Beware of DOW

I rarely speak of the DOW because I rarely think of the DOW. It doesn't really exist to me because none of its components are in my trading universe. Ignoring it however is a mistake in my analysis because it is the granddaddy of all indexes. It is the one every John Doe Retail listening to the nightly news will hear about hitting a new all time high today. It is the index that will have them going to sleep tonight believing all is well in the market, but it's also the index that informs when something isn't quite right.

I consider a leading DOW as an indicator that my trading universe is lagging and since it is compromised mostly of small cap and momentum stocks it suggest that in the least it is currently a risk off environment or a period of distribution. With only 30 components a smaller amount of effort is required to misdirect the eye by pushing the needle and nudging the DOW to new highs while masking the relative weakness in the Russell and Nasdaq.

$INDU:$RUT

$INDU:$COMPQ

These are the times to be more alert and vigilant to a potential change of character in the market. A number of high fliers have been having some extreme volume sell-offs after earnings and many others are showing wide ranging intraday price movements indicating increased volatility which is a sign of distribution. Today TSLA, QUAD, MELI, and JCOM got to visit the woodshed and after hours it looks like SCTY, NDLS, and WFM will be joining them tomorrow morning. At this juncture market risk is beginning to increase and playing with this awareness is prudent speculation.

All is not foreboding however, as the leadership of tomorrow is taking shape today. Two that have been entered into my watch list are ECOM, and VOYA.

ECOM

VOYA

FadeBook?

FB

In October the entire float of Facebook turned over which coincided with the highest monthly volume in its trading history.  However, price closed below September's by 2 cents, and the open/close differential for October was only 26 cents.  Relating this to Wyckoff's third law of effort vs. result, the price/volume relationship is not in harmony on this time frame since price remained basically unchanged even though there appears to be a changing of the guard underway.  It's too early to say if this changing of the guard is from the strong to the weak or a shake out from the week to the strong, but the first price point to be hit, the October high of 54.83 or the October low of 45.26, may be the evidence required to make this call.

Weekend Review 11/01/2103

Had one sold in May and went away, one would have missed an 18% move in the Russel and Nasdaq, an 11% move in the SPX, and a 6% move in the DOW. The theme since May has been marginal high and shallow pullback which is most pronounced on a chart of the DOW, but can also bee seen with subtle variations across the other three as well.

$RUT

COMPQ

$SPX

$INDU

Part of the challenge of swing trading with market timing during this environment has been the sharp V-shaped rallies from the lows that swiftly surge breadth readings from one side of the pendulum to the other on a shorter time frame while keeping the longer term breadth trends extreme. There's a small window of opportunity to exploit from the pivot low of the correction to the pivot high, and if not already positioned much of the move is missed. The problem of waiting for the move to digest setting up tighter chart patterns is that by the time they break out the tendency to fade has been high due to the general market being extended with fewer stocks participating. One of the adjustments I've continued to make is moving away from swing trades on a shorter duration and switching to catalyst and earnings based trades with a longer holding period.   

Looking at the breadth numbers I follow a similar situation is arising yet again. The medium and longer term breadth readings for the most part are extended here, but the shorter term readings have begun to move towards the other end of the specturm.

This has been the character and nature of the market since May 2013. The last lengthy correction that wiped the breadth slate clean was September through November of last year before a linear and persistent up trend ensued. Perhaps there's a repeat and the recent October highs top ticked the market and a meaningful 5%-7% correction begins or perhaps this is just a shimmy shake to put some fear into a psychologically complacent and never ending bull story line and a spine for the bears before ripping to a marginal high yet again.

When I reflect upon the market of 2013 and what it has affirmed to me is to be alert to the harpy like lure that seduces traders to change their core methods and chase the market instead of allowing markets to come to them.  This market has forced me to rethink some of my (mis)conceptions about trading, entry/exit rules, vehicle selection and many other thoughts too numerous to lay out, however the one thing that I've held steadfastly to like a mast has been my core belief in momentum, that the market cycles from range contraction to expansion, and that there is an edge to be found here.  Some of my tactics have fluctuated but my overall strategic approach has not.  

