Trading Thoughts

Wisdom doesn’t necessarily come with old age; it comes through experience, learning, and above all, self-analysis.    The same is true in most professions, sometimes a bad doctor/teacher/plumber stays  a bad doctor/teacher/plumber until he retires.   Two exceptions are sports — if you’re a bad athlete you’ll be cut and that’s that, and trading — if you’re a bad trader you will blow out.    However, the analogy still holds true for everything in the middle ground.  There are traders who are good enough to pay the bills year over year but their PnL never reaches the “comfort” zone.   In our experience there are a few things that can be done to help advance the improvement curve.
1.  You have to analyze your actions.   Trading, like life, is all about patterns.  The newer you are the more analysis you need to do: profit analysis, risk analysis, trading journal.   We did this for years and still keep a PnL Excel graph on a daily basis.  When an anomaly occurs, we write a paragraph beside it to describe what we were doing to cause the anomaly, good or bad.    Writing the HCPG newsletter  for 5 days a week for 5 years is now a form of journal writing for us — it forces us to make concrete what is potentially abstract.   The act of writing lends clarity to one’s thoughts and enables the next stage of understanding.  Starting a blog, even if it’s private, and writing out your trading plan is an excellent method of trade introspection.

2.  You have to be hungry to become better.   Is there any more humbling career than that of a trader?  As the years go by the learning curve flattens but it should never stop.   There is always room for improvment, always.
3.  Having a trading buddy/mentor/community to bounce ideas off  is a fantastic catalyst for advancement.   Many moments of enlightenment for us have come through the discussion with traders of strategies, building upon each other’s thoughts until you reach a new level of understanding.
4. You can’t be afraid to lose.   We read years ago a trader who said: “Trying to avoid losses in trading is like trying to avoid breathing in life.”  Losing money is part of the job, it cannot be avoided.   You cannot trade well if you are in constant fear of losing.    That’s what risk management is for, that is what stops do, they take away the fear and help a trader stand back and let the trade unfold.

5. Once you get the basics of strategy and risk management down it all becomes mental.    For active traders at this stage of  our career it’s all about conviction.  We touched upon this issue in a post a few months ago –  if we start to second-guess ourselves, it’s game over.   Traders know this, and that’s why in a tight trading group it’s a faux pas for any one trader to talk negatively about another’s live position.   It’s the reason we never ask anyone’s opinion about a trade.   If we have to ask then it automatically means it’s not good enough to take in the first place because the idea doesn’t jump out on one — it’s not a no-brainer, a lay-up.   If we had to point to one reason why we’re still around after all these years it’s because we wait for the trades that jump out — if nothing is good enough to trade step back and become a spectator until the next set-up emerges.  Don’t worry,  there’s always a bus that finally comes around the curve.
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Our favorite post of the year (so far)

….goes to Peter Brandt’s  “Cop’s raid the brothel” — part 2

If you haven’t read the post, go read it.  If you’re read it already, go read it again.   Here’s our favorite part:

“first heard this phrase at the CBOT in early 1980 in direct reference to the Silver market collapse…  you will note that Silver topped at 5056, dropped quickly to 3025, recovered to 3970, then was destroyed to 1080 and eventually 4 (that is $4 per oz.) for a total decline exceeding 90 percent.

The reported reason for the decline was the failed attempt to corner the physical market by the Hunt brothers of Texas. Today’s equivilant would be a combination of JP Morgan and the small speculators through the ETFs. The CFTC stepped in January 1980 and hiked the margin requirements. The rest was history.  The real reason for the decline was that Silver had no business being at $50, that Silver is a COMMODITY, and that commodities have boom and bust cycles.

Many, many investors got wiped out by the drop. During a meeting at the CBOT, a member made the statement, “Isn’t it too bad that not only the Hunts got wiped out, but little investors who had nothing to do with the manipulation also lost the family farm.”   To this comment, and old-time trader made the statement…”Well, you must remember, when the cops raid the brothel, everyone gets arrested, even the piano player.” I will never forget the phrase or the meaning of the phrase.”

