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.

The Value of Thin Bets

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Each morning, before the market opens, I fire up my trading platform to see what's happening. Invariably, I'll see some positions with gigantic "losses", because the bid/ask data is just plain silly (e.g. for a $15 stock, it might show a $10 bid and a $20 ask, until such time as the market is actually open). So most of these are false scares.

One of them this morning – APL – was not. This was a short of mine, and it was getting bought for a 35% premium. Not a great way to start the day!

However, this position represented 0.34% of my portfolio, so it was hardly devastating news. Was it good news? Of course not. Would it wreck my portfolio? No. I spread my positions thin. Of course, if the stock dropped 35%, it would also mean that my short wouldn't make a meaningful positive difference either, but everything is a two-edged sword, isn't it?

0728-apl

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.

How I Spent My Morning

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Pretty simple………….two activities:

(1) Dumping my 25 longs

(2) Shorting like there's no tomorrow (and there isn't)

All my longs basically looked like this:

0706-bid 

That is, badly battered stocks that were bouncing. I think stocks like this have a chance of more recovery over the next week or two, but the general trend is down, and I'm not about to let a ridiculous 150+ rise with no basis in reality stop me from shorting more. Indeed, it's a great opportunity.

At the moment, the S&P is up 0.87% while my portfolio is down 0.42% in spite of being over 100% invested. The reason? A combination of the fact I had longs earlier and entered shorts at favorable prices. Being as bearish as I am, having a loss that's less than half of the day's gain is a marvelous success. I'm delighted with the day so far.

My Day

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As you might guess, I have read virtually no comments over the past few days, so I am very "out of the flow" of things, which bugs me. I really like to read what people are saying and referencing. But a vacation is a vacation, and I'm getting a bit of leisure time.

Well, not exactly. My day began, as it did yesterday, at 5 in the morning, and I ambled down to the lodge to start the trading day. I had something like 25 longs and 48 shorts, and I was lightly positioned (maybe 30% of my portfolio; the rest in cash), and tilted somewhat bearish. I was struck with immediate disappointment when I saw the /ES was down 15 points already. I had really, really hoped the last two days of the quarter would be a bore, much like yesterday, but it was not to be.

What happened today sets us up for either an immediate (and it has to be immediate), hearty bounce, or we crack the neckline we've all been obsessing about for all these weeks. Look at the S&P:

Picture 3
 

If we break the neckline, a measured target would be around 875. At that point, I think the bear fun would be done for many ,many months. It would just be a range-bound grind from then on.

Ironically, it would be drastically better for the bears if we rocketed toward 1125 – – or even 1150 – – before softening up again. This would be a once-in-a-lifetime chance to load up on shorts at amazing prices. Sadly, that opportunity may not come.

The Dow Jones would fall to about 8250 (and I believe it will before October is over) in a similar scenario. The giant question is what will happen tomorrow. What could the Fed pull out of their backside at this point?

Picture 2
 

I have been somewhat hampered – – – but only somewhat – – by my remote location and paucity of computer equipment. To be brutally honest, had I stayed home, my results would probably have been extremely close to what I'm seeing thus far.

As of now, I have 87 short positions and 3 long positions (FXE, RTH, and TLT). Tomorrow is bound to be volatile, since today probably threw a lot of people into spasms. Whether it's up big or down big is unclear. I am shocked how fast the fall is unfolding. The bulls are in a much more pitiful situation than even I imagined.