We have been running the HCPG newsletter now since 2006. We are very happy with what we have created over the years and believe that many of the lessons we have learned in running HCPG also can apply to other businesses. So here’s our case study.
1. Don’t claim anything. The quality of your product is the only thing that matters. We could be three punks trading from a double wide in some trailer park, or we could be three very well-off successful traders. We’ve never claimed one or the other. Does it matter? No, not at all. All that matters is whether the information we provide can make you more profit than you would have without the newsletter. Stay with what is relevant. We stay under the HCPG moniker without providing personal information because frankly, our personal life is no one’s business. All we do is provide potential set-ups for any one who pays $44.76/month. You’ll find out very soon (including a 10 day free trial) whether it’s all nonsense or whether it can add to your bottom line.
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4. Be the best in what you do. Easier said than done but what will propel you on this path is to specialize. Find your niche and then be the best. We only trade high-beta very liquid US equities, mostly in the commodity and tech space. We’re not interested in trading small-caps, Chinese time-bombs, biotech-time bombs, and while we like to watch currencies and hear about options, they’re not our specialization and you won’t find them in our newsletter. We want to only talk about things we know very well and frankly, options and forex do not fit into that category.
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7. Don’t fret about the competition. We often retweet posts from our competitors, and consider many of them as online friends. Don’t be afraid. There’s always room for a quality product in the market.
Saturday, April 09, 2011
Friday, April 08, 2011
Market Notes and Week Review
Everyday in our newsletter we review all the triggered trades from the previous night’s alert list. We’re going to do a modified version for this blog, reviewing all swing trade ideas shared in the blog that trigger during the week. Last weekend we gave you $GDXJ $GS trend-line long ideas, and both worked well. GDXJ was straight-forward, broke trend-line and never looked back. We swung it into today but closed the last partial of the position today. GS was more tricky as it didn’t trigger for a few days and thus trend-line moved from 162 to 160 (as we told our subscribers in our newsletter) with targets of 162 and 164. GS hit our two targets and then reversed back into congestion zone (and hit our raised stop). Mission accomplished.
We have a feeling that next week we’ll be looking more at support trades than break-out trades. We like the refiners and are half-regretting not putting on an overnight position near the close as they are all finished right at daily support. However, since our brains seem to be constituted of 80% daytrader/20% swing genes we wanted to be flat and re-assess on Monday. We’re all cash going into the weekend.
On a final note: $USDX death and crude oil $CL_F rip are reaching “too much/too fast” regions and we think there should be some reversion to mean soon in the names. As we tweeted today the market is starting to be more “reactive” to crude movements. We believe we’re at the point now where this relationship will increase at a much greater speed than in previous weeks. The weight of the price of oil is finally showing up in the market price-action. Crude rallied almost 4% in the last 2 days — market dipped on both days but was able to regain its composure by the close. Another move up like that in crude and we don’t think late buyers will show up with the same enthusiasm.
We have a feeling that next week we’ll be looking more at support trades than break-out trades. We like the refiners and are half-regretting not putting on an overnight position near the close as they are all finished right at daily support. However, since our brains seem to be constituted of 80% daytrader/20% swing genes we wanted to be flat and re-assess on Monday. We’re all cash going into the weekend.
On a final note: $USDX death and crude oil $CL_F rip are reaching “too much/too fast” regions and we think there should be some reversion to mean soon in the names. As we tweeted today the market is starting to be more “reactive” to crude movements. We believe we’re at the point now where this relationship will increase at a much greater speed than in previous weeks. The weight of the price of oil is finally showing up in the market price-action. Crude rallied almost 4% in the last 2 days — market dipped on both days but was able to regain its composure by the close. Another move up like that in crude and we don’t think late buyers will show up with the same enthusiasm.
Do or Die Time: Refiners
The four refiners we like to follow, VLO HOC TSO WNR all re-tested support today on very heavy action even though crack spreads were up 5%. The bounced off their lows and all of them closed near support. Bounce or die time coming up on Monday. We tried our hand in VLO TSO but were early and weren't able to find any traction in either (sold both for small gains/losses). It's often a good time to buy support when the whole sector hits it at the same time -- however, it also often needs to be held overnight, something we didn't feel like doing today. Let's go through them all.
