Wednesday, January 18, 2012

The chosen ones

Our readers know that we like to find big spots on our favorite stocks and then focus on them until they break-out.   The longer they’re on the newsletter often the better the trade.  Why?  Because we have watched the stocks for sometimes weeks and know their behavior very well.  When the break-out day comes and we see the action/volume fall into place our conviction is strong.  And once you get the basics down (strategy, risk management, etc) what’s left, at least for our type of trading, is all about conviction.
Two recent examples from 2012.    We saw $POT  44 in early January and wanted that break-out.   It was highlighted in our newsletter on Jan 4, 5, 7, 9, 11  until it finally broke out on the 13th.

 The same happened finally with $AMZN today which had been highlighted as 185 breakout in newsletters sent out on Jan  7, 9, 11, 15, 17 with a 5 point break-out today.

Every trading style is different but for us it pays to watch the big spots like hounds, learn the stock’s behavior, and then hit it hard when the big day arrives.      The disadvantage to this method is that there are fewer opportunities compared to strategies that constantly scan for volume, moves, etc, but the advantage is that the win rate (which in turn helps one’s confidence) is relatively high compared to other strategies.
It’s common wisdom that a trader’s strategy should synch with his personality — we’d rather trade less (relative to day-traders that is) and be right most of the time than trade more and be wrong most of the time, even if the PnL is equal.  Why?   Over the years it’s what has evolved naturally for our type of trading due to our desired levels of confidence, stress-level, and quality of life.

Sunday, January 15, 2012

It's not the charts, it's what mood the market is in

Almost every break-out we had in our newsletter last week worked, from copper stocks, fertilizer, biotech, oil, tech, no wonder what sector, it ran.  They were the same patterns we had in second half of 2011 which often didn’t work.  Same charts, very different success rates.   Why?   Sentiment of course.  We wrote a few times in the last few weeks how this has been one of the most “benign” markets we’ve traded in for a long time (since earlier parts of 2011).    Even the gap-ups would offer opportunities, as stocks would be faded to alert numbers, and then spring like a rabbit up for fantastic moves.   Dips are shallow, buyers are aggressive, and everyone is a genius.       Indices go to resistance, stall, digest and then go higher the next day.  Enjoy it while it lasts because it never lasts for too long.
We’ve never been interested in mechanical strategies exactly because of this — in some markets the exact same chart pattern fails 80% of the time, while in other markets the same pattern works spectacularly for 80% of the time.    Figuring out how benign/generous a market condition is for us is integral to our way of trading.     In easy markets like this mistakes are forgiven, as long as they’re on the long side.   You chased up?  No worries, after a shallow dip stock goes right back to the highs.   What is essential for us now is to look for signs of when this mood starts to shift — the first will be a dip that is not bought, i.e. a trend-day down.   That could start shifting the psychology.
We watch our favorite tells all the time,  the Euro ($6E_F),  silver ($si_f),  bonds, copper, etc, but in the end, all decisions defer to price-action.  How does a stock act at support and resistance is ultimately the most important piece of information for our type of trading.
On a different note some of you have noticed that we’re not “tweeting” that much during session hours — this was part of our 2012 resolution, to keep our focus on trading during trading hours and make appearances more during after-hours.    If things get less busy we’ll probably tweet more but trading will always be priority number one.    We’re grateful to be part of such a wonderful community but after the honeymoon stage of social media is over, the next pivotal stage to conquer is finding a work/life balance.