Love that.  Enough to go download his book tonight for a weekend read.  You can get it here The only thing we’d like to add is that we don’t think the “little investors” were so innocent after all, they were greedy and trying to cash in on the speculative fever.   In the same vein,  the piano player upstairs knows exactly what’s going on downstairs in the brothel.

It's never different, part II

We wrote back on April 16 our post on “It’s never different” which basically stated our case for the coming top in silver.  We added thoughts to the argument in our “Elusive Silver Top“  post on April 21.    Forward ahead a few weeks and we’re 30% down from the highs.
As we tweeted yesterday we started buying GDX SIL GDXJ and stated exactly what we were going to do yesterday in “The Plan“.    We argued the other side this time, that in our experience when multiple supports hit at the same time:

“often two things happen:  1) it bounces or 2) panic overshoots and then bottom forms and stocks run back into primary support. We can’t remember the last time we saw so many stocks hit support at the same time — we think a bounce is coming soon and are positioning ourselves to take advantage of it.”

As evidence for our case we posted 9 charts, the main charts we follow in the sector, and demonstrated how each and every one had hit support.  Today the rally.  We would have been fine to add into overshoots (and had braced each other for significant pain) and had a very detailed plan on where to add and what levels, etc, versus our buying power.  We even had “emergency plans”.

Thankfully it didn’t come to that.  We have already locked in 3/4 of the swing for very nice profits and are holding the last 1/4 possible swing if we can get enough of a cushion (up 2% -3.5% now on last positions).   Our stops now are firmly above our entry.  (update, took the last 1/4 as 20EMA on 5 min failed just before noon, all cash).

Short-term tops are rarely different, but also short-term bottoms are also rarely different.   Both sides work just as well.  We’ve already locked in our best week of 2011 (and put on a lot of real-time trades out there this week, 2 basket daytrades on Wed and Thursday and now this swing).
Trust your experience, but also always have a back-up plan.
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We tweeted our last 1/4 position exit at 11:53 PM once we noticed the 20EMA/5 min failing on our stocks.  If you’re a short-term trader use the EMA.  Blue rectangle is our last 1/4 partial exit and as you can see selling picked up after that.   Might go higher later on but as short-term traders we would have been already been stopped at lower prices.   If you’re a longer term trader then of course it’s not relevant.

The Plan

We tweeted our day but in case you were not following:   we bought the basket GDX GDXJ SIL SLV in the morning and sold everything save SLV (scratched) for nice gains.  We wrote that there could be a head fake and thus the aggressive selling.   We then went flat and wrote several times that we were staying away from SI_F /SLV as the USD rip was too much of a weight on the commodities.  We wanted to get involved in the miners, but not the underlying commodities.   Later in the afternoon we started a small swing position in the miners making clear size was small and it was for a swing and not bottom catching.   We’re currently underwater in all three:  GDX 56.48, GDXJ 36.52, and SIL 24.50.    We’ve being very careful with adds as we think we could easily see another round of sell-off.

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Basically this is the plan: buy the overshoot for a target back into primary support.   It might take a few hours or a few days or more but we like the trade.   We’re again staying away from SI_F/SLV (even at 34 support which had interested us before) and focusing on the miners.  We believe the miners will bottom before the commodity.

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We had a trend day down which is good– as our readers know, the sell-off after a trend-day down in an oversold sector is usually the sweet spot for buying the bounce.   This is our plan going forward:  add on overshoot, take partials on bounce back to support.   Absolute key to executing such a plan is scaling in slowly at different prices.   You add too fast and you will not be able to execute the trade properly.  Don’t worry about catching the exact bottom, this is not what the trade is about (unlike previous daytrades where that actually was our intention).

There are two scenarios that we like and would make most likely make the trade work:   1)  of course the easy one is  we gap up and we go green, that would be nice but not counting on it.   2) on the anniversary of the flash crash, things get, well flash-crashy, and the rubber band stretches even more.   We would be buyers of the next level of support (for example SLW 32.8).  The last scenario is the one that would make us take losses.  No rubber band stretching, small bounce, and then we just base at the lows.   We would probably the loss on this scenario.

