fill the likely gap up for tomorrow's session. Oh yeah, and the other goal is to avoid any impulse trades.

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Trading Results for FTD Wednesday

made +3.5 pts. today.

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Trade3: Long ES@1461.75, initial stop=1459, target=1464
exited @1460.25, risk=2.75, loss=1.50

Trade4: long ES@1461.25, initial stop=1460.25, lost 1.0pt.

Trade5: long ES@1461, initial stop=1459, target=1464.
exited @1465.75, risk=2pts, profit=4.75pts

The orange arrow highlights a trade that I spotted in real-time, but did not take. I got a +ve TICK extreme, but the price was in a downtrend at the time, so the play was to fade the TICK extreme, esp. since it couldn't even tag the upper line of the Keltner Channel. It would have been good for +1.25pt. profit.

Trade1 was a play of the trend continuation. Pullback stopped right at the VWAP (which was just below the 23.6% Fib RT of the overnite run-up that peaked @1467 about 5min. into the session), so I went long expecting a re-test of 1466. I was correct in the decision to make the trade, but managed the trade poorly, as I moved my stop too much and too soon.

Trade2 was bit of a mistake. I saw that ES broke out around 1039a, and wanted to catch that move. But I entered after the breakout (mistake #1), and entered too close to a possible resistance level (VWAP) (mistake #2). I was fortunate this time that the mistake did not cost me. Exited once I realized the mistake that I made.

Trade3 was an attempt to play what I call the "First Thrust-Pullback" off the reversal @1456. I entered a bit too early and wasn't prepared to use a wide stop, so I exited for the loss.

Trade4 I wasn't sure what I was doing, probably trying to time the end of the pullback I think. That is probably considered another mistake.

At this point, I got a little flustered. I took a look at the time and thought there was still time for a big move to happen. I had manually drawn some trendlines (which were accidentally erased from the above volume chart), and could see that ES was still in a volatility squeeze. I decided to put an alert onto XLF. The rationale was that a true breakout in ES would require participation by the financial sector. The alert was for a break above 34.37 in XLF. Once that alert went off, I went long ES @1461. It ran up to 1466 before stalling. ES would go on to eventually climb another 3pts, but not before retracing over 2pts. I wasn't interested in holding thru a retrace, and I knew it, so I exited @1465.75.

Today's performance was encouraging. Things that I did right:
- set an alert on XLF. I think I will do more of that, not just for XLF, but for all of the indicies. I think I will even add this to my list of trade setups.
- waited patiently for my setups to setup.
- remained focus by talking to myself. Using Google docs, I've written down a list of the setups that I am looking for, kept it handy in one of my browser tabs, and periodically reviewed this list of setups just to re-orient myself.
- I started and ended the session on a winning note. Yes, I realize expectancy is supposed to be more important, but I cannot emphasize enough how those wins were very important for my psyche. Only when my confidence is restored can I shift my focus away from win rate, and towards expectancy.

Room for improvement:
- improve my discipline. I kind of lost focus and that led to my mistake with Trade4.
- remain objective. I'd like to say that I practiced letting some of my trade setups pass by without taking a trade. But unfortunately, that was not the case in trade2, where I saw my setup occur, and missed out on it, so I lost my objectivity which led to the mistake.

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Tuesday, August 21, 2007

Plan for Wednesday, Aug. 22, 2007


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ES Resistance at 1456-1460
ES support @1433-1436

Yesterday's IDNR4 day resulted in an NR5 day today.

SPY is carving out an interesting looking ascending triangle pattern. Under normal conditions, and in an uptrend, this is considered bullish. But SPY is not in an uptrend, and the past week cannot be considered normal market conditions.
The decrease in volatility in SPY, and consequently, ES, indicates that it is setting up for a big move, as range expansion tends to follow range contraction.

However, I have no clue in which direction the breakout will occur. I still have some doubts about a break to the upside, but will plan for it regardless.
If there is a breakout to the upside, it has to prove itself, so I will let the initial breakout go by and try to enter on a pullback that retraces 38.2% or less. Basically, my plan is to catch leg2 of the move.

If there is a breakout to the downside, it will break below today's low (during RTH) at 1443. But the plan will be the same - catch leg2 of the move.

Either way, monitoring the opening range and any opening gaps will help to determine whether a breakout will occur or not, and the direction of the breakout.

In the meantime, I will continue to look for 2pt scalps tomorrow according to my setups, and be alert to any urge to make impulse trades.

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Trading Results for Tuesday

made 5.25 pts today.

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Trade1 was a play of the 7am reversal (with confirmation)
Trade2 was a play of the breakout attempt
Trade3 was a play of the ascending triangle. Initial target was where the previous breakout attempt failed @1452. When I saw that price action was bullish the second time around, I stayed in the trade longer.
Trade4 was a play of the last hour reversal.

The disappointing part about today was that I also made 4 impulse trades just after 11am, losing 5.25pts in the process. I think what happened was that I saw the the reversal @1030a occur, but missed out on it, so I decided to enter a trade in without properly assessing the risk. I also think I got away from trading the chart, and relied on looking at the tape too much.

Not sure why that continues to happen, so I will need to think about how I will address this problem. I do feel that I am able to follow the rules that I set for myself (like my rule about no trading during lunch hour dead zone), so I will set a new temporary rule until I can figure out how to trade well in the afternoon session.
The additional rule is to trade only after 1130am (PST). So that means the no trading time has been extended from 9am to 1130am.

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Monday, August 20, 2007

Plan for Tuesday, Aug.21, 2007


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ES resistance @1455-1460
ES support @1435-1440

ES printed an IDNR4 day today.

An IDNR4 day is the pre-requisite price pattern for Toby Crabel's ORB play. Also, the remainder of this week is the time window in which an FTD can occur.

