Ode to the Homerun

Ode to the Home Run

This year I've made the following trading plan to guide me this year.

2018 resolutions: 
A. Possible outcomes for trades (1) small loss; (2) push; (3) huge winner. 

I can't be a home run hitter If I'm content hitting singles so I've taken the small win off the table I am perfectly willing to take a break even trade after I'm up 10 or even 20% on a stock to get a 50% or bigger gain.
B. No partial sales: If I'm in a huge winner, I'm not going to minimize it because I'm insecure in my trade.

Taking partial profits turns a home run into an average trade. The psychological comfort of "locking in" some profits is too costly. Every year only a few trades will account for the vast majority of the return. The other small wins and small losses cancel themselves out or are insignificant so I need to make sure that my big wins make as much money as possible.  
C. Build positions at pullbacks to moving averages.

I need to think differently than everyone else and not be positioned with the crowd. The crowd buys obvious breakouts.
D. Target 100% + moves.

A truly leading stock should be able to at least be able double from its base. If it can't do that, it is an also ran. I will be in leading stocks based on price and volume and I must give them a chance to work.

I recognize that there will be times when I may need to step aside in a stock to manage risk, I will view a re-entry as a continuation of the original position.

E. Aggressively Manage Risk.

There's no point to hit home runs if I give up runs on defense. A break even trade after being up 20% is acceptable. A .01 loss after being up 20% is not. I've had "wins" this year already that other traders would brag about, but I've taken the position off not to lock profit, but to manage risk. For example, not enough cushion for upcoming earnings.

Why I shifted my philosphy and trading plan

2017 was a successful year for me as I posted decent profits mostly from swing trading. I also realized that there were limitations to my approach that would keep me from being a great trader.

The approach I had used in 2017 was to identify strong stocks buy the breakouts using a fishhooksetup or a slingshot (on the pullback and then swing those for gains on) Take profits on the way up.

For example, my most profitable trade (or series of trades, which combined according to my brokerage statements was a 108% return) was in AAOI:

I hit the entry perfectly (Fishhook entry) , added size and phased out. I got tons of "atta boys" from my trading friends which include some of the very best swing traders (guys that are asked to speak at national seminars).  Yes, I made quite a bit of money on this trade, and on the original  position I took at 63 as well that I took another $9 out of but I realized that in some ways this was a terrible approach  for several reasons.

The biggest mistake was I treated this as just another trade.  An AAOI type stock will come around only 4-5 times a year,  had I traded it better, this stock alone should have given me triple digits on the year $30 to 100 in a liquid and holdable stock. But I only had a normal position, which I minimized by selling on the way up with partial sales.

The second problem was I fell victim to my own psychological needs. At the time the position started running, I remember thinking that I was doing a great job because I was up over 10 points and I would usually start selling with a 10% gain and now I'm up 30%+.   This type of thinking is flawed. It was the fear of losing my paper gains that caused me to sell when there was no reason to.

I, like many traders, had (yes I'm using past tense) a problem holding our winners.  For me, it was this need to constantly hit winning trades.  We talk about our win rate, average win, average loss, % of R.  I used to track that shit religiously.  I would sell a stock (like AAOI and some others) simply because the numbers would look really good on my spreadsheet.

You know what looked good on my spreadsheet? A $7 point gain like this:

But the spreadsheet would not reflect how terrible of a trade my $7 point win in TREE was:

Nonetheless, many traders talk about how important it is to hit singles.  Bullshit!

Every baseball fan know that Giancarlo Stanton was the home run champ with 59 homers but who hit the most singles? --  Crickets.  That's because no one gives a shit.  It's the long ball that makes legends. 

So while the singles hitters are going keep celebrating their "wins",  I'm swinging for the fences this year. I'll foul off dozens of pitches in the process, and I won't care.  My defense will be excellent and I'm going to continue crush the damn ball when I get my pitch.. 

I'll let the other guys count their singles, this year I'm tracking only my home runs.

Here's number 1:
I recognize this is a gambling type stock but wow did I like that chart. I sold through the $30 break for a big gain.

Good speculation,

Scot1and

Discipline in Action

I came into this month with my main goal to be disciplined.  I wanted to be hyper focused on cutting my losses.  I swore that I would not let any position become a big loss.  I would not have any losses greater than 1% of my equity.

So how did I do?  I'll take it.

