Trading

At this seasonal time of renewal, change and re commitment—this is the perfect time to evaluate our trading results and a time to make new resolutions.

An old saying comes to mind:

“You can’t manage what you don’t measure.”

It is an old management adage that makes a lot of sense especially in trading. Unless you measure something you don’t know if it is getting better or worse.

Here’s my list.

1. Manage the tendency to overtrade. What is overtrading? It is the act of excessive buying or selling of a security in a defined period of time by increasing the risk limit. A lot of beginning traders find themselves over trading and the sooner they find out that in this career the more disciplined you are and the more successful you are the better it is for the trader’s future. Discipline is what it takes to make it to the next level.

2. Cut your losers and let your winners run. You often hear this but how are you actually applying it? Losing trades are inevitable, they happen; there is no trader, no high frequency trading computer on the planet that only racks 100% winners, losing is part of the game. It’s important to cut your losses before they develop into a red stream of losing trades and starts damaging your accounts. Never add to a losing trade. This requires discipline (again). On the other hand when you have a winning, profitable trade it is important to let the profits run, do not be tempted to close the trade too soon on the first pullback, give it room to develop, give it room to breathe.

3. Keep a trading journal. If you are not already keeping a journal I suggest you start. Keeping a record of all your trades offers the best trading strategy self analysis. It will give you an inside look into your trading strategies, habits and behavior. By thoroughly documenting your trades you can reveal things that you are probably not aware of.

4. Trade the chart. If you are an equity trader the news at times might be already build in the price. If you are a currency trader things stand a little differently. Economic releases are the catalysts for market moves so it is important to pay attention to news releases throughout the world and have an action plan ready.

5. Choose your timeframe wisely. Choose your timeframes depending on your style of trading. Here are my thoughts from trading markets for over 10 years.

• If you are a currency trader, I always teach my students to stay away from the noisy intraday charts and take a step back and look at the longer time frames for many reasons but the most important are: it brings more clarity and it is easier to identify the trend, volatility and spread.

• If you are an equity or futures trader it truly comes down to your style but also you need to pay attention to the time frame on which the pattern developed on (gap traders focus on the 1 and 2 min charts, trend traders on 5 and 15 min charts, swing trader on the 1 hour and daily chart, core trader weekly chart, etc)

6. Responsibility. Take responsibility for your own trading decisions and trading results.

7. Have a diversified portfolio. Diversification is key. Never put all your eggs in one basket. Diversification reduces risk and maximizes returns by investing in different instruments or market sectors. The results will be asymmetrical and less volatile which is good for the portfolio.

8. Adhere to your own trading / investment plan. If you do not have one, it is time to develop one that will encompass your entire trading routine. Having a well detailed plan will reduce stress and emotions from trading.

9. Education. Always strive to improve your trading education. Self improvement goes hand in hand with New Year’s resolutions. Make it your goal for 2014 to learn something new to enhance your trading; there is always room for more and always something new to learn. Whether you want to learn how to trade globally, study another strategy, improve your investment technique or just take on another instrument.

10. Follow your own trading rules. The bottom line is that we as traders need to get ready for 2014, and one of the best resolutions I can think of is to follow our own trading rules.

Happy Holidays!

TradeOutLoud Team

 

“Patience, persistence and perspiration makes an unbeatable combination for success” – Napoleon Hill

Often enough I receive same kind of e-mails from traders asking pretty much the same thing: Why not buy the stock (or ETF) here, now, why wait for price trigger?

Buying or selling (shorting) stocks outside key areas is a common mistake among beginner traders. If there is a trade alert sent for an entry above $84.00 and the stock (etf) is trading currently at $83.56, the most common questions is: why not get in now, way wait, this will save me money and lower my risk, therefore I can buy more shares?

If you intend to take a long position, granted the stock is moving higher you want to make sure the stock proves that it can take out the previous resistance area by showing signs of strength (or for short positions signs of weakness under support).