So, some of the ingredients are in place for a breakout to the upside to occur. Personally, I have my own doubts about a breakout above 1460, since we are still in a downtrend, and today was the 5th consecutive day that SPX closed below the 200d SMA, which corresponds to about 1459 in ES. But I'm sure many other traders are thinking the same thing, right? And shorts covering is often what kicks off a rally.

I've never played an OR breakout before, so the plan is to watch tomorrow's OR, since I am curious to know what happens after an IDNR4 day. I personally define the OR as the overnight range plus the first 30-45 min. of the session.

In the meantime, I think I will stick to scalping for 2pts off my setups until I see this range contraction resolve itself.

- Remember to trade off the charts, avoid using IB's bookTrader for now.
- patience, patience, patience, and a little bit of discipline doesn't hurt either. It's never a bad thing to pass on a trade setup just to see how it will behave.
- keep on practicing the good habits that I've developed last week: reduce and remove, wait for my setups to setup, and don't overstay my welcome.

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Trading Results for Monday

2 Steps forward, one step back.
Lost 2.75pts today.

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Red arrows highlight the planned trades that I made today.
Today was pretty choppy as indicated by the numerous occasions that ES alternated between green and red bars. That should have been my warning to adjust accordingly (eg. either use wider stops, or be more vigilant with timing my entries), but I failed to do so.

Trade1: short @1450.75, stop@1452.75, exit@1449.25, profit=1.50pts
Trade2: short @1446, stop@1447, exit@1447, profit= -1pt.

Trade1 was a play of the reversal of the premarket run-up: I was looking to short @1458-1460, but the reversal occurred before that resistance level. TTM Trend changed colour and MACD crosses zero within 2 bars of each other. The retrace did not even violate the MA's, which increased the probability of the setup.

Trade2 was a play of reversal at the 1446 resistance level. In retrospect, I jumped the gun on this short, and should have waited for confirmation of a reversal.

Then I tried to chase the uptrend with 4 unplanned trades, but the pullbacks stopped me out. That was the biggest mistake that I made today.

I've observed that if I have already made a couple of losing trades, and don't time my entry well enough on the next trade, and then the position goes against me, then I get discouraged, and lose my focus and judgement.

The most important thing at this stage is to guard against losing my focus.
I think for me, staying focused is more important than missing out on a trading opportunity. I don't think I framed my mindset in that way before, so that is what I will need to work on going forward.

Boredom is also a significant, yet subtle obstacle to staying focused. Now that I think about it, I think the boredom trades that I've taken in the past have caused me to lose focus as well. So for sure, staying alert and focused will become one of my trading process goals.

In today's session, ES took 2 hours to grind out the double bottom, but less than 1hr to run-up 20pts. To guard against the many opportunities to get sucked into boredom trades during the dead zone (9am - 1030am PST), I will set a price level alert before I stop trading during the dead zone. I never really got into the (good) habit of setting alerts, so that will have to change going forward.

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Sunday, August 19, 2007

Plan for Monday, Aug.20, 2007

"Strong discipline 90% of the time is not enough because that last 10% of impulse trading will kill you."
- Dan Fitzpatrick

"Do what it takes to sit and wait until the low hanging fruit appears"
- Alan Farley

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ES Resistance is at 1458-1462
First level ES support is at 1442-1446, next one is 1427-1434, and the last one is the gap fill support @1420-1424.

It would seem to me that we have two opposing scenarios that could develop.
On the one hand, we have not had a meaningful test of Thursday's rally. A 50% retrace of the run up from 1376 to 1460 in ES would be around the 1418 level. So, any sustained move below the 1415-1420 zone in ES would pretty much mean a test of the 1380 level is in the cards. It only becomes a question of whether we get that test in one session, or will it span out over 2 or 3 sessions.

On the other hand, SPX is still in oversold condition even though the 2 days of rallying has alleviated that a little. The dead cat bounced for 3 days last time, so there's no reason why it can't bounce 3 days again this time as well. If that scenario plays out, a break above Friday's HoD @1460 would set the stage for a run-up to the resistance @ the 1478 - 1480 area.

With Monday being an Options hangover day, I am leaning towards shorting at 1458-1460, since that corresponds the (approximate) location of the 200d SMA on SPX. But shorting there could get tricky since we could see day3 of the dead cat bounce. So I would need to see a confirmed reversal and clear breakdown before going short - there's no sense and a lot of risk in being the early bird.

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Friday, August 17, 2007

Results for Friday, Aug 17,2007

On the rebound.
Made +5pts.

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What I did right:

- did not overstay my welcome. Most trades were held for less than 3minutes max. I was basically exploiting inefficiencies in the market, and as soon as the surge of buying/selling stopped, I was out.

- In most of my trades, I reduced and removed, and did not give a chance for the market to prove me wrong.

- market conditions changed, so my plan changed. I drew up a new plan and stuck to the plan. Waited for confirmed trend or break of trend before entering. Did not trade during the lunch hour.

- waited for my setups to ..... to setup.

Trade1 was a play of the breakdown of support @1442.50
Trade2 was a play of the first thrust-pullback pattern off the gap-fill bottom @1426
Trade3 and Trade4was a 61.8% Fib RT play
Trade5 was a play of the break above resistance @1438
Trade6 was a play of the bounce off my manually drawn trendline.
Trade7 was a trend continuation play off the 76.4% Fib RT
Trade8 was a play of the break above double top resistance @1449.

- was patient. This meant letting some additional setups that I saw come and pass without taking a trade. I don't have to trade every signal that I get.

- kept persisting in drawing my manual trendlines. Those helped me a lot with my trading.

Obviously there are a gazillion google of things that I can improve upon, such as letting my winners run just a little bit longer, or trade in the direction of the ADX trend. But it's good a good start to get some wins under the belt, and boost the confidence level a bit.

