2018 Review.

Let's put it out there right away +19% and change.  Sure, I  "beat" the market but that doesn't say much.

Coming in to this past year, my weakness was not being able to hold my winners long enough. So I set a goal for myself to take on the year with a "home run" mindset:

Regardless of the end result, I feel that approach was critical for my development as a speculator and I've said it at various points this year that I feel that I'm still 3 years away from being very good at this game.

I needed to teach myself what it felt like to be in big winners, what it felt like to manage the trade, what emotions I would deal with along the way, and what the ultimate exit signals would look like.  I also needed to teach myself what it felt like to take a big position and to hold that position, and to get out of that position when I was wrong. Obviously, that's a lot to learn and at times, I got it right, and at times I got it very wrong.

So the good:

I hit some big trades:
AAXN:

NFLX: Between my positions made about 70 points

MDB:

The Bad:

My worst stock of the year.  This was a culmination of many attempts to get  pull back entry (with size). The most disgusting part about this stock, was I started off with a huge profit.  Within 3 days, the calls I bought for $2 were trading for $15.

What I failed to realize was this was the blow off to the upside. Instead I was convinced that it would resume on the uptrend after pulling back to the 10 ema.   So I was adding shares and size.  Ultimately not only did I give back the entirety of my options gains, I through big losses on the 3 or 4 times I tried to enter on common stock.

TWTR:

I was in early, and first entry worked but didn't give the cushion for earnings.  OF course, it gaps and I got fomo and bought with size and got my butt kicked.  

HEAR:
Another one multiple attempts, my time was never good enough:
I knew this would be a big winner, and I constantly stalked it but my timing was off (or at least stops and position size.  Got knocked out with interlay reversals.

The UGLY

The Ugly had to be my equity curve through out the year.

At times I had massive surges in very short periods. But the backside was awful.   The last quarter was ugly for several reasons.

First, I was right on the market, I suspected when we were putting a top in during October and even moved all my stops up into the gap.

How can I be so right:

I saw the signal, moved my stops up to the gap-- yeah I gave up some profits but that's the cost of doing business.

I went to cash

Recognized the start of the bear

And still got my butt kicked.

The problem was I didn't realize that the character of the market had changed, and I was trying to trade the way I did at the beginning of the year, where I would get into positions, get big gains, and ride the trend.

The buy signals in Q4 were pretty much the same as the rest of the year and they worked. 

My problem; however, was after a massive rally -- and notice that throughout Q4 I had big spikes in my equity only to give up more over the next sessions.-- was that the character of the market had totally changed and I was still trying to trade the same way as I did in May.

I had several massive up days only to be holding a lot of stock and then have the market turn on me the next giving back all those gains and more.



Lesson No. 1.
Holdable Trends arise out of low volatility environments.  The buying pressure is heavily in favor of the bulls so volatility dries up.

Lesson No 2
After an extended rally and the market gaps up.  Sell into it or raise stops.  Sell into quick spikes-- they will need a lot of time to re-set-- look at DBX chart


Lesson No. 3 - Recognize character change.  When the market goes from calm and orderly markup to wild distribution don't expect to hold for the big trade.  Recognize the situation,Volatility is character change of the market.  I must shorten my swing and profit goals.

Lesson No. 4
When market volatility returns.  Sell into spikes hard and  don't rush to get back in.

2019 trade goals:

1.Situational Awareness -- expect chop, rising interest rates will have an effect on corporate earnings, political environment etc...  Don't marry a position, don't marry an opinion.

2. Recognize opportunity - don't fall asleep at the wheel, there will be sectors and stocks that do well -- watch them - but you don't have to be the first in the water.

3. Manage risk,  -- get your position sizes right.

4. Manage emotions: Fomo No mo'

Shorting - My setup.

It's been a while since I've looked at the short side of the market but It's good to review your setups so that we are ready when the time comes.

A lion stalks the weak, and when the moment arises it pounces.  Lions do not go after the strong, they find the frail and go for the kill. 

This setup is for lions. We stalk we find the weak, and when the moment arises we go for the kill.

