Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Trading – Part Two: The Nuts and Bolts (Market Sniper)

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Here is the link to the first in this series of proposed posts on trading for review.

http://dev.slopeofhope.com/2009/12/setting-up-your-trading-business-an-overviw-and-part-1-developing-a-successful-traders-mind-set.html

This post deals with your business plan, your mission statement and your statement of personal belief. The nuts and bolts of building your trading business.

Many lump trading plan and business plan together. It is my opinion that they are different. Parts of your business plan will be incorporated into you trading plans. Your business plan is the overall framework of how you plan to run your business. Your trading plan would be a specific trade or trade setup and how that trade is entered, managed and exited. Trading plans will be dealt with in another post.

Business Plan

Here are some things that can and should be addressed in your business plan:

1. When will you trade? Of perhaps more importance, when will you not trade? Some suggestions: do not  trade when your tired, going through emotional stress, under the influence of alcohol or drugs for example. I also have rules such as after three losing days in a row, take the next day off. After a huge day (I have a metric for that), take the next day off, etc.

2. What will you trade? There is a lot to be said for becoming expert in ONE trading instrument. For example, I know a trader who ONLY day trades INTC (Intel). He has for years and makes a very good living doing that with a $100,000 account. Something to think about for you stock de jour day traders. Every single stock has at least one guy that just trades that stock. You want to go up against that?

3. What kind of equipment will you use? How will you maintain contact with your broker in an emergency? Power failure, etc.

4. How much trading capital will you risk in a single position? How much in a pure directional play? How much within the same sector/market. etc? At what point in draw down will you suspend trading?

5. What methodology, if any, will you seek to use to trade?

6. Are you going to trade as an individual or as an entity (LLC, corporation, etc)?

7. Schedule your time for trading activities away from actual trading (study, chart analysis, etc). In other words, get some kind of schedule or rhythm.

8. what kind of time frame are you going to trade in? Day trader means NO overnight positions in day trades! Big error in day trading is to carry over positions to the next day. IF your trading by plan, you will never allow that to happen. It is essential that you match your time frame to your lifestyle. Do NOT change your lifestyle to accommodate a trading time frame! That seems logical but some decide to become day traders and up and just quit their day job. NOT a great idea unless you have already become a consistent trader. By that I mean, consistently extracting capital from markets regardless of time frame traded!

This is by no means an exhaustive list but just some ideas to get you started.

Mission Statement

Before attempting to understand markets, you must understand yourself! This is your personal goals and mission. You must have a guiding purpose to your life! Most people do nothave any kind of purpose to their lives and wander through life aimlessly, blown around every time the wind changes. IF this describes you, your chances of being successful at trading will be severely limited by your lack of a defining mission in your life.

Mission statements are not fun for most people and most traders will not evaluate their lives in conjunction with their trading! Here is the typical response…well, my mission is to make a lot of money. That does not get it at all as that is not a mission! It is also not a strong motivator! If it were, why are wealthy people such a minority? Your mission as a trader is totally and completely impacted by your mission in life. Determining your life mission is one of the most powerful and important things that you can ever do.

How else can you define what is important to you, interact with other people and obtain self satisfaction as you go through life? How much you can live your life fully and with joy is determined by your mission in life! Here is what you must define: 1) What are your guiding principles and what do you value? Answer those two questions and you will have more knowledge about yourself than perhaps you ever have before. This is some of  the hard work required to become a successful trader. The work few will undertake and maybe now you begin to see why most fail at trading?.

Statement Of Personal Belief

Certain key beliefs which have absolutely nothing to do with markets will determine your success in the markets. These are beliefs about yourself. What do you believe your capable of doing? Is trading and/or success important to you? How worthy of success do you believe yourself to be? A weak personal belief system can undermine and even kill your ability to trade even a great trading system or methodology. You must believe in what you are doing and be doing something that you believe in. Nothing short of that will suffice. This is where the rubber meets the road. Where your mission in life meets trading.