YELP, I Need Somebody

During this past month I returned to the classics and have spent some time rethinking what I learned from Livermore and Wyckoff in particular. I find great value in reading the same book 10 times in a row, however I often find greater value in returning for the 11th reading after time has passed and experience has been gained, even if it is one sentence or a turn of phrase that resonates. As it is the end of the month and I am reviewing a number of charts, I had a sudden connection between one of them and a concept I've been pondering as of late, the Three Wyckoff Laws.

The three laws are as as follows:

The Law of Supply and Demand: When demand is greater than supply, price will rise to meet this demand, and when supply is greater than demand, price will fall until it has been absorbed.

The Law of Effort vs. Results: Every action must have an equal and opposite reaction. Price action on a chart must reflect the volume action below and the two should always be in harmony. Divergences and disharmonious price and volume often presage a change in direction.

The Law of Cause and Effect: In order to have an effect there must be a cause. Further, the effect will be in direct proportion to the cause. In other words, a small amount of volume will result in a small amount of price movement and a large amount of volume will result in a large price move.

One chart that stood out today when doing one of my month end scans was YELP. I wanted to keep the chart clean so I kept it sparse with 4 points of interest in this analysis.

YELP

The green line is the high of the IPO date in March 2012 that was unbroken until May 2013 at point 1)

1) My philosophy about IPOs that I've adopted from Dr. Wish is that the break of an all-time-high after 3 months is a significant price point. Given that this took well over a year adds to its importance. That it did so on the highest volume on a monthly basis outside of the IPO debut strengthens the validity of it. Filtering this price volume action through the three laws I walk away with the following thoughts:

Supply and Demand: There is a supply/demand imbalance here as price is rising

Effort vs. Results: Is there harmony between price and volume? To verify this two questions to ask is what is the width of open to close and high to low. If there is effort which in this case the largest volume over the past 12 months, then there should be an equivalent result, a candle with a wider range and a close nearer the high

Cause and Effect: For the month of May 2013 there was a 14.5% appreciation in price from the previous month. To verify whether this is harmonious action it is important to view the relationship to the preceding months. November 2012 established a pivot low that stood firm and on a percentage basis May had the highest price appreciation and the highest volume thereafter.

2)

Supply and Demand: There is a demand imbalance as price is still rising.

Effort vs. Result: Is there harmony between price and volume? In this situation price closed well below the high, however there was also a large gap up which on a monthly chart will be rare because the gap can only occur on the first day for this to be so. In essence this can be viewed as strong but also cautionary action which switching down to lower time frames could give clues about.

Cause and Effect: As this is the highest monthly volume of all time there should be corresponding price action which in this case is verified by the closing up 24% from the previous month which at one time was a much higher 36%.

3)

Supply and Demand: Price closed higher so there is still a demand imbalance

Effort vs. Result: Is there harmony between price and volume? In this situation there is obvious concern as the difference between the open and the close is only 39 cents. Further there are wicks high and low suggestion indecision on the part of traders at this price level, so the consensus as of now is balanced.  Given the volume and price action, is balanced what one would expect to see in this effort vs. result situation or is this a red flag even though the candle is green?

Cause and Effect: This is the largest volume on a monthly basis in the trading history of YELP and yet price only appreciated 2.37% on a closing basis. Therefor this is an anomaly and not the expected price effect given the volume cause. The float turned over 3 times so this churning may very well be distribution from strong hands to weak hands and reason to be cautious and on alert for declining prices moving forward.

One of the things I've learned from going back for the 11th time is being more observant of the price action on higher time frames and approaching the price/volume action without prejudice and with a set of rules for interpretation. After all, price and volume are just data points and a chart is an abstraction of them, nothing more or less.  My knowing that this chart is YELP elicits certain responses and biases that are difficult to ignore, but in having a process and filtration system some of that can be alleviated.  Based on the evidence I'd say there is reason to be on watch for a change in character and direction for YELP.