When:

This setup works best when the broad markets is in stage 3-4. I actually like the quiet that stage 3 provides.  Kills become more difficult when volatility arrives in stage 4, but the bounty can be the biggest.   

This setup is not recommended where broad market is in stage 2. 

How to find. 

URSA MAJOR Scan:

Elements of Ursa Major

• RSI: (Wilders) Monthly < 49--  This was the trick-- too low and the stocks that it the scan produced were not tradable So it's set just inside the bear territory on the monthly 

• Weekly RSI <32  shows recent weakness.   We want weak and getting weaker

• BOP  (Balance of Power) - Quarterly < 0  -- This element tends to find stocks that have the bull back breaker move--  the “Matador Gap.”

• Price >4  We need to make sure there’s still some meat on the bone. 

Wounded Prey  39> 38 --- this gives us stocks trading below its 65 moving average over last 39 days. 

Characteristics of good shorts

I like stocks where there is no ambiguity-- they are in downtrends. They are weak and the longs dread every opening because they see they will lose money.  There are certain characteristics that appear for these stocks.

Characteristic #1

The “Matador Gap”

The matador Gap is gap that kills bulls.  It typically follows a consolidation period in a bullish stock.  It is this type of gap that tells us the stock is getting weak.  We want the stocks that the big money will be divesting itself of over an extended period… the matador gap is usually the first clue that the bulls are dying.  

It tells us big money is getting out of a stock and when big money gets out it 

Examples: HPQ:

GMCR:

WRLD

Element 2: Consolidation or countertrend bounce .

Just because a stock got hit with a matador gap doesn’t mean that we should chase and hit it right away.   A wounded animal is extremely dangerous before it resigns itself to its fate,  stocks are no different. Many times following the initial matter gap there is a severe countertrend move created by short covering.  Late shorts get destroyed. 

DFRG : Great example of a matador gap on earnings— The stock then jumped 18% so shorts that chased got crushed.  Yet this was still a great short candidate, if executed property.  

To avoid this risk of chasing, I want to enter shorts following a countertrend bounce or consolidation period. 

These period and be easily identified on longer term charts. But once candidates are identified, use the daily chart for the landscape. 

WRLD is a rbeautiful example

:

WRLD was somewhat unusual in that it landed another explosive sell off.  More commonly, shorts will “drip” in that they slowly drip down making us big $ in the process.

Some Drippers:

CENX:

LINE: 

Follow the range expansion.  Not a single close over 9 ema for nearly 2 months. 

CSTM-  Here’s a stock been destroyed (down over 50%)  over the prior year. Keep any eye on these type of stocks that put in some rallies because when those rallies fail they are often not trusted and will sell off badly again.  

At right edge of screen big bearish bar following consolidation.

The aftermath?

Entries And Risk Management

Entries: Draw the trend lines following the matter gap

Once Range breaks keep your initial stop at the previous high.  

(Blue lines trend breaks / Red lines corresponding stops. )

The great thing about this setup is that it allows for tight stops, which = big position sizes and big profits. 

Exits

• Initial stop

I don’t care how hot she is —- always use protection

• Trail with a magic line —

 I find the EMA 9 works very well to ride the dripping phase but different stocks play out differently.  Also Trend lines on shorter time frames can also be effective for trailing the position

• Gushers

On a big percentage move following consolidation there will often be a temporary bottom.  This type of move tells you the trade has been won.  Take the kill and wait for a countertrend move or more consolidation.

Hall of Fame TASR - IPO run

TASR was one of those stocks that made millionaires out of the traders who know how to hold and how to sell.  Most people did not.  TASR made two distinct runs.

The first was its IPO run:
ripped out of the IPO new high,  Took a revisit and then was off to the races.  It was a very jumpy stock and would be hard to ride, but for those who did.

After making a new high

Here's a big warning sign that the IPO run is nearing an end.  Notice the big volume breakout could't hold and it got stuffed on a bigger volume.

 More warning signs.

TASR attempted to rally off the dip but, it was held back at the same levels it previously was accumulated at.

And like Many IPOs, TASR suffered the Fly and die fate.

