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.

Finding Your Trading Style

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There's not much about the market I want to talk about today. I got stopped out of a handful of my positions, but on the whole today pretty much just set about reversing yesterday's progress. We'll see what the retail and jobs numbers hold for us in the morning.

In the meantime, I wanted to wrap up with a post about trading style. My belief is that learning how to trade is one of the richest processes of self-discovery a person can undertake, provided that person is highly dedicated to learning the art of trading and has enough introspection and flexibility to learn and grow. For myself, the process has been long – measured in decades – and difficult, but I can say with confidence I am a little bit better at what I do with each passing year.

But in the course of trying to learn to be a good trader, you are going to need to adapt your own personal style. By "style", I don't mean a bromide like, "a trader who makes a lot of money" – – or, less glibly – "one who trades what he sees"? I think those are empty characterizations, no better than saying your philosophy of life is to "try to be a good person and do the right thing."

My point of view is that trading style encompasses several areas:

+ Quantity – how many markets/positions do you plan to trade? One? A handful? Dozens? Hundreds?

+ Basis – what will the basis of your decision be with respect to what positions you will undertake?

+ Frequency – how often do you plan to enter and exit positions? In other words, are you a day trader, a swing trader, or an investor?

+ Bias – do you have a bullish or bearish bias? I believe the vast majority of people have a bullish bias, in spite of their declarations of neutrality. (The old saw "I trade what I see" is the safe route, similar to a political stance of "socially liberal and fiscally conservative" – – meaningless).

+ Security – what kind of securities do you like to trade? E-minis? Penny stocks? Blue chips?

I'm sure there are other elements, but that's not a bad start. For myself……..

+ Quantity – I like a lot of small positions in order to spread my risk. Once I get my trading mojo back into full gear, I wouldn't be surprised to have a couple of hundred positions.

+ Basis – I'm a chartist, pure and simple. I use my experience of having viewed hundreds of thousands of charts as the rationale for my decision-making. I don't use technical indicators at all.

+ Frequency – I would like to trade only occasionally, but in this market, where I've been pretty consistently stopped out of a variety of positions each day, I'm having to be much more active than I'd like. My preference would be holding periods measured in weeks or months.

+ Bias – Hold on to your hats, but……….I have a bearish bias, and I'm bear enough to admit it. There are a handful of stocks that I like on the long side, but until I feel the market in general has positioned itself for a sustainable, legitimate push higher over a multi-year timespan, I'm not interested in getting real long.

+ Security – I gravitate toward stocks that trade at least half a million shares a day – hopefully much more – and are typically priced between $20 and $90.

What got me thinking about all this was an examination of Covestor, and particularly a look at my friend Tim Sykes' amazing trading success. He's a penny stock guy, and having looked at a bunch of the charts he trades, I decided that penny stocks just aren't my bag. God bless Tim for doing so well, and teaching others to do so too, but it just isn't my style (as timelessly fashionable as making money might be).

Anyway, that's it for me today. My experiment with guest posters has largely been a bust (a handful of folks notwithstanding), so I don't think you'll see anything new until the morning. Sweet dreams!

Dummies Guide to the OPEX Play (by JesterX)

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Hi Jesterx Here, there is a lot of talk on the blogosphere about the opex week that is here. Many
people are scared and dont know what to do so I thought I would shed some light
as to how I normally play this.

I am very cautious of expiration strategies: options and futures have an
expiration date, and I've noticed that the market will often have a severe
drop into the Thursday or Friday the week before expiration, only to then turn
up and rally into the following week's option expiration.

If I see this
pattern set up, I'm leery of getting caught on the short side because I've
seen this pattern before. Many times during option expiration, buy and sell
programs will hit and shake you out of your position and fool you into
leaning the wrong way. I see it time and time again.

Something else that I've observed is that program traders oftentimes will
close the market very strongly in the last half hour, and I've noticed they
go the opposite way the last hour of the following day. I find expiration day
very hard to trade and try to stay out because there are many fake-out moves
due to the unwinding of options positions.

I THINK I CAN…. I THINK I CAN…..

 

In a volative situation like opex, sometimes the market creates nontrending
days where the market is trading back and forth in a range, I found out a long
time ago that the big boys in the futures pits will make money trying to take
out the stops, which no doubt sit right near the highs and the lows of the day.

 

In a non trending day, since these guys know where the stops are, they will
try their guts out and try and blow out all the stops and it usually works. But
BEWARE! No sooner will they do that then you will see that it was just a fake
out and the price action will swing the other way again. I see this time and
time again.


They dont want you to know this, but its how the game is played. The
way to counteract this is to put bids in below the low and offers above the
highs to participate with the big boys. Hey If you want to play with the BIG
BOYS, you have to atleast try to trade similar to them right? OK Great!