Weekend Review 10/18/2013

With a debt ceiling reprieve the market continued to march along, but in reality it never really showed much concern to begin with. So, for the folks paying attention to the market alone and ignoring the news it was a very good week indeed. For folks waiting until afterward it was a very good couple of days. Now that the anxiety has expired and the jubilation has commenced, is there reason to be cautious here in the midst of exuberance?

Looking at the breadth numbers I follow the market is heavily extended here and the probabilities lean towards a correction. Will this be through time, rotation, or price remains to be seen. Will there be one at all remains to be answered, but it looks likely.  Coupled with these readings, the COMP, RUT, and SPX popped outside their Bollinger Band today and since indexes have a strong tendency to mean revert, this event is confirming from my view point.

Extreme Readings

% of NYSE > 10MA

% of NYSE > 20MA

T2108

$ NASDAQ > 50MA

NASDAQ BB

RUT BB

SPX BB

The data suggest I should be cautious over the next 5 days. Putting this information into context and a plan based upon my experience, I'll be less likely to trade break outs on shorter time frames and near their highs.  The rational behind this is that follow through during a pullback becomes an issue so avoiding extended stocks and looking for pullback candidates that are breaking out will take priority.  Additionally I'll be more focused on A-grade set ups and whittle my watch list down to stocks on a weekly time frame that are setting up near their 10-period moving average. Some candidates I'm eyeing:

AVG

DGLY

DWCH

ENTA

MKTG

TUES

Also, the meat of earnings season is underway and I'll be dedicating time this week tracking those that meet my requirement and fleshing out a core watch list to trade off of for the next 3 to 6 months. One stock I'll be keeping a close eye upon and look at building a position is ZHNE.  I have a higher degree of conviction in the potential of this candidate and will look to commit some size and hold as a position.

ZHNE

I'm With These Guys

There's an old adage, you are only as good as the company you keep. When it comes to my trading I've come to the conclusion that I want to be with these guys.

NBG

RVLT

SCTY

More and more I focus upon trading plans that put me in the company of these guys and honing how I can exploit this on my time frame. These guys be found on the daily, weekly, or monthly charts, but they have tendencies and nuances that are particular to the time frame referenced. A recent example is a previous post about my trading plan for RVLT. A current trading plan is one I drew up a few days back for SCTY.

SCTY Model Book

Going into the last half of the month, 53 momentum stocks are currently running at their highest 12 period volume on the monthly time frame. This is my hunting ground for some more of these guys.  These Guys (Finviz Screen)

Trading Is Not A Zero-Sum Game, It Is -EV

Trading and Poker as a zero-sum game is the new efficient market theory. I can't count the number of times I've heard that trading is a zero-sum game repeated without any fact based evidence what-so-ever. Let's look at the definition of a zero-sum game first:

a zero-sum game is a mathematical representation of a situation in which a participant's gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s). If the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero.

So first let's disprove poker.

Buy into a 2/4 limit hold 'em with a $100 rack and post on the big blind. For sake of argument let's assume this is a 2-1-1 blind situation. If the first three hands are discarded, 4% of the rack is gone. If this is a full game of ~8 players and a hand count per hour of 35 you should be blinded 4 times. Without playing a single hand approximately 16% of equity will be lost in an hour.

Now to disprove trading.

I have a $1500 account. I buy 100 shares of XYZ at $10 for a total of $1000 and a commission of $7. I now have $1000 of stock and $493 in cash. I sell $XYZ the next day for $10 and a commission of $7 to you who has a $1500 account but with $1 commission. After this trade I have $1486 and you have $1000 in stock and $499 in cash. Let's repeat. I now have $1000 in stock and $479 in cash and you have $1498 in cash. If this repetition continued further, even though I bought and sold the same number of shares for the same price, soon enough I won't even be able to buy the same number of shares.

