Interview with Mark Cook-- Market Wizard

A fantastic interview.  

Key points: 

Know your personality

There's always a setup, and a vehicle for your personality

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

Hall of Fame -- How QCOM was Born

Everyone knows what happened to QCOM in the year 2000.  Here is how the legend looked in the infancy of its run. 

In February QCOM was very much trading sideways.  on the 22nd it surged.  It then consolidated but held the 10day. on the 27 it had massive volume, followed by even heavier volume the next day. 

Take aways

• When a stock has a strong move and consolidates without pulling back it often has more in store
• when a stock follows an initial power move with an even stronger breakout there is some serious momentum in the name. 

Big Gain Stocks Hall of Fame - RMBS 2000

I suppose you never forget your first-- RMBS was mine.  (note These prices follow a 4-1 split.)

I had originally bought in the 60s. I sold 3 months later at $200,  $50 on this chart. In doing this I misplace this badly and left untold fortunes on the table. But still, I was 19 and there are many lessons still to be learned. 

Characteristics

• Theme -- semiconductor technology that was game changing.  Follows on the heals of QCOM.

 volume picked up on pre-surge.

• 2 week Periods of consolidation right on 10 EA following pre surge. 
• 4 weeks in a row.
• Vicious pull back and then reset. 

Big Gain Stocks Hall of Fame-BVSN '12

As part of my big gain hunting, I've taken a look at some of the best performers.  Extreme momentum movers. Because anything else would be boring.

At the end of 2011-early 2012.  BVSN made a monster move 500%

Surge Characteristics.

• Early volume surge

• over 2 week consolidation held over 20 EMA

• Another volume surge on massive volume. 

• Low Float 4.5M

• 20 MA holds 6 times and then the plunge. 

• 20 MA then acts as resistance 

THEME?
BroadVision is an online commerce and social networking solutions company. 
Was promoted by  National Inflation Association .. Ironic right?

LESSON
BVSN would have been easy to dismiss as a pump and dump and it likely was. But early shorts got smashed nonetheless.   This was a tradeable move.  We can look for secondary entires at support. If a magic line holds, buckle up and buy. 

Chart Set ups

Here is how I set up my Breakout Chart in Tc2000:


The indicators I use for 4% moves are listed. I also overlaid a 7 ATR to give me an idea as to whether a 4% move is significant.

My TI over 105, lists the trend intensity and triggers when the TI exceeds 105. I over laid a 6Ema indicator because I use that moving average frequently for determining exits on momentum bursts.  Dots on top means the stock is above the 6EMA dot below means the stock is below.

so combined we have CDXS, which I took a position in today.  It got a 4% spike from a low volatility period which has triggered a big % run. I just hit a TI 105 and is above a 6EMA.

The Glory of Edge

What is an Edge? 

I used to believe that it an edge was the advantage you could develop over other traders.  In other words, the edge necessary to be profitable was likely some highly complicated strategies that the hedge funds might use with various correlations.  But if this was the "edge" then the retail investor stands no chance. 

As I progressed in my development, I came to realize that you do not need to have a complicated strategy, an edge can be developed by understudying your trading setups inside and out and applying them consistently.   While this certainly was closer to being correct, it is a methodology and not really an answer. I've since come to the realization that "edge" is the edge your system has over randomness.  

Fooled By Randomness

If markets are random, there is no edge. Nothing will make you money, not psychology, technical analysis, trading systems, discipline, or expert money managment.  Thus, it becomes imperative to ask whether markets are random or are they non-random.  

Humans are trained to see patterns in data that does not exist. We can find "bull flags" "head & Shoulders" patterns in completely random generated data. Consequently, I do not believe that training yourself in these chart patterns is especially helpful in developing an edge.

Certainly, much of the market action appears to be random. But given that every trade likely has a strategy behind it, can it be said that the market is truly random?  I  picture the market as a school of fish, every individual movement does not appear significant, but some times, the entire school turns in one direction. 

If your the system does not provide more edge than over a random market, then your system is the same same thing as trading a random market.  It is impossible to make money. 

In other words, if we do not understand the market action, or if our system does not know how to trade it, then the signal is no better than random.  

To make money in the market:

1. There must be a non-random pattern
2. the pattern must be recognized
3. The strategy must be executed properly

There is however, certain times when non-random signals appear. The objective is to separate random from non-random movements and to create a trading strategy that allows you to capture the signal. The difficulty is that randomness hides non-randomness  (signals).

Thus, the question we should ask ourselves is how do we develop this edge?  How do we avoid just trading the noise and ensure that we are not only trading legit signals but doing so profitably.  Given that  some of the best traders often have win rates in the mid 50s%, it is not easy to do. 

Some of my observations that I've built my trading strategies around  are that

1. Stocks rests in periods of consolidation

2.  Volatility leads to more volatility

3. A stock that trends into consolidation will often continue the trend after a volatility expansion.

4. If a stock makes massive move on high volume and the pull back is shallow, the next higher move can be very explosive. 

I've turned these observations into strategies and defined them in my playbook. 

My continuation anticipation setup buys strong stocks in periods of consolidation.

My momentum burst setup buys stocks that have consolidated and have shown their first range expansion -- (volatility leads to more volatility. )

My Fishhook setup looks to capitalize on big volume movers that pull back and then resume the move. 

Confidence

My playbook only works because I have confidence in those setups, Ive detailed.  If someone were to show me a set up, it would do me no good until I have researched it and believe in the setups take advantage of a non-random pattern that I can execute properly.  Until that point, the setup is no better than trading random markets... There is no edge.

 For example, I was able to reverse engineer the Powertrigger Setup. But so what?  I don't have confidence in it, so it is no better to me than a random signal.