This was not an easy month. Gains did not come rapidly or in big chunks.  I actually lost money on 53% of my trades (I had over 90 of them).  But I saw that I had a small edge and my average winners were larger than the average losers.  I didn't have many big winners.  I did have a single loser over 1% --1.12% to be exact. Biggest winner was 2.34% of equity.  By trading small, being nimble, booking gains and cutting losses. I was able to post a respectable month.  Rinse wash repeat.

Stocks have Personality-- Learn Them and profit

One of the best things about creating a trading journal is that it becomes your very own encyclopedia.  Before I enter a new position I look to see how a particular stock has traded before during a similar move.  If I've traded it before even better.  

One recent example is HPJ.

I know that a number of traders rushed in on the gap move only to see an ugly fade. 

 I waited on the side lines and reviewed my trade journal. Last year I saw a similar high volume gap which faded initially.  

There are a lot of similarities between the two moves.  Last August, I bought HPJ as it fishhooked around the bottom. 

I was rewarded with a 3 day 30% move.  I sold this gap at $6.90 in pre-market.

In any event, last August's move in HPJ was my template for it this time around.  If it rallied off the gap, I planned to buy.  On February 10, HPJ sells all the way down to $5.00 and then reverses. I bought at $5.40

So far ... So good

HPJ is now up to $5.71.   This stocks ability to Fishhook after the 1st day fade tells us there is something more to this move.  Had I rushed in I would have been stopped out and would have missed this move.  But knowing that HPJ has a tendency to fade the first day move and then push higher allowed me to be in this trade. Now I don't expect the 30% move I received last time.  But who knows.

Trend Line Tests.

Trend lines are great to a point.  That point usually occurs after multiple tests of a particular line.  EMES has now running heavy against the 10 Week average.  I've bought puts the last two times it hit the line and then reversed (wait for confirmation).

My current thought is that it is obeying the line too well and running into it too frequently.  By comparison, the uptrend only ran into the 10 Week Average 4 times total before the levy broke.  I will trade this one either way but my present view is that this one is ready to break to the upside. It needs a definitive close above the magic line and probably a successful back test before the bulls will be back in control.

Trade Plan: Sit on hands for now.  If hits on a bullish day and then reverses, buy puts with view of a 1-2 day swing trade.  If it closes above, wait until back test.  If back test does not come let it go. If there is a successful back test buy heavy.

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Size Matters

I've written a lot of about my entries and exits as they are more fluid and are more fun to write about. My risk management strategy is just as important as the stocks I trade and where I buy or sell.  Indeed, it explains why I trade the set ups I do. I was recently asked about position sizing so I figured it is time for a Risk Management / position sizing post.

In my opinion, the three main ingredients to a successful trading plan are

1. Entries
2. Exits
3. Risk management  

In determining what entry / exit strategies you decide to trade you need to first set the guidelines for risk management. 

The 2% Rule

My first rule is the 2% rule, which comes from Alexander Elder's Step into my Trading Room.  I never  seldom risk more than 2% on a trade.   This does not mean I only put 2% of my funds into a stock, rather it means I may risk up to 2% on that trade.

So on a 100K portfolio that means I can put up to 2,000 at risk on a particular trade.   On most trades I do not go nearly that high.  A trade that I will risk 2% is saved for very high conviction trades.

Interplay between Risk and Position Sizing 

Most of the trades in my trade journal are entered following a tight range.  The reason for that is that allows bigger size on a  trade because I can place my stop tighter without placing it into "noise"

Suppose two stocks are set up for a break out at 10.00.

Stock A, has been range bound between 9-10 and Stock B. has been range bound between 9.50 and 10.0.  On Stock A, I could place a stop a 9.00 and buy $2,000 shares.   On Stock B I could  be able to buy 4000 shares and place a stop at 9.50.     

Assuming both stocks rallied to 11.00 my profit would be double in Stock B, 4% of my portfolio than in Stock A, which would be up only 2%.

Here is a position size calculator, which you can use to put in your parameters before entering a trade.

Tight Trading Ranges = increased position sizing

Much of my trading strategy and stock scanning is to find stocks with tight trading ranges.  

For example, this trade from last year turned out to be one of my best momo burst trades. I entered on October 27 (big white bar at right of screen) as the trading range to the down side was very tight. 

Entry 

25.93 as RWLK rallied off 25 past the prior days contracted range.  