As long as there is a rake in poker and commissions in trading the game will always be -EV. The typical claim that trading is a zero-sum game is concluded briefly with, “For every winner there is a loser.” However, even this is not completely true as shown in the trading example. Further there is plenty of evidence that the game of trading is really a wealth transfer from the many to the few. A number of account studies have shown unequivocally that 90% of them are net negative and the owners of these accounts have a strong tendency towards the disposition effect: cutting winners short, letting losers run, and adding to losers but not to winners.

This is just one of many market maxims that when not vetted and taken at face value can lead to erroneous conclusions and outcomes, poor habits and thinking. One that I've recently thought about is “Trade what you see, not what you think.” The problem with this is that we now know through behavioral sciences that both are faulty and can not be relied upon unquestioned. When looking at a chart our eyes are subject to optical illusions and blind spots, and our thinking is subject to misidentify a trend based upon a sequence of 2 in a row among other behavioral biases.  Not only are they problematic individually, they can become more so when used in tandem. The moral of this story is: question first, verify second, believe third.  Reality based, evident backed trading trumps assumptions and maxims.

Back to Our Regularly Scheduled Program

Weekend Review October 11, 2013

By Friday, Tuesday did not happen; and so it goes during highly volatile and emotionally driven news cycles such as the debt ceiling and shutdown of the American government. On Tuesday it appeared that big money was stepping aside as well watched and highly liquid stocks sold off hard on heavy volume but by Friday the indexes bounced back just as swiftly with gains of more than 2% on Thursday alone. With a looming deadline this upcoming week, less is definitely going to be more.

I don't know if the market is pricing in a default or pricing in a resolution. Even when either of these events occurs there is still no telling which direction the market will react as it could be a sell the news event regardless. We don't have to look much further back then the 2008 Lehman collapse to know that the market is not always prepared and is willing to suspend disbelief of the improbable because it just can't phantom it actually happening, and this is where the real danger lays.

This is not the week to make assumptions on how the Clowns of Capitol Hill are going to behave. There is a core group of ideologues who clearly have little understanding of anything at all and are acting in an irrational manner with little concern for the potential effects of their decision making. As push comes to shove I do not underestimate the reptilian part of their brain kicking into high gear as the stress and tension mounts resulting in dangerous consequences and precedence.

I know that I trade my beliefs and I also know that there is a fringe group in the US that governs by theirs. This is an important point because when there is a belief system that is subscribed to 100%, one only has to look at the patterns and events that have happened before to be aware of what people are capable of doing. It is misguided to think that it can never happen here even though it happens everywhere else on the globe. It is misguided to think that it can never happen here even though historically some of these things we believe we are above have happened here already.

My preparation for this week is worse case scenario. I'd rather prepare myself for the most negative outcome possible than be optimistic that just like the movies the powers that be are going to wait until 00:00:01 to cut the red wire. Even then it still might blow depending upon market reaction.

Wax On, Risk Off

One of the luxuries of being a blip is the ability to go from 0 to 60 to stopping on a dime with minimal energy spent and impact felt. Those who trade with size and move markets can not do so with nonchalance. They can try to slowly liquidate and pass off from strong to weak hands, but when they want out of a room that's well over capacity and there's only one exit it becomes completely evident what they're up to. This is why it's important to pay attention to the stocks that trade with the highest dollar volume and/or are often spoken of and about as leaders.

Today the market moved from risk on to bum rush the exit as many of these stocks have been taken to the woodshed. The preponderance of evidence now indicates there is a change of character in the market and attention must be paid to it. In my weekend review I noted to pay particular attention to the bigger monied stocks as breadth indicators were sending me a mixed message and I felt it prudent under the circumstances to defer to the behavior of individual stocks. Early in the morning many of these spoke, or rather shouted. that the minefield was live and heightened caution warranted.  

AMZN

FB

PCLN

SPLK

YELP

The preceding are just some of the momentum stocks that took it on the chin today.  In total 361 stocks in my universe were down 4%+ today on higher volume.  Coupled with this, the well known fear index $VIX has been spiking too suggesting that concern about the general market has heightened over the past couple of weeks.