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New Plan for Freaky Friday, Aug 17, 2007

Helicopter Ben and the PPT to the rescue ...... again.

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Ok, forget about anything that I said yesterday.
Nothing I said yesterday will apply to today's market action.

I'm not sure how to deal with monster gap ups created by the PPT. ES gapped up above 5 key resistance levels as soon as Helicopter Ben laid the smackdown on the markets with the 50basis point drop of the Fed Funds rate. Premarket has fortunately settled down a bit more, and is now "only" +28pts above yesterday's close (as I type). Premarket range was from 1400 up to 1470, for a nice +70pt range. I wonder what Dr. Brett has to say about that.

But I know it will be volatile today, on the way and up and down. The best plan is to keep things simple. I will put on my scalping hat.

2pt targets, 2pt stops. I learned this from MNT. Wait for a trend to clearly establish itself, and enter off the 23.6% Fib RT. Or, if I am alert enough, wait for a break of trend, or a reversal off a confirmed double bottom/double top. This will probably mean letting the first run go just to get a feel for things. Hopefully the first run is not the best run for the day.

I attempt to post my trades live on Wallstreak.

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Thursday, August 16, 2007

Plan for the dead cat Friday, Aug 17, 2007

The dead cat showed up today.

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No more chasing, I will sit through the whole day without trading if necessary if my setups are not there.

Based purely on what happened on Aug 1/07 (the same patterns repeat, even though there are different reasons each time), here's what I think ***might*** happen for tomorrow.

The 40pt monster that we had in the last hour of today's session will be tested. So we will open with with some spillover buying from today, run-up to some resistance level, reverse and start heading back down to test today's rally. Then we chop 'n slosh (if you can call 20pt swings "chopping around"), and somehow wind up +ve for the day.

So that was the entertaining part. Now the hard part is to figure out how I'm going to play tomorrow.
I'm going to keep it simple, real blood simple. I think the 40pt rally that we saw in the last hr of today will get tested. So my only play for the morning is to go short after the market breaks the buying that will occur to open tomorrow's session and heads down to re-test the rally. Of course, if we get a huge gap up to open tomorrow that doesn't fill, then all bets are off.
Resistance at 1430-1435, and 1442-1446.

Since I think the market will wind up +ve for the day, then I will look to go long sometime in the afternoon.
Support at 1405-1415. There's a bit of a no man's land between 1430 and 1410, where it's not clear who has control, the bulls or the bears. Probably by lunch hour we should have a better idea of where the market wants to go. In any case, I will only enter long after a shallow pullback (ie. 38.6% retrace or less) off a confirmed bottom (like a double bottom) and break of down trend.

Patience will be the key, and I will need all the patience I have within me to follow the plan.

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What is the Plunge Protection Team?

The Plunge Protection Team is supposed to be just a myth, an urban legend, right?

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On Aug. 1/07, the markets broke below support, was getting ready to crack, and plunge to the downside. But then something funny happened in the last hour of trading:

Fast forward to today. Again, the markets were getting ready to crack, and test the lows of the day. But again, something funny happened in the last hour:

What do the two pictures above have in common? The following 4 curious characteristics:

1. There was a huge, monster rally that occurred in the last hour of trading. 28pts in the first one, and 40pts in the second one.

2. The rally was preceded by wide ranging bi-directional swings marked with numerous pullbacks and reversals.

3. Throw that Fibonacci out the window (along with the rest of your technical indicators), as the last hour rally had absolutely no retrace (for most of the hour too), as confirmed by the smoothness of the 20bar MA.

4. Prior to the rally, there was no consensus between the bulls and the bears.

So, after duking it out with the bulls for most of the session, and gaining the upper hand, the bears suddenly and more importantly, in complete unison, decide to capitulate? And yet, on two separate occasions, this has happened. How strange....

If I didn't know any better, I would guess that the bears were interfered with today..... but the PPT is ****supposed**** to be an urban legend, so it is what it is.

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Trading Results for Thursday

Lost my discipline today....

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I lost 5 pts. today.

Today, I was doing fine in the morning, and stuck to my plan. I was up +4pts. in the morning. I didn't trade during the lunch hour, but I was watching the markets closely, probably too closely. In the afternoon, I got away from the plan, and started to chase the rally, and lost 9pts in the process.

Under normal market conditions, ES puts in 2, maybe 3 10pt swings in the whole session. But today was different, here is how swings of the day in ES went:

+11, -20, +15, -30, +30, -27, +40, ending up around +20 for the session.
It was a wild and crazy day, but that was not justification for the way I performed.

I started writing up the trading plan for each day in order to find out when, how and why I am not disciplined. I started becoming too emotional just from watching the market swing for 20pts at a time, so that by the time the afternoon rally appeared, I just started chasing.

There is no excuse for being up +4pts losing it all. It is not enough for me to say I will not trade during the lunch hour. From now on, if I am up at least +4pts before the lunch hour, I will have to force myself to actually shut the computer down and not even look at the markets for at least the whole lunch hour, so that I will be calm, cool and collected for the afternoon session.

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Wednesday, August 15, 2007

SnP500 Analysis, August 15, 2007

"Money flow is based on sentiment of humans and always follows the same patterns on a macro scale. I assume that the reasons are different each cycle - but the actions are always the same."
- Andy Jaskey

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I took a look at the 10yr chart of SPX. Here are my thoughts on it:

The other interesting thing that I read is how this current market plunge is compared to the panic during the summer of 1998.
(courtesy of Motley Fool Board member Andy Jaskey.)