I was able to risk .25 of my portfolio on this trade placing a stop at $25.50

Exit: I sold  the next day (last day on this chart) at 31.73 (I knew this stock had a history of fading so I sold the open) This turned out to be a  6.6% gain for my portfolio in a day.

Those are the types of setups that offer asymmetrical risk profiles.  I try to find the best and then trade them with the amount of size warranted.  

Putting the pieces together to capture a $53 in under 2 Months.

Let's see if we can dissect some power moves so that we may capture these in the future. 

Netflix January 14. 

Netflix makes an earnings gap and then tests the gap.  

It then produces a surges which allows a Fishhook entry--High volume move, shallow pull back, thrust past surge close.

 If a stock is going to surge it is going to obey a shorter MA and NFLX did so beautifully.  

This trade would have produced gains over $53 in under 2 months.   Not bad. 

Ingredients, great earnings, high volume,  Fishhook entry , trailing moving average. 

Overcoming Bias --- Use the Force!

Many times as traders we  have biases about certain stocks. Certain sectors have bottomed are oversold, are a solid investment etc.  In other words, we hindered by what we think a certain stock should do.  Too often this cacophonay of rumors, message boards, other traders' opinions and our  own need to be right drowns out what the market is telling us.

I was recently inspired by a story told by a successful member in a trader group I belong.  This trader reported that he had a friend who was an accomplished trader and money manager that had previously put up several digit returns managing a multi-million dollar account but was now  struggling.  The struggling trader was now down double digits in January and asked for advice.  The successful trader looked at the stocks the struggling traders had been trading and did something very creative.  He removed the names from the stock charts and asked the struggling trader friend what trade he would make.  

After going through the exercise for over 6 hours. They learned that struggling trader would have had a 90% success rate had he followed his system.  But instead of following his rules, the struggling trader was stuck trying to pick bottoms and making other knee jerk reaction type stocks.

This story inspired me.  Why not just remove the names and tickers from my charts and then do my scans. After all, Luke learned to use the fore with a blindfold.

So here's my Force Chart:

Stock 1

I ran a normal scan and then scrolled through charts until I came to one of interest.

What do we know about this stock?

It recently broke out in a very big way with huge volume.  From that we know that there was a fundamental change to this company.

Was it earnings? An FDA approval?  I don't know and that's the beauty of the approach.   Is there a trade to be made here?  Not under my rules  This is $8.00 over its breakout point.   Chasing a story would likely cause a loss.

What about this one?
Stock 2

This stock also saw a big gap on high volume.  This has the look of being earnings related but the prior day had a big range expansion day so, perhaps not.

 After the initial burst this stock has now settled in  I don't see this as being able to make a burst move that would last 3 days and it would be difficult to place a trade at this level.  To trade this stock, I would want to buy support by waiting until a test of 35 and buying that test.  At the current levels I don't see a trade here.

That analysis was easy to do.  But what if I had just read a detailed SeekingAlpha article by someone who said Stock 2 was his top pick and was surely headed for a double and citing some sound reasons.  we might be tempted to chase if the stock starts moving.

But to avoid that temptation, Use the Force.

Trading Apple's Earnings Gaps

Apple had another blow out quarter.  People rushed in but that doesn't mean this as an easy trade.
Consider last quarter. Last quarter, I bought immediately after the earnings in A.H. at 100, but the action seemed very tepid so I sold for just a small gain. 

Many people were then commenting on how AAPL was not acting right for having such great earnings and the next day, AAPL endured a harsh fade.  
While that might have  suggested a gap fill,  AAPL would go on to run straight to 119 from this point. in a month and a half. 

 This current quarter, we again saw the Day 1 fade. Day 2 was then what expected but then the long wick day 3.


 Does it then begin to trend from this point like it did last quarter or does it try to fill the gap? It's all conjecture and pointless unless we have a plan. Let's consider the possible scenarios and make a game plan.

• Scenario 1:  let's first  assume this is a just a minor shakeout and that AAP L will resume a trend like it did last quarter.  With that assumption, I believe the buy point is Thursday's close of  18.90, with a stop at 115.50.

• Scenario 2: Let's assume  that Friday's pull back is something more and that the market needs to digest all the selling.  Under this scenario, I want to see a test of the earning's gap.  If AAPL can get into the the gap but then reverse and turn green,  I would enter the the trade setting a stop at the low for the day.