HOC through 60 support and overshoot into 20SMA. It held and stock closed right at support. Stop here would be the loss of the 20SMA.
TSO through 26 support and bounced off the lows but couldn't regain support. Next support not until 24.5
VLO went through the 50SMA, overshot, and then bounced back to the 50SMA. Again, if you're long you want Friday's overshoot low to hold.
WNR had support at 17.5, again overshoot, and bounce off bottom back to support.
The most common move from overshoot is a bounce back to initial support. The perfect example here is HOC as first support was 60 which didn't hold, and stock overshoot move to 20SMA which held, and then stock bounces back to initial support. As our readers know, when you get in an overshoot the first target is a move back to initial support. This means if you got in HOC on the reversal at the 20SMA near 59.1, then your target is 60 which was primary support.
For more overshoot examples please see these links:
HOC through 60 support and overshoot into 20SMA. It held and stock closed right at support. Stop here would be the loss of the 20SMA.
TSO through 26 support and bounced off the lows but couldn't regain support. Next support not until 24.5
VLO went through the 50SMA, overshot, and then bounced back to the 50SMA. Again, if you're long you want Friday's overshoot low to hold.
WNR had support at 17.5, again overshoot, and bounce off bottom back to support.
The most common move from overshoot is a bounce back to initial support. The perfect example here is HOC as first support was 60 which didn't hold, and stock overshoot move to 20SMA which held, and then stock bounces back to initial support. As our readers know, when you get in an overshoot the first target is a move back to initial support. This means if you got in HOC on the reversal at the 20SMA near 59.1, then your target is 60 which was primary support.
For more overshoot examples please see these links:
Thursday, April 07, 2011
AAPL
When $AAPL kept testing the 50SMA we made some "old teat" jokes saying that it was pushing it's luck, that if it kept sucking at the teats of the 50SMA it would give out. That's exactly what happened as the 50SMA cratered. Note it's doing the same thing now with the 100SMA: 336 was defended today but if you're long you don't want too many revisits to the area.
Two for Two
We put up a post this weekend of two G ideas $GS buy on trend-line (160) and $GDXJ buy on trend-line (39.6) and already gave an update when one of them triggered.
Now here’s the second update. Yesterday we got our 160 trend-line break, first target of 162 (50SMA) and today second target of 164 (100SMA 164.3). We’re out 3/4 of the name with stop now raised over 162. As more targets fall, stops are raised.
If you got into the two thanks to our posts please take some off and get your stop over entry — targets have been achieved. If you can though still hold partials on both since the charts look great. If you got in as per our recommendation you will be deeply in the green and have the cushion to hold through any chop.
Here are the charts:
GDXJ was more straight-forward, trend-line break was very clear for a very good run. GS became more complicated when it didn’t trigger for a few days, thus moving trend-line down. We’re happy both worked and hope some of you got involved. Note something we tell our readers — the best trades, at least for us, come from stocks/levels you have watched for a while. We tweeted about the “change of character” on GS on March 29 as it bounced on the 200 SMA and it was front and center of our screens from that time. We posted the GDXJ trend-line already on March 27 and were watching for the break already from that time. Our style is to watch a few, really get to know their behavior, and then have the conviction to hit them hard with decent size.
Now here’s the second update. Yesterday we got our 160 trend-line break, first target of 162 (50SMA) and today second target of 164 (100SMA 164.3). We’re out 3/4 of the name with stop now raised over 162. As more targets fall, stops are raised.
If you got into the two thanks to our posts please take some off and get your stop over entry — targets have been achieved. If you can though still hold partials on both since the charts look great. If you got in as per our recommendation you will be deeply in the green and have the cushion to hold through any chop.
Here are the charts:
GDXJ was more straight-forward, trend-line break was very clear for a very good run. GS became more complicated when it didn’t trigger for a few days, thus moving trend-line down. We’re happy both worked and hope some of you got involved. Note something we tell our readers — the best trades, at least for us, come from stocks/levels you have watched for a while. We tweeted about the “change of character” on GS on March 29 as it bounced on the 200 SMA and it was front and center of our screens from that time. We posted the GDXJ trend-line already on March 27 and were watching for the break already from that time. Our style is to watch a few, really get to know their behavior, and then have the conviction to hit them hard with decent size.