$VIX

These are the moments when gains can evaporate, or worse, become loses.  It's of utmost importance to have a game plan of action as to what to do when the calm water becomes a furious whirl pool. A week back I penned (figuratively) a post about mistakes and moving forward. I still have the two open positions I mentioned --AMBA and RKUS --with strict guidelines as to how I will trade them, so in this regards today's action is just noise and does not effect me in the least. My swing trades however, have been abandoned with profits and losses booked as they are on a completely different trading plan and time horizon, and are cut without hesitation when it's clear large distribution is hitting the tape in an extended market.

Moving forward I expect the continued noise of the debt ceiling to be in play so capital preservation until this resolves is the number one priority.  Earnings season will be in play so rebuilding watch list during this period will be where I'll put some of my energy.  Going over previous trades and noting where I've improved and what still needs to be worked on will be my focus.  From every pullback and correction comes renewed opportunity and a robust playing field to take advantage of.

Weekend Review 10/04/2013

If there is one concept this week exemplified it is simply this, read the market... don't interpret the news effect upon it. Yes, the government shutdown is a significant news event and one that hit home to me personally as it has effected friends and family, but the market did not confirm this as a back breaking situation. If anything the market continues to look healthy and robust even with the debt ceiling as catalyst looming.

Breadth Checklist

Going through my checklist this weekend, on a short term basis the market does not look extended here as the number of NYSE stocks above their 10 and 20 period moving average is 45 and 55 respectively. On the other hand, the number of stocks in my universe down 25% in a quarter is 188 and the number of stocks above 50% for a month is 20 which are both signs of caution, so there is a mixed message happening. When there are crossing signals it's best to go to the source and look at what the market leading stocks by dollar volume and most discussed are doing. This gives a clue as to what the big money is doing in terms of potential liquidation as well as what the most highly mentioned stocks that have captured the social/retail attention. Do any of these look problematic?

FB

PCLN

YELP

Additionally looking at the index relationships it's evident that the SPX has been relatively weak while the RUT and COMPQ have been showing strength. This is a sign of a risk on environment as small caps and tech continue to perform and lead the way.

RUT:SPX

COMPQ:SPX

RUT:COMPQ

Looking at the week ahead the Clowns of Capitol Hill will still be the most watched event in the world with ramifications for the market but it's best to keep an open mind as to how the market will gauge the conclusion or lack there of. With Alcoa announcing on Tuesday after the close attention will once again be focused on earnings and individual catalyst. Observe and react to the market, don't consume and presume the news' influence.

RVLT Model Book

Today I'm adding RVLT to my model book and have already drawn up the tentative plan of action on how to trade this.  RVLT shot up nearly 51% today on an earnings related catalyst, trading nearly 10 million shares --approximately 30% of it's float.  After such a large sized move I have no doubt that price may very well continue north without me but from a risk/reward situation I can't justify entering this yet so will wait patiently for price to either flag or pullback and hug the 10 period moving average.

RVLT Model Book

Stepping up in time frame, RVLT has exhibited strong volume bars, nearly turning over its float for 4 consecutive months.  Widening out the horizon it is clear that this volume is the highest in it's trading history.  Around the time this spike occurred there was news release relating to a new product --an energy efficient LED light. (source)  So there is a new product launch and earnings catalyst at play here along with massive volume with increasing prices suggesting accumulation.  If there is any substance to this, price confirmation and increasing momentum will be the clues I will pay attention to in the near term and make a decision as to whether or not this will just become a swing candidate or one I will look to trade on a longer term basis.