• Scenario 3:, Let's assume we have an inside day followed by a number of narrow range days from this point.  I would then wait for 2-3 weeks for the action to quiet and then look for a momo-burst set up.

For example, in the beginning of November AAPL put in a week of very narrow range days but on November 11, it expanded its range and closed at the high. There's the entry with a stop at 108.  The next day saw continuation closing up +1.55

• Scenario 4: What if apple does something not in the first 3 scenarios?  If a stock is not setup to provide a trade according to my playbook, I let it go. 

With the game plan set, we are now prepared.  Have fun

"If You don't know who you are, the market is an expensive place to learn."

I'm taking Adam Grimes' online course. It's free and can be found here.  As an opener, Grimes cites the market adage I have in the title and asks "who are you? 

Who Am I?

In my past reflections and market musings, I've come to the conclusion that trading  is a game we play against ourselves.  It's now time to size up my opponent.

Background

My initial interest to the markets was during the go-go period of 1998-2000. I was in college.  I have a distinct recollection of a 60 Minute episode that portrayed day traders.  The gist of the program was that  people were quitting their jobs in masses to trade the markets and they were making fortunes--except the ones that lost fortunes. I was making $7 bucks an hour and I was hearing about people making 10K in a day. I thought that sounded like the coolest job ever.

 I was still risk adverse and had no plans to day trade.  Nonetheless, I convinced my parents to let me open an investment account at E-trade and I put some of my college funds in the account.  

My First Trades

 Shortly after opening my trade account, I read a Money magazine article about stock picks and Knight Trimark (NITE) was  one of the recommendations as they were a market maker who would make money on every online trade. In addition, I picked Etrade as I figured I would now be using their services so I might as well be an investor. Call it beginner's luck because these trades were absolute home runs. NITE, which I had bought in the 40s would run upwards of $150 and split 4/1.  Etrade made a similar parabolic move. 

Of course, that was not entirely unusual during the period, stocks like AMZN, EBAY, CSCO, JDSU, JNPR were going parabolic.  And then there was QCOM.  One of my college buddies had bought 300 shares when it was a $15 stock.  He was up over a hundred grand, when he told me about it.  I didn't buy but I did buy his next recommendation RMBS.   

I was doing a lot of reading mostly on yahoo messages boards. It was all half-hazard approach but it all worked.  Everything worked back then.  Anyway RMBS looked like it was at support (or at least what I had believed was support) I bought 100 shares at 60.  I would sell it 3 months later for over $200-- (it ran to $470 and split 4/1. )

At that point, I started getting into swing trading.  I came across a guy called "TraderMike." (He now has a site called Wallstreetwindow.)  This was really my first foray into swing trading.  Trader Mike had a free newsletter or email list in which, he would send out a watch list.  These stocks were usually hitting 52week highs. The day after doing so, they would nearly always gap up.  10-50%.  I was making money with this method but I never really understood position sizing or risk management and those types of things.  I had some big winners a $6000 1 day winner in JMAR on a 50% gap up comes to mind.  

Bubbles pop and the internet bubble popped magnificently. All things considered, I came out relatively unscathed.  I gave back some profits, I big losses on a stock called InfoSpace, but I had sizable profits that I had retained.

Tradermike made a call that Gold wold be the next thing...and it would be.  But when gold was still $400 an ounce there were no ETFs.   You had to buy the miners.  While this could have been the trade of the decade, I lost money.  As I look back on it, I had no idea on how to buy a set up. I was constantly shaken out of stocks like NEM, GG, RGLD and became discouraged despite the parabolic rise in gold over the next decade.

CBOE

I was serious about being a trader and coming out of college I landed at an option market maker as a junior trader.  My job responsibilities included placing trades on other exchanges to spread risk for our traders to spread and basically learning how to trade.  I was to go  through an intensive 6 month training program.  Mock trading, option theory, strategy.  After that time, I was to get a badge and begin trading.  It didn't work out that way. 

The market popped in a big way, After 9-11, the market got a huge surge in volatility then the volatility dried up.  When volatility dried up, market maker profits go down.  Everyone on the floor was hemorrhaging money.  The firm was not anxious to put new traders on the floor as it, and every other firm, were firing their existing traders.  It became a very depressing place to work as our mentors were being let go.  I never got my badge and a year after starting the trainee program was discontinued and I was out of a job. 