Wednesday, April 06, 2011
What would make us nervous
Momentum leaders such as $NFLX $BIDU $OPEN $UA $LULU $CMG all red today as they take a well deserved breather. Oil and gas also weak; again not a big surprise considering the run they have had. We are worry-types by nature, possibly a personality trait, and also possibly because we started our career trading tech breakouts right before the Nasdaq lost 78% in the bubble crash. However, that being said, it’s hard for us to lose too much sleep over today’s action because of the following reasons:
Support is still being bought. Notice $NOV 50SMA perfectly defended today — as long as support buyers show up, you have to stay long. Once this changes though it means the music is stopping and you better grab your chair.
As our readers know we love following copper and what is this metal doing today? Having a huge rally right to its trend-line. How can we worry about market health when copper up 2.6%? What would make us nervous? If 421 goes.
We had two ideas this weekend for our readers, long $GDXJ through trend-line near 39.6 and long $GS on trend-line (which we put at 160 in our newsletter last night — trade 160 to 162 resistance).
Financials and semis have been lagging this market but both have a bid today. Rotation. We would get much more nervous if there was a broad breadth sell-off. As long as you see rotation, stay long.
The leaders of this market, silver and gold, act great. Big break-out yesterday ($SIL $GC_F $SI_F $GDX $GDXJ) and nice consolidation today. We take our short-term cues from silver/gold more than any other sector in the market. What would make us nervous? If silver/gold start breaking down.
As long as 1) support keeps being bought 2) copper holds support 3) we see rotation instead of strong breadth sell-off 4) silver/gold don’t break-down we’ll trade to the long side. If any of those factors change, so will our bias.
Support is still being bought. Notice $NOV 50SMA perfectly defended today — as long as support buyers show up, you have to stay long. Once this changes though it means the music is stopping and you better grab your chair.
As our readers know we love following copper and what is this metal doing today? Having a huge rally right to its trend-line. How can we worry about market health when copper up 2.6%? What would make us nervous? If 421 goes.
We had two ideas this weekend for our readers, long $GDXJ through trend-line near 39.6 and long $GS on trend-line (which we put at 160 in our newsletter last night — trade 160 to 162 resistance).
Financials and semis have been lagging this market but both have a bid today. Rotation. We would get much more nervous if there was a broad breadth sell-off. As long as you see rotation, stay long.
The leaders of this market, silver and gold, act great. Big break-out yesterday ($SIL $GC_F $SI_F $GDX $GDXJ) and nice consolidation today. We take our short-term cues from silver/gold more than any other sector in the market. What would make us nervous? If silver/gold start breaking down.
As long as 1) support keeps being bought 2) copper holds support 3) we see rotation instead of strong breadth sell-off 4) silver/gold don’t break-down we’ll trade to the long side. If any of those factors change, so will our bias.
Tuesday, April 05, 2011
What's working and what's not
What’s working and what’s not working, at least in the sectors that we follow, couldn’t be more clear. Let’s start with what’s working — gold and silver. $GDXJ $GDX $SIL fresh break-outs today not to mention the underlying commodities $SI_F $GC_F which are screaming higher. Oil and Gas remain strong ($APA $APC $NOV our favorites) with a special boost from the refiners $HOC $VLO $TSO $WNR breaking into fresh territory and continuing their recent strength. Coal acts great with our favorite $WLT making fresh multi-year highs today, we also like $ANR $ACI $BTU. Ags not at highs but are coming back strong and our favorites here are $CF $POT $MOS and $AGU. Miscellaneous leader momentum remains strong as stocks like $LULU $OPEN $CMG $NFLX are close to highs. Copper $HG_F is missing in action somewhat but holding its own and refusing to distance itself from the 100SMA support. Rails act great with $UNP $NSC $KSU all looking solid. Small caps are rockin and rollin as the Russell melts up on daily basis.