But a 7 to 20 run  not bad.

You Always Sell Too Soon?

One of the most common complaints I hear from traders is that "I can't hold my winners long enough."  I've been there. Here's an amazing 7 point gain that doesn't look so amazing in retrospect:

It's taken me a long time to slay my demon that made me sell stocks for small profits.  Let's face it, selling makes us feel good, then move on to the next and repeat.   The problem is these small gains don't do a whole lot for us.  In any given year, how many of your trades actually impacted your bottom line.  For me it wasn't that many.  Most of my small gains were canceled out by small losses.  It was the few large gains that made my year.  But I saw I wasn't maximizing them.  I was taking partial profits and worse, I was missing huge trends when I had nailed the entry perfectly.

So after much analysis, I realized that I needed to maximize my homeruns.  To paraphrase Soros, its not how often you are wrong or right, its how much you make when your right.  To that end, I need to adjust my approach to allow me to maximize my profits when I got it right.

 It turns out the solution was pretty easy.

Here's the cure.

Stop caring.  Stop caring about making a 8 to  20% gains.   That's noise.  If you are in a winning stock that will make  100% gain or more you have to be willing to let the stock come all the way in.

As Ray Dalio discusses in his "Principles," to be successful, you can't overweight the first order consequences at the expense of the expense of the second and third order consequences.   Yet so often I see people bragging on twitter and stock twits about nailing a 20% gain.   "Congrats to my followers" they say.  -- By all means follow them to mediocrity.

If 20% is good enough to take profits, they will NEVER hit the 100% or more winner that has life changing potential. You can't have it both ways.

When it to Sell Your Stock:

1. Stop loss -  The max amount I'm willing to risk when taking a position on.  
2. Break Event / ITM Stop:  After a stock moves in my favor, I usually move my stop to break even to slightly in the money.   The logic being that If I'm stopped out at this point, it hasn't cost me anything and if the stock re-sets I can take another shot at it without having cut into my equity position. 
3. Failure to obtain an earnings cushion:  Risk management first.  If you don't have 10-20% gains (depending on the stock) you can't take it into earnings.  
4. Market conditions: If leading stocks are getting distributed, it doesn't matter what your stock looks like, get out of the pool.  As Jesse Livermore wrote:

"An old broker once said to me: ‘If I am walking along a railroad track and I see a train coming toward me at sixty miles an hour, do I keep on walking on the ties? Friend, I sidestep. And I do not even pat myself on the back for being so wise and prudent.’"

1. Psychological levels:  buying tends to slow after runs at the major psychological price levels, 50, 100, 150, 200 etc...  If you have gains, this can be a great place to sell into strength.
2. Parabolic Character Change -- when the trend of a stock suddenly accelerates it is often at the end portion of its run.  Sell into the strength:

Abnormal distribution:  If selling hits your stock that is high volume and is out of character get out- ask questions later.

Market Thoughts

Today could be  pretty pivotal day so I wanted to write down some thought to make sense of it all.

I started the day very biased to the long side and had big gains in VRX, AA, TEAM, WTW, and smaller gains in MZOR and TWTR.

My initial trading plan for today was to sell TEAM -- due to earnings and buy one of the best looking breakouts I saw from Friday-- PRGS.

From the onset that market was in rally mode.  I sold my TEAM into the opening prints up another $1.50 from the day before and started hitting my PRGS target.  Then TWTR pulled back to its 5ema and started to bounce so I got really aggressive.

But I noticed something that really concerned me.  SO I sold ALL of my positions.  I am now testing short positions in BABA, NVDA and YY.

Many of the high beta stocks were starting to fade.   Combined with the indexes gapping up after an extended run--exhaustion gap?

Charts.  Follow the leaders.  They are giving us a clear signal to step aside.

And the leaders: (4 hour charts to show gap and fade)

ADBE:

ADSK:

BABA:

NVDA

More speculative beta stocks:

MZOR

NTNX

OSTK:

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

The Birth of a Stock

Characteristics, tight range, never gave anything back

Tighten rang and takes off.