Statement of personal beliefs, by their very nature, are very personal. I will share with you mine. It was written many years ago and is as true today, for me, as the day it was written.

"I believe I possess all of the abilities innately (inside of me) to become a top trader. I believe I have the ability to learn from myself and from others the knowledge and skills to the excellent trader that I am. What I do as a trader is honorable as I supply liquidity to markets. Without people, such as myself, markets would not exist. My ability as a trader helps me, my family as well as my country and humanity as a whole."

I hope this has been of some help in your journey as a trader. Remember: remarkable traders do remarkable things. Separate yourself from the crowd. You deserve what you earn through hard work.

More Money Than God

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I just finished reading More Money Than God, which is a wonderful overview of the history of hedge funds. It's a really entertaining read – right up there with Market Wizards – and I'd describe it as a combination of financial history, amazing market anecdotes, and a bird's eye view of the 2007-2008 financial crisis. I genuinely enjoyed this book, and if this kind of subject matter interests you, I'd encourage you to get it.

0802-moremoney 

Speaking of books, thanks to those of you who have ordered my book – – it popped up to the #1 spot of Online Trading Books on Amazon yesterday.

0802-numberone

As for the present market – – groan. The bulls have been punching the bears in the face since Independence Day.

I've drawn the various lines in the sand below on the /ES graph. As each of those levels are crossed – – magenta, cyan, and yellow – – the prospects of any decent down-move get weaker and weaker. It's going to take a violation of last week's low, tinted in somber grey, to give the baton back to the bears. Until then, the bears are going to continue to be the losers in equity markets. It wouldn't take much – – just a cross above that 1130 level – – to give the bulls another turbo-boost to higher prices.

0802-ES 

Trading Rules from the Marines

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I look at charts so often, I usually have to have something on in the background to keep the rest of my brain from rioting. Typically, that "something" is usually a movie or some music, and today I put in Full Metal Jacket (which, like most of my DVDs, I've seen many times).

Semi-watching the movie made me curious about the Marines, and I found this really interesting code of principals, which I've put below. It's an impressive list, and I think every element shown here is relevant to trading. Please read it:

INTEGRITY
Uprightness of character and soundness of moral principle. Absolute truthfulness and honesty.

KNOWLEDGE
Acquired information, including professional knowledge and understanding of your Marines.

COURAGE
A mental quality that recognizes fear of danger or criticism, but enables a Marine to proceed in the face of it with calmness and firmness.

DECISIVENESS
Ability to reach decisions promptly and to announce them in a clear, forceful manner.

DEPENDABILITY
The certainty of the proper performance of duty.

INITIATIVE
Seeing what has to be done and commencing a course of action, even in the absence of orders.

TACT
The ability to deal with others without creating offense.

JUSTICE
The quality of being impartial and consistent in exercising command.

ENTHUSIASM
The display of sincere interest and exuberance in the performance of duty.

BEARING
Creating a favorable impression in carriage, appearance, and personal conduct at all times.

ENDURANCE
The mental and physical stamina measured by the ability to stand pain, fatigue, distress, and hardship.

UNSELFISHNESS
Avoidance of providing for ones comfort and personal advancement at the expense of others.

LOYALTY
The faithfulness to country, Corps, unit, and to your seniors and subordinates.

JUDGEMENT
The quality of weighing facts and possible solutions on which to base a sound decision.

Frequency and Drawdowns

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A well-meaning Sloper from India wrote to me this morning, suggesting that I simply accept the fact that Goldman Sachs has unlimited access to free money from the government and will simply keep bidding this market higher. Thus, I should focus most of my trading on longs with occasional shorts here and there as a hedge.

I recognize this email was well-intended, but I must trade with integrity. If I wind up losing money, and I am faced with a client who wants to know why, I could envision a couple of possible answers:

1. "I was basing my trading on a historical analog which had been working well for nearly two years, but the analog ceased to work, and I was wrongly positioned."

or

2. "Goldman has a lot of money, and they cheat, so I decided to just buy stocks with the hope the market would just keep going Goldman's way."