What’s not working? Basically financials and tech. Financial sector dead money right now even though we hope this changes if $GS can break through it’s trend-line. Semis have been laggards even though they got a little juice today from the $TXN $NSM news but still need to prove themselves. How? A close over the 50SMA (35)and continuation up tomorrow on the $SMH would be good for starters. Network related stocks are also still in the dumps as recent darlings $JDSU $FFIV still can’t find traction. $AAPL has lost its mojo even though today’s bounce on the 100SMA was impressive. $GOOG dead money right now and acts bearish.
And of course let’s end one more that is certainly not working, the $USDX as this poor currency chugs along downwards losing a bit of value every day.
What’s not working? Basically financials and tech. Financial sector dead money right now even though we hope this changes if $GS can break through it’s trend-line. Semis have been laggards even though they got a little juice today from the $TXN $NSM news but still need to prove themselves. How? A close over the 50SMA (35)and continuation up tomorrow on the $SMH would be good for starters. Network related stocks are also still in the dumps as recent darlings $JDSU $FFIV still can’t find traction. $AAPL has lost its mojo even though today’s bounce on the 100SMA was impressive. $GOOG dead money right now and acts bearish.
And of course let’s end one more that is certainly not working, the $USDX as this poor currency chugs along downwards losing a bit of value every day.
Update on this weekend's swing ideas
Our two swing long ideas for this week were $GDXJ $GS on their respective trend-line breaks. As we tweeted on the actual break this junior gold miner ETF broke through the trend-line today (and currently up 2.7% from time of our tweet). Great action, looks solid. If you’re active trader take a few profits and move stops up to at least above break-even on trend-line — but stay involved and swing on a good close as there’s lots of free air now:
The second idea was $GS long on 162 break which would have been a break of trend-line and 50SMA and which still hasn’t triggered. This has become slightly more complicated now as stock has moved down thus moving down trend-line and creating space between trend-line and 50SMA.
We still like this idea but now it’s become more of a buy through trend-line and take first partial on 50SMA trade which makes this a potentially less lucrative trade. We would have much preferred little space between trend-line and 50SMA for a double break-out.
The second idea was $GS long on 162 break which would have been a break of trend-line and 50SMA and which still hasn’t triggered. This has become slightly more complicated now as stock has moved down thus moving down trend-line and creating space between trend-line and 50SMA.
We still like this idea but now it’s become more of a buy through trend-line and take first partial on 50SMA trade which makes this a potentially less lucrative trade. We would have much preferred little space between trend-line and 50SMA for a double break-out.
Monday, April 04, 2011
Technical Stars Line Up
We see it all the time — just as a stock hits a significant technical level some fundamental news comes that makes it bounce. We think to ourselves, this has to be a coincidence, we just got lucky, but it occurs with such frequency that it makes you go hmmmm…
The support longs in our newsletter this weekend consisted of tech stocks and within those domination by semi stocks (it’s almost always commodities so this was an anomaly), with BRCM being the star. The alert was 37.8-38 (today’s low was 37.78, and it traded to 200 SMA 39.4 in AH session). We also posted some freebies during the day about INTC BRCM and SMH mentioning that support buyers were putting up a fight.
he semi complex is up across the board tonight as $TXN buys for $NSM with a fat juicy 80% premium. We don’t actually believe that $TXN decided to time its release of the acquisition news of $NSM based on the stock hitting it’s 200SMA/ $SMH hitting 100SMA. That of course is a coincidence, and it would be very naive to believe otherwise. But at same time there are many similar examples, and it’s hard to believe in coincidences that happen with such consistent frequency. However, we have often seen analyst upgrades come exactly as stocks hit support and we believe those indeed were intentional in order to maximize short squeeze potential. We’re not going to over-think it — we’ll just keep going with what works. Chart voodoo indeed.