The correction of 1998 took 12 weeks to play out completely (bottom and retest of bottom). If that same script plays out again this time around, we should see one to two more weeks of pain and a couple weeks of recovery before the retest. And if the script of 1998 truly plays out this time around, we will also see a plunge down to 1244 (20% correction, just like in 1998).
If we just visit the 1240-ish level and bounce back up from there, then there is no bear market, and the 4yr uptrend (as outlined in my 10yr chart above) is intact. However, the longer we linger around below 1250, the more precarious this bull market becomes, and the uptrend will be in serious jeopardy.

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Plan for Thursday, August 16, 2007


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The BPSPX is at levels not seen since March 2003, when the markets finally recovered from the bear market of 2000-2002.
VIX is at 3yr highs, but not 5yr highs. Likewise for the $SPXA200.
Another measure of volatility, the ATR, is currently at 26.75pts for the SPX (34.65 pts for ES). The scary thing is that the ATR is on an 1month uptrend, so this looks like it might get worse before it gets better.
The charts of APPL, GS, GOOG, BIDU, CROX are all busted up. Even RIMM looks like it wants to fill that monster gap. The only bright spot was IBM, which managed a late day recovery.

Otherwise it would seem that the market is acting like a bear market. S&P500 (cash index) would have to close below 1400 for this to become officially labelled a correction, and a close below 1244 would officially put us in bear market territory.

We remain in oversold conditions, so the dead cat should make an appearance soon, although I have no clue which day that will be. We will probably know that the dead cat is here when the "sell-the-rallies" theme no longer works (for the day).

For ES, resistance zone is at 1430-1435, and 1442-1446. 1427-1428 would be a 50% retrace of today's afternoon selloff.
Support is @1375-1380 - this is the bulls last stand. Possible support @1400, since the market has an affinity for round numbers, but the bears have been vicious for most of this month, so, it's not clear whether the bulls will prop up 1400 or not.
QQQQ should also find some support at its 200d SMA, which is @45.31. Not quite sure if that is enough to prop up the rest of the market, but something to watch.

If the market rallies, buy only if the retrace is 38.6% or less and only after the retrace clearly reverses.
Otherwise, I will look to sell rallies - especially a double top at the end of a 10pt run !!! (That was such a noob mistake.....)

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Trading Results for Wednesday

- Phantom of the Pits

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Today, I initially made 1.5 pts, but lost 1 of those points trying to chase the selloff in the afternoon. So, on a day when ES put in two +15pt run-ups, another 10pt run-up, followed by a 36pt selloff, I made 0.5 stinking, lousy points.

Anyways, I think one of the things that I have been doing wrong was making the mistake of assuming that my position was correct.
As per my plan going into today, I skipped the first two signals that I got. I kept thinking short @1450. But then I saw that ES looked like it was trying to form an uptrend. So I went long. Even though the plan that I wrote up yesterday night suggested that I should be looking for shorts, I went long. But that was okay, since the market environment can change on a dime, and you must adapt with the changing market conditions.
What was not ok was how I mis-managed the trade. By the time ES hit 1444, I naively assumed that my position was correct (it looked correct, but was not ***proven*** correct). By the time it hit 1446, I was blinded by the emotions of my position, and failed to see that ES had put in a double top that was beginning to gather strength. Had I been more objective, I should have reversed the trade @1445 because of the potential double top formation at that time, and at least play for the 23.6% Fibonacci retracement. I finally gave up on my position @1442.50, and was too frustrated to look for a shorting opp.
That shorting opp. would come very soon. I think the box play pattern made a rare appearance in ES today - a double top vs. a triple bottom. At around 245pm, ES broke below the triple bottom @1430.50. It would go on to drop 21points, something that even I thought was impossible. However, disbelief provides the strongest fuel for a mo-mo run (up or down).

Anyways, I know what I did wrong today (I did not remove my position until I was proven incorrect), so I will correct that mistake and regroup and prepare for tomorrow.

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Tuesday, August 14, 2007

Plan for Wednesday

"Strong discipline 90% of the time is not enough because that last 10% of impulse trading will kill you."
- Dan Fitzpatrick

"Do what it takes to sit and wait until the low hanging fruit appears"
- Alan Farley

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SPY Resistance is at 144.6 - 145.3
First level SPY support is at 140, next one is 137.5-138.

1430-35 was supposed to be a significant support level, but that has now been breached. The onus is on the bulls to reclaim the 143.5 level. Then they have their work cut out for them to reclaim the 200d SMA @145.3. Failure to do that will result in a visit down to 1400.

SPY is reaching oversold conditions again, but that doesn't have too much meaning in this current environment. SPY didn't even provide a shortable rally in the morning, so that kind of speaks to the bearish sentiment present in the market. That also makes me doubt whether tomorrow we will get a rally up to resistance @145.3.

For ES, shortable resistance is at 1450-51 ( this is where Tuesday's retrace stopped, and also close to where the 200d SMA is). It's not clear at this point whether 1435 will act as support or resistance, but I do believe that there is support @1400.
Range days usually follow trend days, so if we do see another 30pt trend day, that would be very bearish. I will be on the lookout to short any rallies that get close to 1450. If we do get a range day, I think it will be safer to play the mean reversion from the top of the range rather than from the bottom of the range. Other than that, I need to be more aware of my setups and wait more patiently for my setups to happen.

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Turnaround Tuesday

Deconstructing another trend day....

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The SubPrime Lending Crisis delivers yet another trend day.