Reason (2) might actually be a more profitable trading strategy, but I could never utter it in the face of a trading loss, because it would mean I was basing my trades on whimsical innuendo as opposed to a method I respect.

My core problem with this market, as I've mentioned, is frequency. I'm a swing trader. Dealing with a market that does a 180 degree turn every few dozen trading hours is maddening. Because being up 5%, down 5%, up 5%, down 5%, up 5%, down 5% is taxing to a man's soul.

In a market with any kind of trend, I'd instead be up 15%, down 5%, up 15%, down 5%, and so forth, which I can happily handle.

Since I've only said it three hundred times, I'll say it again: my postulate is that the market will reach around 925-930 within the next couple of months, and I want to be positioned for that. I am basing my positions on individually-selected securities that, on their own, seem like good short setups.

I have tempered with positions with three longs – DBA, FXE, and – – much smaller – – CPX (which is a position I suggested a few days ago and has been performing well).

I will say this, however…..at least an actively managed portfolio – even a bearish one – has held up OK in the chaos of the past ten months better than a straight-up bearish position. For instance, let's say you decided the market was generally going to be in trouble, so you bought TWM, which is the ultra-short ETF based on the Russell 2000. You'd be down about 30% at this point, even though the Russell has barely budged. So even though I've been running in place for ten months, at least I'm not facing that kind of uphill battle.

I did go through all my charts again, which I used to do every one or two weeks, but now I am doing nightly (and there are a thousand charts, so it's a lot of work). I did smoke out 20 positions which I put in my Bullish camp, but half of them are nothing more than Badly Beaten So Maybe They'll Bounce Back, which isn't my favorite reason to buy a stock. The other half – – if that – – are honest-to-goodness good-looking bullish patterns, which I'll probably share some of later this weekend.

The bottom line for me is that I'lm going to continue to base my trading on the 925 target until the evidence points me elsewhere. And, should that target be met, I plan to cover all my shorts and trade almost exclusively on the long side for many months to come.

Road to Nowhere

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With the exception of commissions-based brokers, it's hard to believe there's anyone out there who has really enjoyed the stock market over the past few months. I mean, just look at the ES below. I don't care what kind of implausible hockey-stick-shaped equity curves might be out there on the web (cough, cough); neither bull nor bear can consistently accumulate profits with whipsaw action like this.

0722-esnowhere 

It's no better on a longer-term scale. How has the Russell 2000 done for the entirety of 2010? Let's take a look:

0722-rutyear

That's right………..zilch.

It seems almost impossible for me to believe that just 18 (very long) months ago, I was racking up extraordinary triple-digit percentage returns for myself. These days, even the greatest hedge fund managers in the nation seem to be struggling to eek out returns that resemble nothing more than passbook-savings rates from the old days. People are satisfied with even just a few percentage points.

It's a huge amount of work for very little reward.

I guess you can sense my frustration. One day everything will line up. The next day it'll all get taken down again. The real stickler right now is that we're in kind of a no-man's land of prices. The index charts themselves are not clearly bullish or bearish. They're just in the middle of a huge morass.

Individual charts are a different story. It seems that these days, I'm getting one or two "blow-ups" a day among my short positions. Yesterday there was CMTL. Today there was NFLX. It looks like tomorrow it's going to be AMZN, which I'm also short.

Indeed, AMZN is down something like 15% after-hours as I'm typing this. That means that tomorrow, in the span of three months, Amazon will have lost one-third of its entire market capitalization! So it seems like the darlings of earlier this year (NetFlix, Amazon, etc.) are getting shellacked.

One thing I will say is that I have avoided, and will continue to avoid, any of the "ultra" ETFs. With this constant up-one-day, down-the-next, over and over again, people hanging on to such instruments are going to get destroyed. I'd rather hold fast to my current short positions, knowing that these are nominal price levels that will not get eroded by the machinations of day-to-day action.

I'm pretty tired of charts right now, so I'm going to call it a day. Someone let me know if we ever have a trending market again. It would be a nice change.