Here is the most important tip I can give : ALWAYS REMEMBER TO USE STOPS.
Write it out 100 times, 1000 times if you have to. I cant STRESS this enough. I
have seen too many traders with VERY large accounts blow them up because they
think they are invincible and simply dont use them. No matter how many wins in a
row you have or how long you have been trading, you will never beat the market.
So Don't fall into this trap, or the market will teach you an expensive lesson
you won't forget in a hurry. 

STOP LOSSES are a must, and will save you if you
are wrong, you are stopped out, then you live to fight another day.

No matter what you hear on the news, or that idiot on the subway with the
next hot stock tip, Repeat this over and over when you get up in the morning, as
I do. "The Market Is Never Wrong, And my charts never lie" Because that is the
truth, whether you like it or not. The charts are your crystal ball to show you the way and to indicate what could be coming.

 

Here is one of my favorite quotes from Louis Binstock “Very often
we are our own worst enemy as we foolishly build stumbling blocks on the path
that leads to success and happiness"

“Aim Small, Miss Small” (by Ryan Mallory)

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Hello fellow Slopers - I am a first-time guest poster on SOH. My name is Ryan
Mallory of SharePlanner.com. As for my style of trading, I am a swing-trader who
prefers to keep his charts as simple as possible, with my analysis
coming primarily from price and volume.

As many of you already know, one of the biggest factors in successful trading
is how well you manage the trade – that is the stop-losses you place, the amount
of capital that you put to work, where you take profits, and how you protect the
profits that you already have. You could, no doubt, write many books on each of
these subjects, but for now, I'm going to focus on a small, but critical aspect
of risk-management and my inspiration comes from the movie "The Patriot", which
happens to be one of my favorite movies of all time.

In the clip below, Benjamin Martin (the
father) asks his two young boys, "What Did I tell ya 'fellas about shooting?"
and they replied, "Aim Small, Miss Small". Every time I hear those words I tell
myself how true they ring across so many spectrums of life. As an avid hunter, if you
just aim the gun at the direction of the game you are targeting, you are bound
to miss. However, if you pick out a tiny, specific area of the animal, whether
its the upper-right side of the chest, or some other smaller area, you have a
much better chance of hitting your target. In fact, the smaller the target area,
the lesser amount of margin for error you have in missing.

So how does this apply to trading, you must be asking? The stop-loss that we set
in relation to our entry price is a reflection of our "Trading-Aim"

When I trade, I look for setups that are as close as possible to a desirable
stop-loss. By desirable, that means I'm not just picking a spot that is 1 or 2%
from my entry price for the sake of it being so, instead, if I am long, I am
going to look to place a stop-loss somewhere underneath a critical support
level, and if I am short, then I am going to place a stop just above an area of
resistance. So the place that I choose for my stop-loss is that of a strategic
area and a point to where I know, that if it hits the stop, I know that my
thesis is no longer valid and therefore, I must exit the trade.

I try to stay away from positions that require me to put a stop-loss at 10%
or more from my designated entry price. Mainly because the capital I can
allocate to that position would not be meaningful enough, and as a result the
potential gains wouldn't really be all that favorable for me. I want my
stop-loss to be no more than around 3-5%, from my entry price, while preferring
something around 1-2%. Now some might say that I'm not giving myself enough
"wiggle-room" and that it will lead to a lot of positions being prematurely
stopped-out, but  I would argue that if I aimed for stops in the range of 10% or
more, that my win/loss ratio would probably be about the same as the stop-losses
I currently use now of 1-2%. The difference being with small stops, is that I
can put more capital to work, and thus realize bigger gains.

There is also an opportunity-cost in using wide
stops relative to the entry price, in that, you commit your capital for an
extended period of time beyond what is necessary, and can vacillate within a 10%
range from your entry price and stop-loss without ever making a significant move
in any direction. But with tight-stop-losses, if I am wrong on the trade, my
capital isn't likely to be tied up for near as long, and whether I'm right or
wrong on the trade, I am going to know it much quicker.

Finally, it is worth mentioning too, that when you "Aim-Small" you give
yourself the opportunity to "Hit-Big". If my system of trading dictates that I
only risk 1% of my total portfolio value on any one trade (not meaning the total
position value is 1% of your portfolio value, but the total amount risked
between the entry price and the stop-loss is 1% of your portfolio - the total
size of the position will be much bigger that 1%) , and I initiate a trade in
which a stop-loss is 2% from the entry price initially, and ultimately that
stock makes of move of 12% in my favor, then I just realized a 6:1 return in
terms of Risk-to-Reward! which thereby means that one trade just increased my
portfolio's value by 6% – and that is just one trade.