I became very jaded on trading in general but one good thing about taking the job at the CBOE was that trading in personal accounts was strongly discouraged due to conflicts of interests, etc.   After I was let go, I went on to more schooling.  My trading profits were spent on tuition.  As I worked towards my new career, life got in the way and my trading fell mostly by the wayside.

The Next Chapter--Discouragement 

Most traders go through the discouragement when they first start to trade. I got mine a decade later after I attempted to trade again.  I tried  to keep up on the market and would read seeking alpha articles on various stocks.  I wanted to get back to trading but I had convinced myself that it is now too difficult.  I read about the complexity of the various hedge fund strategies, paired trading, high frequency trading, automated trading and all that good stuff. I was convinced that trading again was beyond my capabilities and it would be a fool's game to try.

In 2011, I placed some long term trades after the market sold off very large.  I bought MO, DIA, JNJ.  I did well, but as I attempted to move towards shorter term strategies my results were not that impressive. I would win on most of my trades but then shit like an elephant when I lost.  I had no concept of proper money management.

Fortunately, I then came across "Step Into My Trading Room" by Alexander Elder. I learned the importance of the 2% rule--- no trade risks more than 2% of your equity and the importance of keeping a trading journal.

I would like to say that everything suddenly made sense and I started following all these rules and became a profitable trader at that point, but that's not what happened. Here's what really happened:

I was initially hindered by positions I had that were not really trading positions.  But I didn't want to simply sell them because I had read a few books.  My trade selection was poor, It was a difficult time in the market and I fared poorly and lost interest. 

In 2013, I took a look at some beaten down stocks that I thought could make comebacks.  I bought NOK and BAC.  Both stocks made come backs over the course of the year but my returns lagged the market badly.  But I made a strong charge at the end of the year. 

It was this move, that revitalized my interest in trading again.  NOK sold out its handset division to MSFT.  I then did a few more profitable swing trades and my account had recovered. 

2014- My Breakout Year?

  I've eventually learned to define my setups, find profitable setups, and make money.  This was not exactly a smooth year. I've had numerous relapses into past bad habits  but I am now confident I can succeed and I've done so:

Self Assessment

Here's where I am at this point in my development as a trader.  It is an honest assessment and a transparent assessment.

Strengths:

• I have defined my setups.
• I have defined my risk tolerance
• No hesitation to take a trade.
• No regret about missing a trade
• Not usually afraid to re-enter a stock at higher prices if the setup warrants 
• I go into a trade with the mainframe how much will I lose.  This frame of mind has allowed me to properly position trades and to avoid hype
• I still have confidence in my setups even after multiple losses in a row.
• I can overcome multiple losses in a row with 1 or 2 profitable trades.
• For the most part, I have been  able to immediately take losses.
• I've been able to consistently find profitable setups. 
• I've made some very good counter-trend trades. 
• I've bought well for the most part.
• I've avoided significant drawdowns. 
• I can research stocks for profitable shorts. 
• Transparency -- 
• My trade journal remains an open book. By keeping it open to the public, I force myself to be accountable. It helps me follow my rules and my setups.  It is also a very helpful tool to see how stocks I've traded in the past acted on past trades.

Weaknesses:

• I occasionally take impulsive trades that do not always fit my set up criteria
• I'm too influenced by trade recommendations of people I respect.
• I take profits too early on many breakout trades.  
• I am uncomfortable when a stock Rips in my favor.
• I am uncomfortable when a breakout buy fades -even if just a small amount so I sell
• On a handful of occasions, I've froze and not taken a loss when I should have and I have broke my 2% rule.
• I've fallen prey to the sirens call of massive profits and have traded too big at times. 
• I've not been able to consistently stay in trends.  I captured only 1 big trend this year.  
• My selling criteria are not as well defined as my buying criteria. 
• I have little conviction in any particular trade.
• I migrated from strategy to strategy a little too haphazardly.

Year Highlights

• I caught a 50%+ trend trade in HCLP

• I developed a setup to trade low price momentum stocks profitably, which has delivered gains over 50% on a few stockss

• I've traded continuation anticipation setups well 
• I have found a trading community that I very much enjoy.
• Having the resolve to recovering from a trade that took 9% of my equity.

Goals

• Catching a superstock / EP early 
• Staying in stocks that are moving in my favor longer
• Gaining conviction in individual trades.
• Fewer mistakes.