Notable characteristics of this trend:
- Previous day was marked by a gap up that faded into the close, but the gap did not fill.
- The time window of entry without suffering through any retracements was in the first 35 minutes of trading. After that, you would have to suffer through retracements of up to 14points if you were short and wanted to catch this trend.
- There was really only 1 low risk entry that would enable you to capture most of this move:
It was in the first 35min. of trading when there was a high volume break below 1455. There was another opportunity that came around 9a, after the price had retraced 55% of the initial first thrust down. You could have shorted the second tag of VWAP and hold for some 20pts into the close. However, you would have to endure many choppy, 5-10pt retracements along the way. There was also a 10pt move downwards available in the last half hour of the session, even though you missed out on most of the trend.
- The best part of the trend occurred between 7a and 805a.
- There was no shortable rally, no double top reversal to mark the start of the trend, as the market sold off right out of the gate. market dropped over 20pts in the first 90min, then spent the next hour retracing 55% of that drop, chopped its way down 7pts for the next 2 hrs, and accelerated the pump and dump for the remainder of the session.
- Trendlines were broken on numerous occasions, making this trend day hard to catch (despite the 30pt drop). In fact, it would be unrealistic and unreasonable to try and hold through a 14pt retrace not knowing that only an additional 6 pts of downside (from 1437) was available for the rest of the session.

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Trading Results for Turn Around Tuesday

The (more important) goal is to trade well, not to trade often.
- Alexander Elder

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I made a couple more points today, but I am not happy with the way I performed.
For one thing, I posted on WallStreak about how it would be funny if the S&P500 eMini Futures (ES) retraced 100% of the morning drop. After posting that, I couldn't shake that thought out of my head, and spent the remainder of the session with a bullish bias. It was only by chance that trading against the trend today did not cost me dearly. Next time I will not be so lucky.
It sounds like I am once again beating myself up, but I do need to start taking this more seriously. I am still at the stage of consciously incompetent, and lack the committment to take my trading to the stage of being consciously competent.

For tomorrow, I may start letting the first couple of my setups go by in order to practice some patience and discipline.

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Monday, August 13, 2007

Market Sentiment, Aug 13, 2007

confusion still reigns supreme

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Well, I thought that the Russell 2000 would lead us to the promised land. Luckily I did not come out and call for the bottom over this past weekend. Today, the Russell sold off for most of the session, so it is unlikely that they will provide leadership to rally out of the hole. It would seem that the divergence between the Russell and the other indicies is now weak at best. There is still some positive divergence, but after today's action, it certainly is no longer as convincing. The best looking index today was the techs (QQQQ), and even they broke down at the end of the session.

SMH, XLF, IAI, GDX, XLE, they all sold off for the majority of the session. Since no one is stepping up to the plate to provide leadership, that would imply we are either going sideways or heading back down for a retest of last week's lows.

IBM, AAPL, GOOG, RIMM, MA, ICE, GS all started gapping up in promising fashion, but sold off for the majority of the session and ended up looking anemic. Same theme - no leadership.

The BPCOMPQ actually increased today despite the weak price action of the Q's. It is still in oversold territory, and the techs would have to rally for a few days in order to take it out of oversold conditions. And since I just implied that no one seems to be willing to rally out of the hole, we could see the BPCOMPQ remain in oversold territory. Things can and do change in an instant, so we'll just have to wait and see what the market shows us.

The BPSPX looks like it is putting in a double bottom, which is a more encouraging divergence. But it too remains in oversold territory, so everything I said for the BPCOMPQ would also apply to the BPSPX.

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Monday's Trading Results

Bad habits coming back again

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Today I overtraded yet again. Too many trades to post to a chart, so I won't bother. The bigger concern is that I actually made +0.75pts from trading ES today, so this might reinforce a bad habit. My loss from the top was 4.5pts, so that part was frustrating. No more giving up points.
Really, there are so many intraday swings that can occur, so 10-12 trades per day should be the limit.

New Rules to help me cut down on overtrading ES:

1. No new trades during the lunch hour (9am - 10am PST)
2. No trading until 645am.
3. Stick to the setups as per my Futures Trading Plan.

I think the volatility will start to decrease a bit for the next few days as we enter a trading range until the market figures out whether it wants to drop some more or actually put in the bottom.
When I say a decrease in volatility, I'm talking about no more 40pt days..... I'm going to miss those days....

For tomorrow, I think we will fill that open gap in ES @1451, and then go for a test of the support level @1445 first. If that doesn't hold, then we will see a test of the 1435 level.
But if things turn bullish, then the bullish scenario will see a successful test and break above resistance @1468-1473 and wind up somewhere in the 1480's.

The more likely scenario will be some range-bound chopping around between 1450 and 1470.

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Sunday, August 12, 2007

Looking For a Tell

Confusion reigns supreme, but what kind of footprints is the market leaving behind?

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I've been reading various websites, and there are definitely mixed messages as to the state of the markets right now. On the one hand, sellers are definitely in control of the market. We have seen 3 BSC (Bear Stearns) Hedge funds have collapse, three funds from BNP Paribas are halting redemptions, and rumours are swirling about that some GS (Goldman Sachs) hedge funds are also in trouble. Whether those rumours are true are not does not matter at all, it's the perception of fear created by these rumours that matters at this juncture. Many stocks are just one shoe drop away from a visit to their respective 52-week lows.

On the other hand, the selling has been overdone as indicated by the BPSPX closing @47.5 on the weekly, which is a level not seen since the July correction of last year (or was that already a distant memory?). And the SPXA50 (very similar to the T2108 indicator) seems to be trying to grind out a bottom here.
And then I see this interesting picture of divergence:

The important visual clue that I get from looking at the above picture is how the Russell 2000 Index has put in 5 consecutive higher highs against all the other major indices (S&P500, Dow Jones Industrial Average, and the Nasdaq100). In other words, the small caps led the blue chips (DIA), the techs (QQQQ), and the overall market (SPY) in the past week, a week characterized by one massively bearish day sandwiched in between 4 constructively winning sessions. The other interesting note is the fact that the Russell 2000 did not participate in Thursday's carnage, and on Friday, more than fully recovered to close in the upper half of its trading range for that week. I don't believe that 2000 stocks being bidded up for 5 consecutive sessions is a fluke random occurrence.