Now there is a drawback to this type of trading, in
that the risk of holding a stock overnight, opens you up to an increased risk
greater than the one represented by the stop-loss set originally for the trade.
Perhaps overnight, there was a downgrade against your long-position, and now the
stock is trading down 5% pre-market, well now, you are much further in the red
than you anticipated ever being, and had you used a wider stop, you'd actually
be in the trade still. The best way to prepare for this is by putting some
buffer in the capital that you are willing to risk in a trade. If you only want
to risk 2% on a given trade, than maybe consider risking only 1% of your
portfolio value so that you can prepare for any sudden surprises. Other ideas is
to avoid earnings announcements and other "known" events that could cause a
sudden and dramatic price drop in the value of your position, especially if it
occurs while the market is closed.

Despite the risk I just outlined in the previous paragraph, it is important
to remember that we cannot completely eliminate all of the risk, both known and
unknown from our trades. Risk is inherant, but we can manage it to such a
degree, that it affects us the least possible amount on our trades due to being
disciplined with our management of the trade. While there are plenty of
successful traders out there who use wide stop-losses compared to what I am
advocating on behalf of, I nonetheless, believe that using tight stop-losses
takes advantage of maximizing the potential of each trade, while preventing you
from wallowing in a losing trade for an excessive amount of time simply because
your stop is too wide. It will also allow you to take advantage of more
opportunities out there, since the time you spend in losing trades will be
minimal to the time you spend in winning trades, and your profits will be
maximized in the process.

And to wrap it up with one more piece of
advice from Benjamin Martin:

"Lord, make me fast and accurate!"

Risk Manifest (by Steve)

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Wednesday's sentiment and the market's recent price action has made me step back and stroll down memory lane for some context. The increased debt in our society is very destabilizing even though when it is being created and put to use, it has the appearance of tranquility, and masquerades by the ever so juicy bullish nickname of liquidity. These debts and imbalances are cumulative and must either be paid off,defaulted on, or monetized in the case of a nation.They have not been paid off and some have defaulted but the size of the debt has increased dramatically, and terms have been extended.

Risk  -  General: Probability or threat of a damage, injury,liability, loss, or other negative occurrence, caused by external or internal vulnerabilities, and which may be neutralized through pre-mediated action.

Manifest – 1 : readily perceived by the senses and especially by the sight2 : easily understood or recognized by the mind: obvious

In 2006-2007, perhaps earlier it was clear to me that the market and the economy were going to be hit with a very high magnitude earthquake. The Fed has always been relieving the pressure of any tremors with low rates and bailouts, so that by this time the pressure of debt accumulation was off the charts -literally. Capitalism's destructive side had been banished, and the nation would know only good times thanks to Central Planning. Who is against that? There were so many economic first's that exceeded all of our previous historical extremes, including the Great Depression era,such as CEO pay in relation to the average worker, and debt to GDP ratio's. I had a nice basket of puts on Nova Star,New Century, Countrywide, WAMU, etc….. but I was looking for the glue factory that kept all of this debt together. I stumbled upon Ambac financial and read the following on yahoo finance ABK profile –

"Ambac Financial Group, Inc., through its subsidiaries, provides
financial guarantees and financial services to clients in the public
and private sectors worldwide. The company operates through two
segments, Financial Guarantee and Financial Services. The Financial
Guarantee segment provides financial guarantee insurance and other
credit enhancement products in the U.S. public finance market, the U.S.
structured finance and asset-backed market, and the international
finance market. The Financial Services segment manages interest rate
swap and investment agreement run off businesses for municipalities and
other public entities, health care organizations, investor-owned
utilities, and asset-backed issuers."

I suspected I had hit a future Grizzly Bear junction, but I am only a non-pro -"don't try this at home"- type, with no Street connections. Looking back you must admit that profile is a scream. I  A quiet, off the radar, multi -billion market cap black box! I bought Jan08 85,70 and 60 puts from AUG 06 until Feb 07 at prices from $1.45-$2.90. Nothing huge as I had no conviction, just a hunch. By the spring of 07 I was stupefied (extremely pissed) that the market had not priced in what I was seeing.

Then I read this – sounds like today.

"I haven’t had much to say lately. Just more of the same. With money
growth my firm estimates at an egregious 14% (compared to a falling GDP
now quoted in the 1-2% range, we can safely say that the money is
becoming more and more anemic in producing growth), no wonder
speculation in stocks and other assets is unabashedly high, along with
risk. But I don’t confuse risk taking with value and I hope you don’t
either". "I have suspected for a long time that government
“intervention” or “participation” (or whatever you want to call it) in
private asset markets is as high as it has ever been. The markets are
just not acting “naturally” to me. They seem orchestrated in many ways.
Why? With the levels of debt in the system (we have no historical
reference), central banks must keep asset prices rising so that the
debt doesn’t look so bad on balance sheets. To keep the public and
corporate sectors borrowing, they have to have rising collateral.
Governments are becoming a larger part of the real economy with their
debt creation. Free money means lower returns for everyone." – John Succo of Vicis Capital May 17th 2007 full text is here http://www.minyanville.com/articles/5/17/2007/index/a/12859

That might explain it, the Fed starting intervention at 5% from the highs, but finally by July, New Century and some others started to pay off but it was small consolation at the time. Then on July 19th I read something about analysis and pricing that I will never forget.