The support longs in our newsletter this weekend consisted of tech stocks and within those domination by semi stocks (it’s almost always commodities so this was an anomaly), with BRCM being the star. The alert was 37.8-38 (today’s low was 37.78, and it traded to 200 SMA 39.4 in AH session). We also posted some freebies during the day about INTC BRCM and SMH mentioning that support buyers were putting up a fight.
he semi complex is up across the board tonight as $TXN buys for $NSM with a fat juicy 80% premium. We don’t actually believe that $TXN decided to time its release of the acquisition news of $NSM based on the stock hitting it’s 200SMA/ $SMH hitting 100SMA. That of course is a coincidence, and it would be very naive to believe otherwise. But at same time there are many similar examples, and it’s hard to believe in coincidences that happen with such consistent frequency. However, we have often seen analyst upgrades come exactly as stocks hit support and we believe those indeed were intentional in order to maximize short squeeze potential. We’re not going to over-think it — we’ll just keep going with what works. Chart voodoo indeed.
Saturday, April 02, 2011
Two "G" ideas for next week
The best two ideas we have for next week are swing long $GS and $GDXJ. Both these names have been recently on our radar, as posted on change of character tweet as it lifted off the 200SMA on Tuesday and $GDXJ trend-line break that we have been patiently waiting for all week.
Here are the updated charts:
The 200SMA held and this financial king is starting to act better — we like the recent action and think it’s a good swing candidate on the break of trend-line/50 SMA which are almost aligned near 162.
We always have an eye on this gold miners juniors ETF as it is, in our opinion, the best technical ETF out there. We were hoping to get in near 37.2 for entry and hold for reversal back up to the trend-line but it never pulled back to that area. We like the recent basing and like this as swing long on break of trend-line.
Here are the updated charts:
The 200SMA held and this financial king is starting to act better — we like the recent action and think it’s a good swing candidate on the break of trend-line/50 SMA which are almost aligned near 162.
We always have an eye on this gold miners juniors ETF as it is, in our opinion, the best technical ETF out there. We were hoping to get in near 37.2 for entry and hold for reversal back up to the trend-line but it never pulled back to that area. We like the recent basing and like this as swing long on break of trend-line.
Sunday, March 27, 2011
Oil and Gas
Our readers know that oil and gas has been our favorite sector to trade for a while. Most of the charts in the sector though have rallied significantly in the last little while and are quite extended. Here are a few that are on our screen:
Let’s start with a driller that actually is under-performing:
We like RIG 74-75 on support, or on breakout of trend-line on strength. Anything in the middle we’ll leave alone:
The next six charts all belong to refiners/marketing sub-sector.
HOC is our favorite (and we got long on anticipation of trend-line break on Friday and are holding). Next resistance is 60 and 62. Great chart.
VLO beautiful bounce from 50SMA. Nothing wrong with this chart but a bit of basing under recent highs would make it look even better (and give us an entry!).
FTO similar chart but more extended from 50SMA. Very strong, and looks like it wants to get out of this recent range asap. Too extended for us to swing but active traders will probably be interested in 29 for a quick one.
WNR a bit more messy and no clear spot yet but a few days under 17.5 would set it up.
TSO made our newsletter after Japan for a target trade to 26 which worked great. It’s now regained that area and looks to be grinding higher. Too extended for us to get involved.
SUN the strongest of all and has already broken out. Very impressive but too late here for our style.
The next charts belong to the sub-sector of independent oil and gas:
Nice basing here under 78 for NFX– this could be a nice one if it can sit for a few more days.
Similar chart here for DNR to a lot of the refiners, again, too Vish for us, needs to base.
OXY trying to lift off from 50SMA. Not a bad swing right here with stop under 50SMA.
Nice action PXD as it lifted from 50SMA, again decent entry right here with stop under Thursday low.
Let’s start with a driller that actually is under-performing:
We like RIG 74-75 on support, or on breakout of trend-line on strength. Anything in the middle we’ll leave alone:
The next six charts all belong to refiners/marketing sub-sector.
HOC is our favorite (and we got long on anticipation of trend-line break on Friday and are holding). Next resistance is 60 and 62. Great chart.
VLO beautiful bounce from 50SMA. Nothing wrong with this chart but a bit of basing under recent highs would make it look even better (and give us an entry!).
FTO similar chart but more extended from 50SMA. Very strong, and looks like it wants to get out of this recent range asap. Too extended for us to swing but active traders will probably be interested in 29 for a quick one.
WNR a bit more messy and no clear spot yet but a few days under 17.5 would set it up.