That said however, given that I've written about the folly of calling Market Bottoms, I guess I shouldn't contradict myself by calling for a market bottom here. However, what I will do is look for signs of buyers stepping up to the plate to support this market.

As first initially noted by Dr. Brett, ES has a congestion zone of 1465-1475. This zone has been touched in 11 of the past 12 market sessions.

The resistance zone remains the same as previously mentioned, with the possible addition that I would update it to be 1495 - 1505 on the ES futures.

The support zone is now 1435-1445 for the ES. Break this and we will make a visit to 1420. Surprisingly enough, even a drop down to this level still does not violate the current bull market - we would have to drop below 1400 to officially enter a correction market.

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Thursday, August 09, 2007

SnP500 Analysis for Aug 9/07

"``This is an old-fashioned credit crunch,'' Chris Low, the chief economist at FTN Financial in New York, said in a report today. ``This is not a small thing. A credit crunch, when the short-term credit markets seize up, is extraordinarily serious, almost always the precursor of a significant recession.''"

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Lots of carnage in the market today as the "SubPrime Lending Crisis" continues to wreak havoc on the markets worldwide.

The chart of SPY shows some additional information not found in the chart of the SPX index, and that is the fact that the market gapped down today. There were three pieces of news which changed the perception of the markets. That gap down today was even bigger than the gap up to spark yesterday's rally. And more ominous was the fact that the S&P500 could NOT fill the gap down today, although there were initial signs that it might do so. The open gap now reinforces the resistance in the 1490 zone for the cash index.

The 50d EMA (intermediate trend) is pointing down, but the 200d SMA (long term trend) is pointing up. SPX is sandwiched in between these two trendlines, and it will be interesting to see who will blink first, the bulls or the bears.

Bearish notes:
- AAPL, GOOG, and now CSCO all tried to save the market and failed. People who bought into the post-Fed rally and the CSCO outlook are now trapped and waiting to get out.

- The Russell2000 Index rally stopped right at the stiff brick wall called the 200d MA. Anyone who has held the IWM since April 2007 is still trapped.

- The downtrend is not over yet, the bears are still in control. In fact, we never even made it to overbought conditions during this 3 day rally.

- Market is becoming increasingly sensitive to negative news.

- S&P500 eMini Futures are currently pointing towards another gap down for Friday.

- 30yr Treasury Bond Futures are starting to trend up again.

Bullish Notes:
- Today's selling was a bit overdone, which again, sets up another possible dead cat bounce.
- Market is still responsive to positive news, such as the Fed interest rate announcement and Cisco's positive outlook.
- There is still some buying support at the 200d MA.
- The BPSPX is also pointing to oversold conditions.

In the bullish scenario, the bulls will successfully defend the 200d MA (1453 for the cash index, 145.4 for SPY), but more importantly, sustain that move to close near the HoD (High of the Day). An even more bullish scenario would be a close above 1500 in the cash index.

In the bearish scenario, the bears will take the markets below the 200d MA and sustain that move for a close near the LoD's.

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More Words To Trade By

This is for whenever I need to draw upon some inspiration and encouragement.

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I compiled the first set of Words to Trade By here.

TraderBubs also has a good set of Words to Trade By here.

Here are some more Words To Trade By that I have come across which I find encouraging.

Most aspiring traders underestimate the time, work, and money required to become successful. To succeed as a trader, one needs complete commitment. Just as in any entrepreneurial venture, you must have a solid business plan, adequate financing, and a willingness to work long hours. Those seeking shortcuts are doomed to failure. And even if you do everything right, you should still expect to, lose money during the first five years – losses that I view as tuition payments to be made to the school of trading. These are cold, hard facts that many would-be traders prefer not to hear or believe, but ignoring them doesn’t change the reality. – MARK D COOK

Markets offer unlimited opportunities for self-sabotage, as well as for self-fulfillment. If you do not know where you are going, you will wind up somewhere you never wanted to be. You can succeed in trading only if you can handle it as a serious intellectual pursuit. To help ensure success, practice defensive money management. A good trader watches his or her capital as successfully as a professional scuba-diver watches his or her air supply. - ALEXANDER ELDER

I believe that to be a good trader it’s very important to be rational and have your emotions under control. I’ve been trying for years to get rid of anger completely when I completely lose money, and I’ve come to the conclusion that it is impossible. I can work towards that goal, but until the day I die, I don’t think I’m ever going to be able to look a big loss in the face and not get angry. - MONROE TROUT

Being wrong is acceptable. But staying wrong is totally unacceptable. Being wrong isn’t a choice, but staying wrong is. To play any game successfully, you have to have some skill, an edge, but beyond that it is money management. Good traders manage the downside; they don’t worry about the upside. - MARK MINNERVINI

To be a successful trader, you have to be able to admit mistakes. People who are very bright don’t make very many mistakes. In a sense, they generally are correct. In trading, however, the person who can easily admit to being wrong is the one who walks away a winner. Besides trading, there is probably no other profession where you have to admit you’re wrong. In trading, you can’t hide your failures. Your equity provides a daily reflection of your performance. The trader who tries to blame his losses on external events will never learn from his mistakes. For a trader, rationalization is a guaranteed road to ultimate failure. - VICTOR SPERANDEO

Most of traders lose because they don’t have a winning strategy. Apart from this even among those traders who do, many don’t follow their strategy. Trading puts pressure on weaker human traits and seems to seek out each individual’s Achilles’ heel. - GILL BLAKE

The ability to change one’s mind is probably a key characteristic of successful traders. Dogmatic and rigid personalities rarely succeed in markets. The markets are a dynamic process and sustained trading success requires the ability to modify and even change strategies as markets evolve. Successful traders have the ability to adapt to the changing dynamics of the market and in the process maintain their consistency of performance. - GILL BLAKE