RVLT Monthly

Month High Volume Revisited

Is it volume which causes price changes, or do price changes cause volume –the hen or the egg, which came first? -H.M. Gartley, Profits in the Stock Market

To use a homely analogy, volume is to the price movement of stocks as gasoline is to the automobile. If you step on the accelerator of your car, giving the motor more gas, the car will start to travel faster. The more gas you feed it, the greater will be its momentum. Now, when your car has acquired considerable momentum, if you throw the clutch out and coast, your car will travel a considerable distance on the acquired momentum. -Richard D. Wyckoff

The current consensus is that high frequency trading accounts for 70% of the daily market volume on the surface and below the surface it is estimated that dark pools accounted for 32% of the trades in 2012 and this has most likely increased in 2013. As retail traders it is important to understand the implications of this, particularly in smaller caps and stocks that trade a few hundred thousand shares a day and assess who is on the other side of our trades and how this effects our price potential. If there is an average of 200K shares traded and 70% of that is HFT, this leaves a pool of 60K shares for day, swing, and positions traders, both professional and retail.

There are both positives and negatives to this. One major positive is that when these algos run amok and in our direction they can rapidly push price in our favor. This works best if one is already positioned in the stock. A counter point negative is that on entry day this can cause price to move beyond a proper risk/reward price point and also has the effect of deeper sell offs into the close or lack of follow through the next day because the demand is mostly manufactured and the absorption of supply is temporal and mainly intraday. Another negative is that the supply remaining can be easily moved by a small group of day traders taking a position then blasting it out to their 10,000 twitter followers.

We can bemoan this effect or we can realize from historical study that there always has been and always will be disadvantages presented to the average retail trader along with the standard risk of trading that applies if the game were fair. Although this is the case, the underlying fundamentals of market mechanics remain the same to this day and the same edges, anomalies, and patterns of 100 years ago work today. One significant change that has occurred, however, is the underlying internal market structure. Darvas spoke of abnormal weekly volume when shares traded exceeded 50 thousand, but the market has become much larger and the vast majority of the stocks in my universe trade more than this on a daily basis. Another fundamental shift is that during Darvas' time the majority of trades were transparent and there was not an informational edge when it came to price/volume relationships, unlike today where the order flow is algo driven or often hidden resulting in a lack of complete information and therefor a disconnect between price/volume.

When I started my studies of volume a year ago I was well aware of the perspective that “Only price pays.” and that volume was not particularly relevant or useful any more due to distortions and off market exchanges taking place. Hell, I even had a hard to reconciling the value of volume and its importance to myself. But, what is often left unreflected is that while price may pay what is the price being paid in the first place and is it an honest price, for not only does a significant amount of volume go unregistered, the prices being paid does as well. And even though I was aware of the statistics and effect of HFT and dark pools I continued to move forward with my line of thinking because volume has to matter after all because along with the open, high, low, close, it is the only other piece of information available.

As a result of these studies and realization of the effect of HFT and DP I've made the decision to move up to higher time frames, particularly the monthly when it comes to my volume studies. I started doing this 6 months ago and now have a model book of the best performing stocks during this time based upon this metric and have been able to improve my criteria for vehicle selection based upon the greater clarity this time frame gives when it comes to quantifying the absorption of supply. Once strong hands accumulate the float the expectation is that the clutch can be thrown into neutral and price will continue its acceleration as the shares that remain come at a premium.

March Momentum/MHV Watch List: 19% of list increased 50%+

Another change I've made to my trading over the past year is to my entry and time stop. Unless there is a compelling reason to enter a trade off the open I will wait until the last hour before making my decisions. There is a trade off as mentioned previously in which I will forgo some of the algo driven potential, however I also get to see if my signal completely forms and price is not faded and sold off hard into the bell. A second modification I made is extending my holding period from 3-5 days to 10 days to account for the lack of immediate follow through I've witnessed on my trades. This has allowed time for price continuation on its terms and has reduced the amount of churning trades by exiting trades that were not above entry price after 3 days.

The current underlying and dominant theme to this market is the FED induced liquidity, HFT, and DP. These are subject to change and hence the market structure as well. This is the flux markets will be under, but unless and until all shares traded are cloaked, there will always be a reason to be studious of both price and volume, thinking in terms of who is on the other side of the trade and what is their time frame, as well as studying chart patterns to identify better risk/reward set-ups.