GDX 57 we traded yesterday for a great daytrade but went flat before the close.  We’re again in the ETF but lower price (56.50) and much smaller size.   Our plan is to add on overshoot and sell at least partial back into 57.

IVN at 200SMA, again watch for overshoot and then rally back to 200SMA.

PAAS at 200SMA, same plan.

We bought and sold SLW near the close for a quick gain — we like the stock again on overshoot to 200SMA with target back to trend-line.

GDXJ we’re already in — will add on 200SMA.

Already in SIL,  will add on 200 SMA.

AG held 100 SMA into the close, again watch for overshoot and bounce.

SLV to 100 SMA,  again, overshoot and trade back to 100SMA.    As we noted, more volume today in SLV (all time high volume) than in SPY.    30 level big support.

EXK held on 100 SMA, again overshoot and bounce back.

What do all the following charts have in common?  They’re all at or over support.   When a whole sector hits support like this often two things happen:  1) it bounces or 2) panic overshoots and then bottom forms and stocks run back into primary support.
We can’t remember the last time we saw so many stocks hit support at the same time — we think a bounce is coming soon and are positioning ourselves to take advantage of it.   If you’re following us in please be careful with your adds.   Many times traders get the idea right but are not able to enjoy the fruits of the trade due to using too much of their buying power too early.

Review and the Note

Our newsletter consists of 2 parts:  the first is a review of ALL trades that trigger the alerts from the previous newsletter, win or lose.  The second is a fresh list of new alerts for the next day.   We wanted to share with you the first part of the newsletter that just went out to our subscribers:

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We wrote last night that “Our focus tomorrow are the gold and silver miners” and we wish we had remembered that this morning when we kept getting chopped around in everything else. Note we didn’t list SI_F or SLV last night in the support list– the edge we think is now with the miners and not the commodity.   In the afternoon though the miners set-up and we got off a decent trade but everything else was tough.   Let’s review everything that triggered:

CLF we wrote would be “cute” to break 90 and quickly scum to 89.3.  It actually worked very well if a) you caught it and b) you took the quick trade.  After that it grinded down all day.    One thing that came up repeatedly today was our rule of  “buy the first test but never the second”.    First test 89.3 worked fast and well, second test was a complete avoid or short.

UA didn’t come close enough to our 62.5 alert for us to get involved but we wanted to include it to show what a nice support long-set up looks like — see how it’s choppy without an stair step down movement?  That’s exactly what you want.  The stair step down moves following descending EMAs are the most difficult support longs to catch.    Stock spiked down away from EMA into S2 and bounced.

DE we bought on first square and it worked well until it hit 9 EMA, after that it re-tested and stopped us out (second square) and wasn’t enough of a bounce to take partials.    Scratch trade.

WLL bounced on 64 near the open (64.02 bounced 37 cents) but second test was failed.   If you wanted it long after that then the place to do was after the EMAs flattened out (blue rectangle).   It doesn’t always work but if you want a support long trade and missed the bottom, then that’s the place.

We got in near on reversal at noon  near our alert on MOS but took an early scalp exit in it as by that time all we wanted to do was un-do the damage and go green.  We nailed the 200 SMA bounce alert though and know some of you banked coin in this- nicely done.

Here’s the reason we went red in the morning — AGU 83 we tried catching 2x and lost on both.  Finally got it again when it stabilized but just like MOS, by that time all we wanted to do was to go back green and made a hasty exit and  missed the big run.   AGU had earnings out this morning, and had a lot of volume and was just stair stepping down.  We should have left it alone or gone in with smaller size and wider stop.

Up until we hit the miners we kept churning our account, barely green.      Here’s what went down in the afternoon (we put out real-time tweets of entry and exits so hopefully that helped).

GDX SIL hit our supports and even though we didn’t have much confidence left after our morning we thought it would be worth to go small and put some feelers out there.  We bought the basket GDX SIL GDXJ.   As we wrote last night GDX 57 was pretty huge number, with 2 trend-lines and 200 SMA all converging (reason we wrote that miners would be our focus for today).