THE STOCK NEEDS TO PROVE ITSELF

We need the stock to prove to us it can challenge and conquer the key focal area of interest. If each time when it gets close to that key trigger area a selling occurs (for a long position) it simply means that it is not ready to continue higher). By having the patience to wait for confirmation it will stop your aggressive approach towards buying a stock that is not ready yet to take off. This will increase your winning odds a great deal. This will also keep you away from “catching the falling knife” syndrome.

By waiting for the proper trigger with confirmation you will also have a defined stop area and there you have it a defined risk.

The key areas I am referring to are areas of support and resistance. These areas will be monitored for possible trigger. Trigger above resistance for long positions and triggers below support for short positions. If the stock/etf shows/proves it can trade above resistance (for longs) it is considered a sign of strength and the other way around for short positions (a trigger below support is considered a sign of weakness).

The quality of the set-up should be also analyzed. If you are in an ongoing strong trend on one time frame you have to make sure that all the other major time frames are still in sync with your potential new trade and this will assure continuation to higher targets and fluidity in the move of the stock.

Buying a stock with no price trigger confirmation will increase your odds of stop-outs. This simple trading rule will keep you out of trouble and in the green.
In the example below I want to emphasize the extra risk you may take on by choosing to enter a trade ahead of the trigger price.

PUT THE ODDS ON YOUR SIDE

The confirmation entry for this trade (ETF) $XLB  to continue higher would come in if price will take out resistance area $84.48 if this happens then the stop is under support $78.33. So we have the game plan, entry, stop and defined risk. But, not waiting for price confirmation and taking the trade where it is trading now that would increase the odds of this trade now working.

The Spooky Quad Week

Quadruple witching, occurs on the third Friday of the month of every quarter, in March, June, September, and December, and refers to the simultaneous expiration of single-stock options, single-stock futures, and stock-index options and stock-index futures.

Stock index futures: Nasdaq, Dow Jones Industrial Average, S&P 500 and Russell 2000 will fully transition from the September contract to the December on Friday September 17.

Options volumes tend to be particularly elevated during quad-witching periods, which may also account for some of the choppiness associated with September as the worst-performing month for indices in general.
Quad witching usually only results in higher than normal volumes, and those usually peak on Wednesday or Thursday of the expiration week.
Options volume typically spikes around 3:30 p.m. Eastern Time on quadruple-witching days, but it remains to be seen on how that will play out in reality on Friday.

Historically, quad witching hasn’t been particularly characterized as a high momentum day not week. The S&P 500 index, for example, has a daily average gain of 0.04% since the first quad witching in 2002, according to Dow Jones Market Data.

The Volatility Index VIX (the fear gauge) – reflects bullish and bearish options bets on the S&P 500 in the coming 30 days, and tends to rise as stocks fall as investors turn to options to hedge against market downturns, has seen muted moves.

So how does this translate into the market and how to trade it?
Right before the quad week begins the price tends to remain range bound. As volatility increased mid week price tends to SHAKE.

For example if an index in into an uptrend during the quad week – it will tend to base, remain range bound for a few days and as it is getting closer to expiration then it pulls back into a prior resistance level, usually testing higher time frame support.

And this is not valid for QUAD week but for any options expiration in general….

So can we determine a pullback area with approximation? Yes and no. Every day, week and month is different in the market but based on price action, a few simple indicators and symmetry we can assume that pullback are likely repetitive based on price memory. If we look at the chart below of the SPY we can see that since January 2021 it tested and retested the 50 SMA on the Daily chart before rotating back to the upside and continuing the trend.

Also note that the weekly in 2021 (since January) has followed the 10 EMA rigorously.
So can we expect a test to the 10 EMA? Likely – SPY $443.00 area on watch.
Click the link below to zoom in.

The end of the month trading has a different vibe. Volume increases, institutions are hopping in the market, funds are making adjustments to their positions within the last 3-5 days to the end of the month and stock prices rise.