It takes time for positions to be built by large players and I've found that by moving up to a higher time frame and following  momentum stocks with large monthly volume I'm better able to track rapid price increase with underlying supply absorption.  A periodic review of this list to prune those with waning momentum or decreasing price is sufficient to keep my watch list actionable with the greater confidence that I am on the correct side of the order flow for my time frame. The debate of which is more valuable or important or came first I'll leave to others as long as I have a hen that lays eggs I can eat.

Weekend Review 09/27/2013

It would be nice if the Clowns of Capitol Hill was a reality television show, but unfortunately it is a very real broadcast where the contestants get to vote off the populace/viewers. With the first DOW component Nike reporting, earnings season has kicked off, however it looks like the clowns are playing kick the can. Yet again a government shut down is being threatened and although this is more akin to powering off an unplugged lap top, there will still be serious ripples in the market. If ever there was a week to have a solid game plan, this would be one of them.

Last week breadth was very stretched on the shortest time frames I follow and that has waned somewhat this week, however the longer term readings remain elevated. Regardless, there is an identifiable headline risk this week that takes precedence. With this increased market risk event on the horizon my game plan for next week is to simply avoid opening new positions and be acutely aware of my current risk level. Market breadth analysis for this week is not so important to my overall outlook.

Mistakes and Moving Forward

I am a patient boy
I wait I wait I wait I wait
My time is like water down a drain
...
I'm planning a big surprise
I'm gonna fight for what I want to be
And I won't make the same mistake
Because I know how much time that wastes -Fugazi
 

Albert Einstein stated, “Insanity: doing the same thing over and over again and expecting different results.”  However, another genius would beg to differ as the following quote (one of many variations) attributed to Thomas Edison regarding his invention of the light bulb shows, “I have not failed 10,000 times. I have not failed once. I have succeeded in proving that those 10,000 ways will not work. When I have eliminated the ways that will not work, I will find the way that will work.”  

Notable trader and “Market Wizard” Linda Raschke has stated the following, “I only had to make the same mistake about 100 times before I learned (i.e. you can get overconfident, start trading too large, and make other mistakes).  I didn't learn from making the same mistakes just twice.  It can take repeated bashing of the head for something to sink into the skull.”

Today I felt like I needed a bit of catharsis and in the process share the frustration resulting from making the same mistake repeatedly as well as recovering and moving forward.  I embody this Rashke quote in nearly all I do.  I repeat the same mistakes, sometimes knowingly, and sometimes in the pursuit of a different answer (right or wrong) or a more elegant solution.  I repeat the same mistakes because sometimes I don't learn the first time and sometimes I don't learn the tenth time and sometimes I may not learn at all; however, when I do learn it sticks and from that point forward the knowledge is mine.

I've been repeating a similar mistake for well over three years now.  The main reason I still have skin in this game is because I have learned to keep my losses small --with the occasional hiccup --and I have been marginally profitable even though it seems I've tried everything in the book to assure antithesis of this order.  I've maintained the stance that I am biding my time until my experience catches up with my knowledge and have done my best to assure this is the case by limiting draw downs to my capital and being in general a risk averse trader while progressing into a risk aware trader.  In part I've succeeded in this by trading small and being scared shitless. 

The second smart thing I did was try as best as possible to stick to one ideology and this was momentum.  My tactics, entries, exits, holding periods, stop placement, position size etc... has been fiddled around with repeatedly and perhaps detrimentally, however my general approach has remained the same through out.  My daily bread has been a focus on momentum stocks and range expansion but admittedly I've experimented around with these parameters  which is a natural progression in trading because as experience and time in the market grows so does the understanding of the underlying mechanics and structure of the market.  I don't begrudge myself for doing this at all.