We bought small near 37 and SLV bounced on 50SMA, so far so good.  Then we noticed that SI_F GC_F was starting to weaken but miners were not.  We thought about our divergence post that started our whole silver short obsession http://highchartpatterns.net/its-never-different/

What got us interested in shorting silver was the fact that the miners were pulling back while the commodity went ballistic.  Today we saw the miners hold their ground while silver made a new low — miners sold off first, they will likely bottom first.   As we tweeted at this time we added to the basket (4x add on position size) as the divergence gave us more confidence.    Trade worked great and we hope many of you caught it.

GDXJ didn’t come to alert but we added it in basket anyway.

Very nice bounce at 37

SIL 25 alert worked perfectly

And GDX 57 even more perfect.

We wrote in the newsletter last night “Our focus tomorrow are the gold and silver miners” and on top of that the last thing we did last night before going to sleep was to write this note (to re-affirm focus) and leave it on the keyboard:

GDX 57  GDXJ 36.5 SIL 25

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Conjecture?

Last Sunday night we were glued to the screen.  Silver had suddenly been shot in the head diving down 13% (!!) while ES_F stayed green, up 4 points.   We couldn’t figure out what was happening but were amazed ES would stay green while silver was being shot dead.    Then the news came that Osama had been killed — we had quite a bit of conviction that the good news (in a very extended market) would be sold.   We quickly put up our Osama Top post when futures were up 12 at 1372 (now down 24 points from that call) and warned in our tweets that we believed that the rally would be faded.
We’ve been on twitter for over a year and  have put out a newsletter 5 times a week now for 5 years.    We respect a lot of pros on our stream  @dinosaurtrader @gtotoy @zortrades @szaman @peterlbrandt  (just a few names among many that pop out — all our 36 follows rock) and for the most part we’ve earned the respect of our followers.     And then once in a while we get tweets like this — which came our right after our Osama top post:


Of course it’s conjecture.  What else would it be?   The best any trader can do is to made an educated guess based on their strategy and experience.    Man….

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Ag support

Back to stocks:
We like to buy support when a whole sector hits it simultaneously (in our experience it increases the odds of success exponentially) –  several of our favorite Ag stocks (POT CF AGU MOS) are looking like they want to test their respective 200SMAs.    Let’s take a look:

MOS is the closest one — we’ll probably try a day-trade there but don’t really expect it to hold for too long.


We like CF near 120 — 200 SMA  and daily support.

AGU is on trend-line now — again, we think this will break and eventually could test the 83 zone.

POT we like 51 for a trade:

Trade your plan

As many of you know we have been obsessed with silver in the last month.  First we wanted it short against 50 and talked about it in several posts, especially The elusive silver top and we got our trade short.      Then we backed off for a while but kept talking about the trend-line long, here State of Affairs and posted a few charts on that 41 spot:





And finally posted it when we went long on the stream real-time at 40.79.    It took us two tries, first tried 41, got stopped for 14 cents, and then went for overshoot.  At this point we had a lot of conviction.  Why?  Because we had talked about it so much.   At the time it actually felt awful — it was kind of grinding down, heavy as hell, looked weak and we could have easily talked ourselves out of it.   But the only thing that helped us is that we had talked about that level so much, posted about it so many times, that we trusted it.    We hope that our posts help our followers in that we give them good ideas but the newsletter and stocktwits also helps us because it re-confirrms repeatedly levels that we think deserve to be acted on — levels like the trend-line on silver.

We took off all our positions save one last SI_F contract into the bounce:


If felt hairy and our hands were shaking but at the same time, we had so much conviction, enough to buy multiple contracts of SI_F, YI_F and for good measure, SLV (39.78 av).    Don’t ask why all three, not too logical, but somehow it helps us slow down the exits.   Do your homework before and when the time comes, trade your plan.     That being said, don’t be stupid either.   Trade your plan but don’t forget about risk management!
p.s. we have 1 contract $SI_F left with stop over entry – if 41 breaks we go flat.
p.p.s  stopped out of last contract.  Gave up nice $$ on that but we never regret losing potential profit on the last partial — we like to keep that in these type of trades for potential home-runs.
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Osama Top?