Basically, when you get down to it, to make money, you need to have an edge and employ good money management. Good money management alone isn’t going to increase your edge at all. If your system isn’t any good, you’re still going to lose money, no matter how effective your money management rules are. But if you have an approach that makes money, then money management can make the difference between success and failure - MONROE TROUT

My weakness has always been being a bit premature on entering positions. I’ve learned to think to myself, “ Patience, patience , patience.” I try to wait until things set up just right before I take a trade. Then, when I am ready to take the trade, I slowly count to ten before I pick up the phone. It’s better to have the wrong idea and good timing than the right idea and bad timing. - LINDA BRADFORD RASCHKE

I put a great deal of effort into getting the best entry price possible. I feel this is probably one of my strongest skills. In day trading, a good entry price is critical because it buys you time to see how the market will react. If you buy because you think the market should bounce, but it only goes sideways, you’d better get out. Part of the trading process is a matter of testing the water. If your entry timing is good enough, you won’t lose much even when you’re wrong. - LINDA BRADFORD RASCHKE

Forget trying to judge trading success by how close you can come to picking major tops and bottoms, but rather by how well you can pick individual trades with merit based on favourable risk / return situations and a good percentage of winners. Go for consistency on a trade-to-trade basis, not perfect trades. - JACK SCHWAGER

We use technical analysis not because we think it means something, but because other people think it means something. We are always looking for market participants to take us out of a trade, and in that sense, knowing the technical points at which people are likely to be buying or selling is helpful. - MICHAEL MASTERS

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Wednesday, August 08, 2007

Bi-Phasic Sleep: Update


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A mere 5 months ago, I talked about how it would be neat-o to try a bi-phasic sleep schedule. Then I found out that it was not that easy to adhere to such a schedule, since there were times when my body did not feel like napping.

Between April and Aug, my body started adapting to the bi-phasic sleep schedule. I used to sleep 7hrs at nights, but now it is down to somewhere between 5 and 6hrs. As I mentioned before, sometimes I would skip naps because my body just didn't feel sleepy. But even as I thought less about it, I began to nap more and more consistently. At first I would take 20min. naps, but the naps became longer and longer, until eventually I took 45min. naps, and now, sometimes, I even nod off for the whole 90min. I usually take my naps about an hour after the market closes. I don't even know when I started to nap consistently.
When I wake up from my naps, sometimes I feel a bit groggy, but after a few minutes walking around and taking in some fresh air, I feel fine and actually refreshed and energetic. The naps that I take do not feel like 45min. or 90min. long. It feels like I only slept for about 10 or 15min. or so.
How do I know that I am now on a bi-phasic sleep schedule? Because yesterday something funny happened. I skipped my regular nap for the second day in a row, and in the afternoon, I felt this urge to nap. It was a weird sensation, sort of like the subconscious pressuring me. And of course, I felt really zoned out, I couldn't think straight and found it hard to focus on anything. All I kept thinking about was "I think I need to take a nap." Eventually, in the early evening, I took a 25min. nap. When I woke up, it was not a feeling of being refreshed, but more a sense of relief.

So nowadays, I just nod off in the afternoon and no longer try to time the duration of my naps, but instead, just let my body decide when it's had enough resting time.

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SnP500 Analysis

possible trading range in the works....

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There's a ton of technical reasons why the S&P500 will find it difficult to sustain a move above 1495. 1495 is a 50% retrace of the drop from 1555 down to 1435. 50d EMA is at 1501 and trending down. 1495 was a prior support level.
That said however, ES put in a triple bottom @ today's lows, which corresponds to about 1456 on the SPX. So, 1456-1460 looks like a decent support area.

Although the overall trend is down, the (very) short term trend is up, and today's Fed announcement amounted to a successful test of that mini-uptrend.

In the bullish scenario, we could see a possible run-up to fill the gap from two Thursdays ago after some further consolidation in the 1470-1480 area.
The bearish scenario would see a break below 1460 and eventually a drop to re-test the 1430-1440 area.
Average True Range for the past 5 sessions has been a crazy 31 points. Traders who base their stops on a multiple of the ATR are obviously having a lot of trouble in this current environment.

Cisco beat expectations and guided higher, so I am leaning towards the bullish scenario for tomorrow, but will prepare for either scenario.

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Tuesday, August 07, 2007

Today's Trades


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I made a few trades in the Nasdaq 100 eMini Futures (NQ).

637a: Long NQ @1954, stop@1952, exited @1956, profit=2pts

1038a: Long NQ @1962.25, profit=2.25pts

1127a: short NQ, 2.25pts profit

1132a: short NQ, 1.25pts profit

1158a: short NQ, 2pts loss

1205p: long NQ, 3pts loss

1215p: long NQ, scratched.

In between Trade1 and Trade2, I made several boredom trades which wiped out my initial gains. After that, I took a break and left my office. I came back thinking focus, focus, focus.

Once the Fed made their long anticipated interest rate announcement, I came out swinging and scalped NQ as it chopped its way down to 1942.
On Trade5, I was making a play of a potential double top. As it turns out, I was shorting without waiting for confirmation. So I was basically calling for a reversal which never happened, but I was okay with that, since the amount risked was acceptable to me. However, the last 2 trades (Trade6 and Trade7) were basically mistakes. In those two trades, I was betting on a continuation of the 30pt run-up that NQ had just put in. I actually had a sense that it would make one "last gasp" rally before topping out and reversing. The question would be how much of a pullback would occur before that happened. Again, I was premature in jumping in without waiting first for confirmation of continuation of trend. I thought it would only pullback 2 or 3 points, but it was actually much deeper than that. The last one was especially annoying because I was playing with my stops too much. I should have given the trade a wider stop because I was anticipating a 5 or 6pt last gasp run-up. The last trade was actually a correct decision to enter (broke out of the pullback), but the trade was mis-managed.