TSO made our newsletter after Japan for a target trade to 26 which worked great. It’s now regained that area and looks to be grinding higher. Too extended for us to get involved.
SUN the strongest of all and has already broken out. Very impressive but too late here for our style.
Nice basing here under 78 for NFX– this could be a nice one if it can sit for a few more days.
OXY trying to lift off from 50SMA. Not a bad swing right here with stop under 50SMA.
Nice action PXD as it lifted from 50SMA, again decent entry right here with stop under Thursday low.
Chop Chop
Many sectors stalled or reversed at resistance on Friday. Expect some choppiness ahead as market decides its direction (bull option: digest the move and plow ahead; bear option: bounce over, back down to lows). Considering recent resilience of the market bias is firmly with the bulls until proven otherwise.
SPY reversed at trend-line
QQQ reversed at 50SMA and trend-line
We posted this chart a few times last week expecting a move and pause into this area. Basing under would be healthy in order to set up a new move up.
DBA big move from 100SMA into 50SMA and now pause.
The BEST technical ETF we follow -- GDXJ bounced again perfectly on the 200SMA right into trend-line and now basing on 100SMA. It could retrace 50% of the move and still be bullish. Beautiful chart.
SLX we had charted last week as a move from trend-line to 50SMA -- here it is and now pause. Again, any basing here would be healthy.
Our favorite sector right now is Oil and Gas -- note how it's basing under trend-line. We're expecting a breakout soon from this area.
KOL has also been hot -- we're basing near recent highs. Any digestion here would be very healthy for the upside.
SPY reversed at trend-line
QQQ reversed at 50SMA and trend-line
We posted this chart a few times last week expecting a move and pause into this area. Basing under would be healthy in order to set up a new move up.
DBA big move from 100SMA into 50SMA and now pause.
The BEST technical ETF we follow -- GDXJ bounced again perfectly on the 200SMA right into trend-line and now basing on 100SMA. It could retrace 50% of the move and still be bullish. Beautiful chart.
SLX we had charted last week as a move from trend-line to 50SMA -- here it is and now pause. Again, any basing here would be healthy.
Our favorite sector right now is Oil and Gas -- note how it's basing under trend-line. We're expecting a breakout soon from this area.
KOL has also been hot -- we're basing near recent highs. Any digestion here would be very healthy for the upside.
Thursday, March 24, 2011
Bottom or dead cat? Too early to tell but enjoy the move.
What do these all have in common? They broke through their 50SMA, found support on the 100SMA and now are lifting up to go visit the 50SMA. None are technically healthy, yet anyway, but all look like they want higher. If the tech move is for real, we should get some nice clean spots in the near future. If it’s not for real, then the 50SMA should prove to be resistance. Considering the resilience of the market advantage goes to the bulls. $NVLS $QCOM $SPRD $RVBD $SWKS
All look like they want at least to 50SMA and all look like good daytrade shorts on first test of 50SMA
All look like they want at least to 50SMA and all look like good daytrade shorts on first test of 50SMA
Tuesday, March 22, 2011
Support/Sector
Without a doubt our most profitable support long trades have been when a whole sector hits support simultaneously —
Networking related stocks are on our radar for a group bounce — points of interest are horizontal line on charts:
$CIEN $JDSU $FFIV $JNPR
Networking related stocks are on our radar for a group bounce — points of interest are horizontal line on charts:
$CIEN $JDSU $FFIV $JNPR
Saturday, March 19, 2011
Rationality #Fail
Odds of a nuclear core meltdown are estimated by scientists to be 1 in every 10,000 years. That’s very interesting especially in light of the fact that we have had 3 at least partial core meltdowns in just the last 50 years. This is the kind of statistic that makes us shake our head at such mathematical estimates based on a purely rational approach. Of course anyone in our profession will instantly see the parallel between the utter failure of the scientific estimate regarding potential nuclear disasters and the utter failure of the estimated risk of financial meltdown in 2007. Statistically both were nearly impossible and incredibly unlikely. And both are occuring in a very regular time-line. What becomes very clear is that complex systems defy rational mathematical estimates of risk.