Update:   We now have the answer to our question as to why ES_F would stay green while whole commodity complex went red.   News was already being traded that Osama was dead.    ES_F now up 12 points but US dollar also catching a bid.   A sell the news effect could take place if  DX_F can continue on tonight’s move (not as easy as it sounds as every rally has been faded lately).    A multi-year low on the USD, multi-year high on market, the Osama top?
Lots of excitement for a Sunday night.
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State of Affairs

Proving to be a very exciting interesting Sunday night with silver absolutely pummelled, at one point down 13%.   And no good explanation that we have read so far (not Comex raising margins, not China tightening, nor Bolivia putting a pause on its nationalization plan).   Possibly a dump from a fund but why would they pick a thin illiquid Sunday night for such activity?
Trend-line at 41 on the SI_F– even with all this blood (down 20% from highs already!) it’s still in a bull trend.

We’ve shown this trend-line now a few times on copper — it broke on Friday and continuing to weaken tonight.

Crude off from its highs but nothing interesting

Gold off its highs after silver dump but again, nothing too drastic.


The most interesting chart for us is actually the ES_F, holding green up 4 points!    The entire commodity complex is red (including grains now) and we don’t even go flat? Wow.




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Reverse Engineering using Stocktwits 50 and Finviz

Almost all our trading alerts are found manually as we go through our master list every day.     However if you don’t have a master list or are new to the game, here are some alternative methods to finding alerts and to building your own master list.

Start with stocks that know how to move.   A good starting place is just to look through the   Stocktwits 50 list.

Now do two things:  1) look for themes and then when you find something you really like, 2) do reverse engineering.

Look through the sectors of these momentum move type stocks.  Is there one sector that keeps popping up? Or is there one stock which is moving really well?



There are a few sectors that keep coming up, and one of them is Oil and Gas Equipment & Services.    The second stock mentioned, RES, belongs to this category. Now go to www.finviz.com and plug in RES on the right hand corner:




RES chart pops up and below it you’ll find a  link to all the stocks in the same sector:



Sub sector of Oil and Gas that RES belongs to comes up.   Now from here comes the manual work.   A good start would be to filter out anything under $20 and trading under 1 MM volume.
We don’t often use this strategy because we like trading stocks that we know well (currently around 230 stocks).  However, if you’re new to the game and you want to build up a list, this a great way to go using two great free resources available to everyone.

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Four Sector Focus for the week

Most of our favorite set-ups for the week  belong to the following four sectors:  Oil and Gas, Semis, Machinery, and Software
Here’s a sampling and also a few hints on how we look for sector moves:

Oil and Gas:
$OXY has been our favorite in the sector for a while.   We caught a nice break-out at 106 for our subscribers on Friday for an 8 point rip.   OXY is best of breed in the sector and one of our favorite trading stocks.  Disclosure:  long.

Three stocks that are setting up in the broader oil and gas sector are $UPL $APC $COP





Do you remember thic chart we kept posting on the $SMH?   After $INTC earnings the semis gapped above resistance and never looked back.  The sector is hot.

Some aren’t quite ready and some look better, but the names on our radar in this sector are $CAVM $ARMH $SWKS $SPRD






Software:  ORCL caught our eye this week.   Stock is too slow for our type of trading but very impressive move for the big daddy of the software sector:

So you think to yourself, wow, $ORCL is a leader of software stocks, what else is setting up?
You hit Application Software in FinViz (the greatest tool for sector scans and free to boot), adjust volume and price to your liking (over 1 mil, over $20 for us) and voila out comes  the result:
The best set-ups in the sector are $CRM $NUAN $RHT





The last sector is machinery.   We had patiently waited for $CAT to set-up for a while but it gapped over our buy spot.   We focused on the sector and found the following which still have not broken out:
$DE $TEX and one for the low-volume lovers on the stream $ASTE




Getting primed but not liquid– not our cup of tea but we know some of you love these thin ones: