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.
What I'm up to…..
+ Covering selected short positions whose risk/reward levels merit it;
+ Tighten up stops on those shorts that remain;
+ Went long large DIA;
+ Went long medium TBT (I know, I know);
+ Went short GLD and GDX and SLV when gold was doing its breakout thing
Basically I'm taking some profits and backing away in preparation for the bounce-that-never-seems-to-appear.
This is going to be one of those "essay" style posts, which are uncharacteristically devoid of charts, considering the typical post on this blog.
First, a couple of bits of business. I'm not going to harp on market direction much, since I've made my point of view quite clear – – a hearty rise up to some level beneath 1173 that I haven't decided yet, followed by a pause of indeterminate length and then the best plunge of 2010. It's as simple as that. Whether that is days, weeks, or a couple of months away remains to be seen. So I'm not going to be repeating that until we're a lot closer to action.
The other I wanted to touch on is this: I got an email from an otherwise grateful reader who was somewhat irked that I didn't mention my massive short-covering yesterday morning more promptly (I did the post maybe 30 minutes after I had done so). He asked me, as a "small favor", to make a point of posting my portfolio changes in real time.
Errr, look, if any of you are doing this sort of thing – – – don't. By "this thing", I mean trying to ape my trades. I make no claims as to the accuracy, completeness, or timeliness of any of my portfolio changes. The only people who are going to get that kind of service are my partners, and that's because I'm managing their money alongside mine. But please – for your own sake – don't get the impression that you can simply read what I write here and mimick what I'm trading. I mention a few things here and there, usually if it occurs to me and when I get around to it, but it is by no means a real time "feed" of my actions.
Now, back to the business at hand: a few people have written me to explain why and how I sometimes manage a lot of positions. There are times when I have over 200 positions going, and I actually intend to get around 250 before the hoped-for Big Plunge that I anticipate. The typical feedback is, "gee, I an barely manage seven positions; how do you do it?"
For 99.9999% of people, I think doing this kind of thing is inappropriate. My view is that, for a person serious about trading, they dedicate many years of their life to shaping and crafting their own personal trading style. This style will hopefully conform to their own strengths and weaknesses so that it's appropriate for them and amenable to their trading success.
I've got more than my share of quirks; among them is an obsession with order. If I ever mention in the comments section that I'm going to take a break and sort socks, I'm probably not stating that in the metaphorical sense. I like things clean, organized, and manageable. I'm a neat freak.
This obsession with order has, in turn, made me obsessive about my watch lists, my trading platform, and my custom-made spreadsheet. These components are the instruments in my orchestra, and I'm their conductor. I run everything on my own, and between my one brain, two hands, three laptops, and four monitors, I'm managing what is often a large number of positions in a pretty large portfolio.
But why so many positions? Is it some kind of pathetic, male My Watchlist Is Longer Than Yours mind-trip? No; there's nothing Holmesian about my desire for a lot of positions. I've thought a lot about this, and there are probably two good reasons behind this.
The first is that, in the spirit of Will Rogers, I've never met a short I didn't like. In a market like this, which recently has become very friendly to technical analysis, there are such a glorious variety of shortable patterns, and I want to take advantage of as many of them as possible. For the move higher, I'm keeping it as simple as can be, with the likes of IWM. For the subsequent move down, I'm instead going to spread my bets very thin and very wide. On a down day, what I want to see out of this wide variety of positions is to be up more than the market is down.
The second reason may surprise you, but it's probably the more important reason for me: having this many positions slows me down. It gums up the works. It makes me less nimble as a trader. And that is often a good thing!
If, for instance, I decided to just trade the SPY and nothing else, I'd try to capture every squiggle and wiggle that happened, and that would probably benefit one party more than anyone else: my broker. We all know that, The Squid excepted, no one can take advantage of every little wiggle in the market. Having an unwieldly number of positions kind of forces a person to "sit tight" since, believe me, it is time-consuming to exit a couple of hundred positions. You might get out of 50 choice ones, and then throw up your hands and just decide to tighten the stops up on the rest. More often than not, that decision has been a profitable one.
So I don't expect anyone to have read this post and take any action based on it, except hopefully to dismiss the idea of trying to do the same. It's a huge amount of work, very much a full-time job, and it requires – – shall we say – – a certain kind of personality that gravitates toward this kind of system. This whole topic will be moot until such time as it is ready to "load up" again, but I've got a watch list of 350 symbols (whose list's name is, appropriately enough, Bounce House) that I plan to seriously considering entering. And that, my friends, will make 2010 memorable for all of us.
There are five main kinds of posts I put up on this blog:
+ A "one-off" idea – usually a simple chart with its symbol and a declaration that I'm going either long or short the position;
+ A group of symbols, collectively presented as long or short ideas;
+ A goofy or musical video;
+ A video I've made discussing market direction;
+ An essay about something that's on my mind
This posting will be the "essay" kind, since I'd like to talk about my recent success with trading and what it's meant to me. More importantly, I'd like to go over how it informs my own trading.
Most of you know that I started managing money professionally late last year. The response to my new career was enthusiastic, and a large number of clients joined me in my new venture. I obviously want to do very well for them as well as myself.
In retrospect, it was a challenging time to start a fund for someone with a bearish tilt, since there was a huge stretch of time – November through April – that was, on the whole, wildly bullish. Through a combination of judicious risk management and an only partial deployment of my buying power, I was able to contain losses. But, let's face it, a loss is a loss, and dealing with a string of losing months stunk. It was more emotionally draining that I can describe with words.
Over the past few weeks, I have been trading extremely effectively. In the span of just a dozen days, I've undone a half a year of self-inflicted damage. Being able to perform at my best, virtually on a daily basis over the past few weeks, has been enormously encouraging. It has also been marvelously healing for the portfolio I manage.
So what's different? What changed? How is it that I've put together an almost uninterrupted string of days whose profits were so strong? This is something I've thought a lot about, because I really, really like this feeling, and obviously I'd like it to continue – – well – – forever.
Although it's no explanation, one thing I can say is that I've been very in synch with the market lately. Do you remember biorhythms? Those were the goofy graphs that were really popular back in the 1970s. They supposedly helped you understand how, based on time, you were going to get along with the rest of the universe. I've never put much stock in such things, but I was reminded of the subject when thinking about my own relationship to the market.
For a long time, particularly during February and March, I found the market agonizing. I felt utterly out of synch with it. Charts didn't make sense. The market's behavior didn't make sense. I started to wonder if technical analysis even worked at all. I scoffed at techniques, such as Elliott Wave and cycle analysis, which I felt had held such promise. I couldn't seem to make trading work for me anymore. I felt confused, inept, and – at times – helpless. And all through this time, I was really, really trying my best to be a good technician and a good trader.
In April, things started to slowly come back together for me. Keep in mind, the market kept climbing through April 26th, but even before then, things seemed to start to 'behave' better for me than they had in a while. As April turned into May, things kept getting better. I started having days whose profits were larger than I had ever had. I mentioned having a "record day" more than once, since I kept beating my old record. Even trading things like precious metals and natural gas – – and even FAZ and SRS! – – started going my way more often than not. I was on a roll again.
What's the reason for the change? Since Goldman has felt the heat of government inquiry and public scorn, have they pulled back their interference with the market? Maybe. I've got to say, starting with the (glorious) day that the government announced its civil suit against Goldman, the market has been working much more like I'm accustomed. Charts work again. Trendlines work again. Perhaps the market is being permitted to act like itself.
Another big aspect of this is trend. We're actually getting up-and-down patterns that make a certain amount of sense. Indeed, on that fateful day when I stood back from my Macintosh, stared at the screen, and made my prediction about what was going to happen, I felt uncomfortable, since so many of my predictions had a monkey wrench thrown in them. The fact that, move for move, everything went as I believed, was both gratifying and confidence-building.
The key right now, of course, is not to blow it. Indeed, I hesitated putting a check in the "Victory" box when choosing categories for this post, since the superstitious side of me is terrified of jinxing something. I've even considered dumping Victory as a category altogether, since I figured I'd never, ever want to use it again. It seems too much like tempting fate. But I run an honest blog, and I feel victorious, so I'm going to mark this post as such.
There's a difference between victory and hubris, however. As I made clear earlier today, I took my heavy foot off the pedal. I have no "ultra" funds at all. I have no large short positions on. I've got a series of large long positions to balance things out. And my portfolio commitment is smaller than it was.
I think one lesson I have firmly embraced through this entire ordeal is that it's good to be "light" in one's portfolio when things aren't clear as a bell. I was confident during the past few weeks about my point of view, so I could actually put on large positions, including double- and triple-ETFs, and still sleep reasonably well at night. I also had to be aggressive in order to claw out of the hole I was in. I'm glad that I was daring, but now that I've made so much progress, I am adopting a more conservative position until we're back to "clear as a bell" on the charts again.
As I said, I have felt very in-synch with the market, and as long as I continue to feel this way, I'm going to continue shaping my portfolio – either bullish or bearish – in the way the charts tell me. As I fall out of synch, as inevitably I will, I will back off – – way off – – and get very light. Your understanding of emotions and the market is vital to trading success. Likewise, your understanding of how aligned you are with the market's machinations is, I believe, a vital guide to how aggressive you should be (up to and including being purely in cash).
We are living in historic financial times. I see politics, business, and history through the lens of charts, and because of all that, it is a fascinating daily exercise. One's personal experience with the markets demands psychological self-awareness, and, from what I've experienced, I believe it is a lifelong journey. These have been my own thoughts about what this journey has been like for me lately, both on a long and hard road, as well as the recent weeks that I've had the profound pleasure of creating and living.
This is a topic about which there appears to be a tremendous amount of confusion. I have spend more than a small amount of time thinking and reflecting on this topic as well. These are my thoughts and reflections.
Is there a difference and if there is, what is that difference? Is there a grey area in between? Both trading (the term "speculation" can be used interchangeably) and gambling imply risk to capital. Risk exists in the very act of living. Here are my starting definitions and a signpost to the potential difference between the two:
A speculator seeks to take advantage of risk that is already in existence. He does not create the risk.
A gambler creates the risk. Without action on the part of the gambler, the risk does not exist.
Here is another potential difference. The speculator makes a trading decision based some type of analysis and can modify his risk and capital committed to the trade through time. The gambler, however, once the bet is placed, is now an observer and the rules of the game now control the outcome.
There are many games of chance. A professional poker player may actually approach trader status. He plays with a definable edge and I consider poker to be a game of skill. For the purposes of illustration of the differences between trading and gambling, I will use the game of blackjack in a casino setting.
The blackjack player's first decision is the size of his bet. A trader makes the same decision as to trade size. The dealer deals you your first card. You can do nothing. This is the equivalent of a price move to a trader and he can then re-evaluate his position. He can exit, he can increase his size, etc. Dealer finishes the deal. You now know what your hand is and half the hand of the dealer. Now the blackjack player has decisions to make. He can hit, stand, double down and split his cards. He can also choose (if rules allow) to surrender half his bet. These are also the equivalent of price moves in a trade. Now, the dealer has dealt you a blackjack, can you increase your bet to the total size of your bankroll? Of course you cannot. A trader could!
Now let us examen expectancy of outcomes. A trader has a perceived edge when entering a trade. It is developed over time using the same trading setup. Does the trader know the outcome of the trade? Of course he does not. However, he CAN know the outcome over a large population of trades using the same setup with the trades all executed in the same manner (discipline). Does the blackjack player know the outcome of the hand in advance? Of course not. Neither does the casino. The casino could not care less about the outcome of your hand either.
They are playing thousands of hands and the casino has the edge. Their edge is that you have to make decisions before the casino does. You lose your hand by busting out and the casino busts out as well, the casino already has your money. There is no equivalent of this when trading. Can the casino's edge be overcome? Yes it can but only by applying a very high level of skill. In days past, you could count cards. The casinos have employed counter measures and there is no longer an edge counting cards. However, advanced shuffle tracking methodology CAN give you an edge. This is the same as trading then in some respects. A highly developed skill set can overcome the beginning negative expectancy in a trade which is the spread between bid and asked and the commission for the trade. You begin each trade negative.
When does trading become gambling? There is a very thin line. I maintain that most traders ARE gamblers. They use markets as a substitute for a casino. Here are some of the sign posts that you have crossed the line. I love Jeff Foxworthy so I will steal his "you just might be a redneck."
1. IF you enter trades without a clear trading plan, you just might be a gambler.
2. IF you trade just to be trading, you just might be a gambler.
3. IF your bored and enter a trade, you just might be a gambler.
4. IF you look at potential profit before assessing potential loses, you just might be a gambler.
5. IF you have no impulse control, you just might be a gambler.
6. IF you have no methodology, you just might be a gambler.
7. IF you rely on others for your trading decisions, you just might be a gambler.
8. IF you do not take full responsibility for your trading outcomes, you just might be a gambler.
9. IF you increase your risk due to losses, you just might be a gambler.
10. IF you do not use stop losses or do not adhere to them, you just might be a gambler.
And my all time favorite
11. IF you get an adrenaline rush when your entering trades, you just might be a gambler.
In summation I would like to say that I do enjoy casino gambling as a form of entertainment. I strive to over come the house's edge when I do gamble. Gambling is entertainment and trading is a business and should be approached as a business enterprise. IF your using the markets as a gambling outlet, be my guest. Traders that approach trading with a positive expectancy WILL take all your money. They will send you stumbling out into the night, cross-eyed and mumbling to yourself. Be smart. You can either feed the trading gods or feed your head. Do the work and get educated before risking one thin dime. Employ laser like focus in your trading and use iron discipline. The end result can be well beyond your wildest expectation.
This is a very important – and somewhat selfish – post. I need your help, and I'm hoping you'll come through. But I think we might all learn something together. I'm going to leave it up for a good long while so I can get as much feedback as possible.
In spite of a horrendously rough month, my faith in charting – – the kind of charting I've been doing for decades and which I discuss in my book – – is strong. My charts haven't done me any damage. My judgment of market direction definitely has.
Generally speaking, my decision-making process has been a three-step approach:
(1) Make a judgement on the market's general direction;
(2) Assess individual charts and choose bullish and bearish patterns
(3) Load up on either bullish or bearish charts, based upon the conclusion from step (1)
This method worked marvels in 2008/early 2009. Even though the middle of 2009, it continued to work well. Even during the last six months, there have been brief instances (Jan 19 to Feb 5) where it has worked, but there have also been times (Feb 5 to present) when it's been devastating. In a market like this, the above "top-down" method isn't working consistently enough to keep. So I need a new approach.
Part "(2)", I am totally happy with. I'm a good chartist, and I think I can pick out bullish and bearish charts with the best of them. So this area – which is where I've got twenty years of experience – can remain.
It's parts 1 and 3 that need to get thrown under the bus, and I have three new approaches that are candidates for its replacement. I will tell you right now I do not judge all three of these as equal; there's one I really like, and there's one I don't care for, but I am going to try my best to excise my feelings about any of these three since I'd like unvarnished opinions. Oftentimes the comments section drifts off into other realms, but I ask that, for this post, let's stay on topic. Your aunt's recipe for Zesty Banana Pudding will have to wait.
So here are my three candidates, along with a brief description of each and, off the top of my head, the advantages and disadvantages for each. I could write a lot more about each of these, but I think you'll get the gist of it.
Candidate One: See-Saw
Assumption: That the market's direction, being unknowable, should not be relied upon as a basis for positions, and that the bullish/bearish configuration of a portfolio should simply be dictated, in a Darwinian fashion, on which positions "survive", adjusting accordingly.
Description: The simplest execution would be something like this: in a portfolio, an even number of bullish and bearish positions are executed, each of which is similar in size. Let's say 20 of your best bullish charts, and 20 of your best bearish charts. Stops are set and are updated daily. If a given position is stopped out, the trader is allowed to enter a new position on the other side. (Example: two bearish positions are stopped out; therefore, two new bullish positions are entered, yielding a mix of 18 bearish and 22 bullish positions). The mix "see-saws" either bullish or bearish, depending on what happens on a chart-by-chart basis.
Advantages:
+ Agnostic initially with respect to market direction
+ Intuitively, it seems to me that this is the most objective trending mechanism, because by its nature, it permits bullish (or bearish) positions to continue on their merry way, and it nukes losing positions (and permits opposing positions to take their place). So this seems to be a self-correcting mechanism.
Disadvantages:
+ Having equally-sized positions is troublesome. After all, does one want to have the same sized bullish position on something like SPY as they do a bearish position on some micro-cap stock? It also severely "collars" the size of the portfolio, because the small position is going to restrict the overall size. For example, let's say the most I wanted to risk on a particular position was $20,000, and I'm planning on having 40 positions (20 bullish, 20 bearish). That means a total portfolio of $800,000. That isn't going to do it. I need to be able to size for a much larger portfolio than that, but at the same time, I don't want to risk, say, $200,000 on some speculative issue only because overall portfolio size requires it.
+ It seems a method like this would be dangerous in a very choppy market. If, for instance, things were up one week, down the next, over and over again, a strategy like this would chop one into little pieces. It seems to me this method is best for markets that trend for at least a couple of months at a time.
Candidate Two: Cyclic Weighting
Assumption: The assumption here is that the market regularly moves above and below its moving average (for the sake of example, let's say its 50-day moving average) and, generally speaking, oscillates over time.
Description: This system would weight the portfolio from extremely bearish (a figure of -1) to extremely bullish (a figure of +1) – – usually somewhere in between – – based on the relationship of a major market index (like the $SPX) to its moving average. For instance, once the index has reached an extreme high vis a vis its moving average, the portfolio would be weighted highly bearish (perhaps 95% bearish positions and 5% bullish). If the index were exactly in the middle of its historic extremes, the split would be half bullish, half bearish. And, when the index was at a nadir relative to its moving average, the portfolio would have reached a point whereby it was almost entirely bullish. The portfolio would be in a constant state of change based upon the oscillation.
Advantages:
+ Makes the most of bullish moves from weakest points in index performance, and makes the most of bearish moves from strongest points in index performance.
Disadvantages:
+ Would suffer greatly in a trending market. So, for instance, if an index was at an extreme relative to its moving average, and it stayed there for many weeks, being loaded up on bearish positions would be harmful. Of course, the moving average would be in a constant state of "catching up" with its index, so bearish positions would be trimmed, but a market that is steadily trending up or down for long periods of time may be very disagreeable with such a system.
Candidate Three: The 80/20 Rule
Assumption: That, by and large, markets tend to go up, and while there is some room permitted for bearish positions, on the whole the assumption should be for asset inflation.
Description: The portfolio overall would have a weighting of 80% bullish positions and 20% bearish positions.
Advantages:
+ Simplest of the system
+ Over the long haul, this is the most in tune with broad market direction
Disadvantages:
+ Seems overly blind to market movement. If one remained 80% in bullish positions during 2007 and 2008, the bearish positions would have not be sufficient to fully counteract the damage going on.
I'm putting a poll below, so if you think any of these three is worthwhile, please vote for it. If you have a totally different approach that addresses this need for a "weighting system", please put it in the comments section. I am really looking forward to reading what people have to say. Thank you!