We were pondering these thoughts last week when our intelligent friend Alex recommended reading Richard Bookstaber’s A Demon of our Own Design. Fantastic book — here are a few quotes:
“I believe the markets can better conquer their endogenous risks if we do not include every financial instrument that can be dreamed up, and take the time to gain experience with the standard instruments we already have. Just because you can turn some cash flow into a tradable asset doesn’t mean you should; just because you can create a swap or forward contract to trade on some state variable doesn’t mean it makes sense to do so. Well, in the efficient market paradigm it does. . .But in the world of normal accidents and primal risk, limitless trading possiblities might cause more harm than good. Each innovation adds layers of increasing complexity and tight coupling. And these cannot be easily disarmed through oversight or regulation. If anything, attempts at regulating a complex system just makes matters worse….Rather than adding complexity and then trying to manage its consequences with regulation, we should rein in the sources of complexity at the outset.
Simpler financial instruments and less leverage make up a painfully obvious prescription for fixing the design of our markets. These modifications will lead to a financial marketplace that will be apparently less finely tuned and less responsive to investor needs. But, like the coarse response mechanism of the cockroach, when faced with the inevitable march of events that we cannot even contemplate, simpler financial instruments and less leverage will create a market that is more robust and survivable”
We were pondering these thoughts last week when our intelligent friend Alex recommended reading Richard Bookstaber’s A Demon of our Own Design. Fantastic book — here are a few quotes:
“I believe the markets can better conquer their endogenous risks if we do not include every financial instrument that can be dreamed up, and take the time to gain experience with the standard instruments we already have. Just because you can turn some cash flow into a tradable asset doesn’t mean you should; just because you can create a swap or forward contract to trade on some state variable doesn’t mean it makes sense to do so. Well, in the efficient market paradigm it does. . .But in the world of normal accidents and primal risk, limitless trading possiblities might cause more harm than good. Each innovation adds layers of increasing complexity and tight coupling. And these cannot be easily disarmed through oversight or regulation. If anything, attempts at regulating a complex system just makes matters worse….Rather than adding complexity and then trying to manage its consequences with regulation, we should rein in the sources of complexity at the outset.
Simpler financial instruments and less leverage make up a painfully obvious prescription for fixing the design of our markets. These modifications will lead to a financial marketplace that will be apparently less finely tuned and less responsive to investor needs. But, like the coarse response mechanism of the cockroach, when faced with the inevitable march of events that we cannot even contemplate, simpler financial instruments and less leverage will create a market that is more robust and survivable”
Friday, March 18, 2011
Daytraders: Hang with your own kind
We read an interesting article a while back by Kid Dynamite about the benefits of seeing opposing viewpoints. The article was well written and made sense for his trading style as a swing trader. However, all we could think about is how the exact opposite is true for daytrading. Once again, time frame changes everything.
At our stage of the game all the technical matters are automatic. We know our setups, we know exactly what to do in terms of risk management, it’s become second nature. What’s left is all psychological. The quality of our set-ups is consistent, our risk management is stable, so what’s left is all mental.
As a daytrader you have to make instant decisions within seconds and when you are putting that much money on the line in a split second decision you will rarely have 100% conviction. The money at risk for a swing trader’s typical 8% stop can easily be equivalent to 50 cents for a typical daytrade. It’s notoriously easy to get talked out of a daytrade position. Daytrading is much more instinctual than swing trading, and the less rational thought that goes into it, the more psychological it becomes.
This is one of the biggest drawbacks of a chat room that has traders who use different trading strategies: you mix in every color and in the end you’ll get an ugly brown. This is the reason that the traders we follow on stocktwits all have similar trading styles, we want the confirmation, we do not want dissent. If we’re in a trade it’s because it fulfilled the required conditions (set-up, risk/reward) and the last thing we want is to question the trade.
At our stage of the game all the technical matters are automatic. We know our setups, we know exactly what to do in terms of risk management, it’s become second nature. What’s left is all psychological. The quality of our set-ups is consistent, our risk management is stable, so what’s left is all mental.
As a daytrader you have to make instant decisions within seconds and when you are putting that much money on the line in a split second decision you will rarely have 100% conviction. The money at risk for a swing trader’s typical 8% stop can easily be equivalent to 50 cents for a typical daytrade. It’s notoriously easy to get talked out of a daytrade position. Daytrading is much more instinctual than swing trading, and the less rational thought that goes into it, the more psychological it becomes.
This is one of the biggest drawbacks of a chat room that has traders who use different trading strategies: you mix in every color and in the end you’ll get an ugly brown. This is the reason that the traders we follow on stocktwits all have similar trading styles, we want the confirmation, we do not want dissent. If we’re in a trade it’s because it fulfilled the required conditions (set-up, risk/reward) and the last thing we want is to question the trade.
Thursday, March 17, 2011
Trading Strategies
We have four different strategies based on daily charts that we commonly use:
1. The first is the one most familiar to traders and that’s the “break-out”. This is a trend-following strategy. It works well in trending bull markets.
2. The second is the “break-down” and it is also a trend-following strategy. It works well in trending bear markets.
2. The third is buying support, a reversion to mean strategy. This works well in markets that are correcting but still in longer term bull trend.
3. The fourth is shorting resistance and is also a reversion to mean strategy. This works well in rallies within longer term bear trends. This strategy can however also work well in range bound markets or nervous markets.
In addition to these strategies (all based on daily charts) we have three intraday strategies that we have created over the years that work in conjuction with the daily strategies: the base and break, the Indy, and the overshoot support. The first two are used in the trend following strategy, while the third is used in reversion to mean buying support strategy.
Here is an example of a typical break-out: BHI breaks out of congestion over 72.
Here is an example of a typical break-down: JDSU will probably hit some stops through this support base of 20. This strategy hasn’t work well for a while as buyers have repeatedly bought the dip; where stocks should typically die, they instead reverse. We are not interested in breakdowns at this point.
Here is an example of the third strategy, buying support within established longer term bull trends: CLF near 80 would be supported by the ascending 100SMA and daily support and would get us involved long:
Here is an example of the fourth strategy, selling resistance within established bear trends, OR in nervous markets. QCOM short 55 would most likely be good for a daytrade short as there is strong resistance at that level. Note that we always buy the first test of support and short the first test of resistance. After that we don’t get involved. This means we would expect the first touch of 55 to work well as a resistance short, but the second test to quite possibly be a successful breakout.
Of course there are also many nuances that come from the intraday set-up (for example we don’t buy support if it is basing on it instead of a vertical panic move towards it, etc) and many smaller points one has to keep in mind when trading these strategies. However, this is the skeleton of how we have traded over the last 14 years, and will most likely trade until we retire.
1. The first is the one most familiar to traders and that’s the “break-out”. This is a trend-following strategy. It works well in trending bull markets.
2. The second is the “break-down” and it is also a trend-following strategy. It works well in trending bear markets.
2. The third is buying support, a reversion to mean strategy. This works well in markets that are correcting but still in longer term bull trend.
3. The fourth is shorting resistance and is also a reversion to mean strategy. This works well in rallies within longer term bear trends. This strategy can however also work well in range bound markets or nervous markets.
In addition to these strategies (all based on daily charts) we have three intraday strategies that we have created over the years that work in conjuction with the daily strategies: the base and break, the Indy, and the overshoot support. The first two are used in the trend following strategy, while the third is used in reversion to mean buying support strategy.
Here is an example of a typical break-out: BHI breaks out of congestion over 72.
Here is an example of the third strategy, buying support within established longer term bull trends: CLF near 80 would be supported by the ascending 100SMA and daily support and would get us involved long:
Here is an example of the fourth strategy, selling resistance within established bear trends, OR in nervous markets. QCOM short 55 would most likely be good for a daytrade short as there is strong resistance at that level. Note that we always buy the first test of support and short the first test of resistance. After that we don’t get involved. This means we would expect the first touch of 55 to work well as a resistance short, but the second test to quite possibly be a successful breakout.
Of course there are also many nuances that come from the intraday set-up (for example we don’t buy support if it is basing on it instead of a vertical panic move towards it, etc) and many smaller points one has to keep in mind when trading these strategies. However, this is the skeleton of how we have traded over the last 14 years, and will most likely trade until we retire.
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