An Intricate Pas de Deux, Starring Mr. Market and You

"Lastly, I'd like to make a comment about analysis versus opinion. In
the investment business, there are two components of an outcome you
expect to see in the marketplace. The first is your analysis of the
phenomenon or security you are scrutinizing. The second is your opinion
(educated guess) about how other people will greet (price) the outcome
that you expect.

For some time now, I have
been chronicling the problems in subprime and what they mean. It was
possible to look at what had been occurring in subprime and know that a
very large number of these loans shouldn't have been made, as they
weren't going to be paid back. In addition, it was possible to know
that the people who owned the loans were levered up, as were the people
on the hook for them. Thus, it was logical to conclude that many of
these mortgages would be defaulted on, creating ramifications
throughout the financing and economic food chain.

Those
of us who believed in that analysis have been correct, and I believe
are continuing to be correct. However, those people (like me) who
thought that analysis would matter to the stock market (the opinion
part) have been incorrect, as thus far it hasn't mattered. Nonetheless,
I am more convinced than ever that the outcome I envision is
unavoidable, even as the timing remains unpredictable.

In the Final Analysis, Trust Analysis

Why do I bring this up? Because folks at home trying to determine who
they'd like to listen to/and what information to ponder — versus what
to ignore — need to be aware of those different components. I say that
because if somebody continually gets the analysis part wrong but gets
the guess part right — i.e., temporarily makes money buying
stocks because he says that either subprime doesn't matter or is
contained — that incorrect analysis will ultimately see him get
carried out. In the long term, correct analysis is more important than
your guess about how people will react to it.

Today's bulls have all been right about their belief that stocks should
go up every day, but many have been wrong in their analysis. One of
these days, Mr. Market is going to exact a penalty for the guessers
who've guessed right for the wrong reason. I believe that day is coming
sooner rather than later, and will cause far more damage than anyone
expects." -Bill Fleckenstein's Daily Rap 7-19-07

Here is what ABK looked like going into July 2007

ABK 

Daily "Endurance" Relief Chart 

ABK2

 "Risk Manifest" and a true picture of our financial system.

ABK TODAY

So where does that leave us today? Where are some ABK"s? Looks easy now – remember all the Fed tricks and Jam Jobs to keep the tape together? It was crazy. It is crazier now, but many of those stocks are gone and the problems have changed somewhat and the risk shifted. Fleck has had virtually no shorts since March. Fred Hickey none since October. Jimmy Rogers said today "this is one of the few times in my life I have not had shorts anywhere in the world". The reason? Fear of money printing liquidity re-fueling the stock markets.

Could we see something similar to this again? Of course we could and I should welcome it rather than fight it. Patience. I knew they would keep bailing until they are forced to stop, and that is why I own gold.

Spy

Was yesterday our July 19th 2007 and the reality of our economic plight gets priced right? Is it 2004 again? Where is safety? Cash? 

Finally an article I re-read frequently as it captures the quintessential nature of "Risk Manifest" in this era. You can read it here -http://www.minyanville.com/articles/index.php?a=24852

"I’d like to discuss human nature and the paper we call money from a
slightly different perspective. I was recently thinking about what's
transpired in this country in the last decade: First the equity bubble,
then the real estate/credit bubble, and then the steady debasement of
the dollar (where a trickle is now threatening to turn into a flood).

I've been struck by how few people seem to understand how all these
events are related, in that at the root, they each have irresponsible
money-printing as the cause; the sociological and psychological
phenomena that go with it (i.e., the regulators not doing their jobs)
are just part of the process. Each problem led to the next, where one
year ago, the financial system was bailed out at the risk of the
country ultimately enduring a funding crisis.

One fact that strikes me is how few people seem to have been able to
protect themselves from the first two (even though they were so
obvious) and how few will be able to do so on this third, huge problem.
In my own little world, I wrote until I was blue in the face about the
risks inherent to both of those bubbles (as did other people), but
still only a small subset of folks managed to avoid calamity." Bill Fleckenstein 10-08-2009- Its All Just Monopoly Money

Make sure you are in the small subset this time around! This is not quite ABK but it is the real glue factory in my eyes and I will be unleashing the put army when it finally breaks. Good Luck to us all!

Tlt