But who leads? What should traders focus on? The answer is SMALL CAP STOCKS The end-of-month phenomenon has a more pronounced effect on small-cap and low-priced stocks. Research shows that small-cap stocks have considerably higher returns on the last day of the month versus high-cap stocks. This finding is not considered a variation of the historical trend among small-cap stocks to outperform high-caps. Having said that, high-priced or large-cap stocks can also experience the end-of-month effect.

Below is the performance of IWM into the end of 4 consecutive months May – End of August 2021. Notice the rallies that are happening at the end of the month.

It should not come as a surprise for any trader that has been trading for a while that the market is more volatile and choppy around options expiration week and more precisely on the exact expiration date. It is known as the Shake n’ Bake week for the retail traders….

Options Expiration happens each third Friday of the month.
Options Expiration can impact the markets (etf’s, stocks and futures)
Even if you are not an options trader it is important to know how options expiration impact stocks, etf’s and futures index prices the week of the expiration and more so on the exact expiration day.

Within options expiration week the market tends to have a back-and-forth action driven by the exposure of option traders causes stocks to remain close or be “pinned” to strike prices. This is called PINNING.

“Pinning” refers to the price of an underlying stock trading closer to an actively-traded option strike price than it would absent the options activity.

Psychology: Many investors don’t wish to run the risk of the stock gapping down at the Monday open, so they enter stock positions designed to keep the stock price away from the short strike of their options — this is particularly true for investors and firms with large option positions relative to the trading volume in a stock.

So now that you know need to adjust to the market conditions and ride the waves. And this is what we did this week, we have adjusted our stops so we do not get dinged out of trades by institutional force selling in our long positions.

If you can’t measure it, you can’t improve!

Journaling is your self analysis tool where you are your own coach
You do not know whether or not you have a successful trading system unless you clearly define it and and track it. With a clearly established metric for success, you can quantify progress and adjust your process to produce the desired outcome. Without clear objectives, you’re stuck in a constant state of guessing.

A trading journal is one of the most powerful tools to track your performance . It is where you record and review daily, weekly trades. Entries, Stops used, targets, the time of the day you tool the trade, market conditions, etc… are just a few details that every trader needs to track down.
Journaling will not only track your progress but will point out your mistakes and trading system flaws. It will point out what strategies work for you and what …not. It created accountability and what are the areas you need improvement.

Journaling a self analysis tool where you are your own coach. Journaling your trades will help with trade development , tweaking and perfecting strategies, timing, risk and developing a well greased trading system. It will determine your strengths and weaknesses.
Here are some elements that you need to keep track of:

• Entries
• Stops
• Targets
• Strategy (set-up or pattern)
• Date and Time of the day you have entered the trade
• Position size used for the trade
• Duration of the trade
• P&L – the result
• Comments – ample description of the trade

Documenting your trades is an essential part of trading.
At the end of the month and quarter you can make a self evaluation, see what worked for you and what has not worked. A common mistake many traders make is either jumping in the trade too soon or chasing trades, exiting the trades prematurely, not letting winner run or waiting too long until the traded pulls back and wipes out all your profits. Another mistake is overtrading, or jumping from one ticker symbol to another, oversizing or revenge trading and doubling in. This tracking system will help you alleviate that.

When you have all your data at the end of the month or quarter you can evaluate and determine all the mistakes.
A great way to add to your metric is charting. Print 2 charts of the same stock / futures / forex / options trade you took:

• On one chart mark the area where you entered, where you placed your stop and your exit.
• On the second chart analyze where the entry should have been, the stop and how it needed to be managed.

Do this every day for all your trades. It will make you more selective, patient and you will learn from all your trades.
There are 253 trading days in one year. Imagine taking only one trade / day and analyzing it – at the end of the year you would have 253 charts analyzed in depth, 253 lessons to consistency.

Sow the seeds of hard work and you will reap the fruits of success.

Journaling can be done manually or using a journaling software like TraderSync (our partners) where you can upload your data directly from your broker or input it manually – whichever you prefer. If you want to give it a try CLICK HERE to get a 7 DAY FREE TRIAL