The third smart thing I did was seek help which was one of the most difficult admittance in the world for me to do as I am prideful of figuring things out for myself and doing things on my own.  For whatever reason, when I made a commitment to improving myself as a trader I realized I would do what ever it takes hubris be damned to progress down the path even if it meant asking for assistance, something that mortified me.  It meant accepting that I was human and I couldn't do everything on my own and it isn't necessarily being a burden upon another in seeking guidance. And so one day after a horrific trade (one that was actually profitable by the way but didn't follow my rules) I threw myself into the pyre and sent a raw journal entry to a total stranger.  That journal entry became a blog post on philpearlman.com

This was the beginning of the turning point for me.  What was echoing within the confines of my mind was finally externalized and was a surprisingly uplifting experience.  In the pursuit of my passion I exposed myself to another who didn't know me but merely accepted me based upon an imploring outreach to become better at what I wanted to do.  For this I am eternally grateful and from this a new plot was being toiled.

So what does all this bloviating boil down to?  I'm a phenomenal scanner.  I can scan like nobodies business, but it's not about the scans.  I've improved considerably at pulling the trigger on entries and taking my losses, so I'll give myself a pat on the back.  I'm still pretty weak when it comes to filtering a lot of the trading data I follow into meaningful information and maintaining and tracking quality watch list.  I still really, really, really, really suck at trade management.  I suck so hard at this that I missed an opportunity to increase my account size by 20%.

How? I didn't follow the plan.  Immediately after entry price continued in my direction for 2 more days --hooray --before it pulled back over the next 9 –Rut-Roh!-- and  I sold when price returned to my entry point as I was  unwilling to accept the possibility that this might turn into a loss after such a promising start.  Of course the following day price put in a pivot low, above my stop level, and never looked back again.  That trade was MAKO.

MAKO Entry

MAKO Trade Management

But wait, there's more.  It wouldn't be much of a lesson if I was harboring feelings from a trade I exited August.  How about a trade I exited last Friday under similar circumstances?  Yeah, there's the rub.  

Try, Try Again

So, I missed this because I repeated the same mistake that I have for over three years.  But you know what: I went to the fridge, grabbed a carton of milk, poured some into a glass, returned the carton to the fridge, and then proceeded to tip over my own glass.  I don't cry over this shit anymore because it's nothing new.  As Beckett so cleanly started Murphy, "The sun shown having no alternative on the nothing new." I'm use to it by now.  I'm not happy with it, but at least I know that even though I've suffered the same fate I no longer consider it neurosis because I'm in the company of Edison and Raschke, and more importantly I know that I'm capable of putting myself into these situations where luck can and will favor me because this time is different... at least in a few meaningful ways.

 Through all the trial and error over the past few years there are a couple of things I know- I've persisted and I haven't blown up.  Along the way I've learned a few other things, most importantly that I'm finally beginning to get a rhythm and style and cadence that suits me and I am understanding the market on my terms, which is invaluable.  I've taken the pot holed road of many weary traders and I've come to where two roads divide and I'm choosing not to take either because I'm going to blaze my own right down the middle.  It may take longer, and it may not be as scenic, it may be filled with hundreds of mistakes, but in the end it will be more satisfying because it will be my path.

So here's my deal to myself.  I have three positions open that were taken with a similar set up and the exact same trading guidelines as the MAKO trade.  I have not fucked these up.   I do not have any false expectations that these will return 20% to my account, but I do feel like today's crack on the head was sufficiently skull numbing and the lump left behind will still be noticeably protruding for the duration of these trades that I will not make this same mistake.  I have no delusions that I still won't make other mistakes and do so repeatedly because that's how I am, and even if that wasn't the case there are enough trader tombstones of those who didn't learn from theirs littering the landscape to keep things in perspective.

On a side note, oddly enough, today while I was beginning to journal my response to the MAKO news there was a related post to what I was undergoing by Darren Miller published on SeeItMarket.com/  that I think is well worth reading.

AMBA

AMBA Hypothesis Prior to Entry

RKUS

SIGM

These are the trades that I will be moving forward with.  The time ahead has the opportunities that the time behind didn't catch but showed the way.