So the moral of the story (with which I am still struggling to improve), is to wait and wait, and then wait some more the for the low hanging fruit which inevitably appears. Following this rule would have avoided making Trade6, which would have saved me a couple points. For that last trade, I need to plan out the trade more carefully the next time, and improve upon my analysis of the stop placement.

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Monday, August 06, 2007

Review of Today's Trades

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I called the bottom today in the Nasdaq100 eMini Futures.
That was the good news. Unfortunately, calling the bottom isn't even worth the binary code in which it was transmitted, if I am unable to take advantage of the bottom call.

Next time, if I am going to call the bottom, I should at least have the sense to check the hourly chart so that I would realize that 1926 was also a few ticks away from Wednesday's Low, hence it was actually a double bottom on the hourly chart.
Had I realized the double bottom on the hourly chart, I would have been a little more confident to risk the initial 50% retrace, and subsequent 20+pt run-up.

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Sunday, August 05, 2007

Trend Following Friday?

Taking a look at Friday's action one more time....

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I inquired whether Friday was shaping up to be a trend day. I noted the price level of 1469 because I thought that it was a key price level at the time I was watching the charts and the tape. As it turns out, ES did break above 1469, but what I've learned to be more important now is whether that break above can be sustained. Price moves almost at random sometimes, stops get taken out, shorts cover, etc. so touching a price point is not as significant as sustaining a price area. And, we see the reversal of trend @925a as a the strongest sign that the move above the 1469-70 area could not be sustained. That should have been the sign to look for as confirmation of trend day.

Friday's action must have left some more hedge fund managers spewing blood in the streets. Just when you thought it was safe to go long, we see another cliff dive into the close, trapping more bulls from Wednesday and Thursday.
In 1997, we had the Asian Currency crisis. I think I will call this latest downtrend the "SubPrime Lending Crisis." You heard it here first.

Notable characteristics of this trend:
- Previous two days were marked by massive rallies in the last half hour of trading.
- The time window of entry without suffering through any retracements was in the first 20minutes of trading. After that, you would have to suffer through retracements of up to 12points if you were short.
- There were 2 low risk entries: the first was in the first 20min. of trading, and the 2nd opp. was just after 11a, when price put in a double topp-ish looking lower high after the reversal of trend @925a.
- The best part of the trend occurred after 11a.
- The market dropped 17pts in the first hour, then spent the next 100min. retracing 75% of that drop, double topped and dropped for the rest of the session.
- Trendlines were broken on numerous occasions, making this trend day hard to catch (despite the 40pt drop).

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Saturday, August 04, 2007

SnP500 Analysis

Get ready for another dead cat....

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Friday's selling into the close created more oversold conditions as indicated by the MACD and PVO. Unfortunately, oversold just doesn't mean that much anymore in the current market environment. Not only that, but Friday's bearish action utterly and viciously engulfed the 28pt monster rally on Wed.
The Bulls have their work cut out for them, as there is now resistance at every major level: 1450, 1460, 1470, 1480. The biggest one is at around 1490.

If the dead cat starts bouncing on Monday, then 1440 can be looked upon as support.
In the bearish scenario, the market will start probing 1420.

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Friday, August 03, 2007

Tracking Trend days

3 Trend days since July 24/07. Going forward, I will be tracking them all here.

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Starting from July 24, The first one was on July 24:

notable characteristics:
- previous day was a (relatively) narrow range, low volume day
- trend duration was just over 3hrs starting from 930a
- no 100% retracements after impulse moves. The biggest retracement was after the first impulse move, which retrace about 75%
- market opened gap down -10. Initial attempt to fill the gap produced a double top failure. Reversal triggered the trend.
- if you had entered short any time before the third hour of trading, you would have to suffer up to a 9 point retrace. The real Trend did not really start in earnest until after the third hour.
To avoid a 9point initial stop, you would have to recognize in real-time the formation of the double topping pattern. There were two low risk entries:
The first was when price reversed the second time at 1543.5, enter at 1541. The second Low risk entry was on the high volume breakdown below support at 1536.

The next one was on July 26:

notable characteristics:
- The biggest retracement was just before the final impulse move. There was a 83% retracement of the middle impulse move.
- 20MA was not broken for more than 2 candles.
- previous day was a high volume, choppy, range bound day
- trend duration was at around 4hrs, and accelerated in the afternoon
- market gapped down -12 to open, and the trend came from a failure of the initial attempt to fill the gap.
- if you had entered short any time before the third hour of trading, you would have to suffer up to a 9.5 point retrace. Trend did not really start in earnest until after 8am (PST).
There were two low risk entries:
The first was to observe the attempted gap fill, and enter on the reversal at 1512.
The second was on the high volume breakdown out of consolidation at 1506.

A borderline trend day on July 30:

notable characteristics:
- if you had entered any time before the first hour of trading was complete, you would have to suffer up to a 12 point retrace. However, if you had entered any time after the second hour of trading, you would only have to sit through a maximum 66% retrace. The moral of the story - it pays to be patient for a trend to clearly establish itself.
- there wasn't anything special that happened in the previous session which indicated even a hint of a trend day.
- market dropped 8pts in the first 10min. but then reversed for an equally impressive recovery. A subsequent test of the LoD reversed and started the trend in earnest.
- the real trend did not occur until after the third hour of trading. After that, the 20MA started trending up for the remainder of the day and was never violated.
- 19pt move over the course of 3.5 hrs.

There were three low risk entries:
The first was the reversal at 641am, enter on the break above 1464.
The second was the reversal after the double bottom was put in at 1461, enter on the break above 1463.
The third and last low risk entry to catch this trend was the break out of consolidation, enter at 1466.

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