Saturday, February 23, 2008

Weekend Sampling of the Blogosphere

* Deterioration - Quick update of my recent overview: Despite a late day surge, we're seeing deterioration among the broad list of NYSE, NASDAQ, and ASE shares. Friday saw a reduction in the number of 20-day highs (383) and an expansion of new lows (1270). Even after the late rise, Demand closed at 52 and Supply finished at 105, which means that twice as many issues closed below their volatility envelopes as above them. The picture continues to be mixed with respect to technical strength: 11 stocks in my basket finished strong, 15 neutral, and 14 weak. I continue to play off strength or weakness in key sectors and stocks--most notably the financial issues--for intraday trading, which has been helpful. Playing off the early distribution of the NYSE TICK was also quite useful Friday.

* Mental Fitness - Just as our daily lives don't provide enough exercise to keep us physically fit, our daily routines do not sufficiently exercise our brains. Interesting post from Sharp Brains.

* Trading Scared - Here's a thought-provoking view from John Forman about how the best trades are hardest to take. I have to say that my experience is different. I find the best setups easy to take, because all the parameters have been researched in advance. For me, the hardest part is sitting through choppiness on the way to a price target. I'm often too quick to take the quick profits. The fat, profitable tails of returns, however, are often what differentiate the winning traders from the losers.

* More Good Links - The difficulties of bailouts and a comparison of TIPS and Treasuries are among the views unearthed by Abnormal Returns. See also the excellent updated links from Trader Mike, including efforts to predict stocks 30 seconds into the future.

* Where the World's Money is Headed - Very interesting post from an excellent site: January's challenges for hedge funds contribute to the convergence of traditional and alternative asset management.

* Value Investment and Earning Growth - This one takes a couple of readings, but it is very, very good: an examination of the limitations of the PEG ratio.

* Which Stocks Rallied - Nice investigation of which stocks did and didn't participate in the late day rally Friday. Gives a worthwhile insight into how fast money flows and, by reverse logic, which stocks traders are most worried about with respect to credit concerns.


John Forman said...

Good morning Brett. Nice to see someone else is up freakishly early on a Saturday morning. :-)

Thanks for the reference.

The point I would make on my post and the trading I do is that it oftentimes requires trading against the direction the market has been moving. I have never had any problem going with, so to speak, but counter trading is a bit scarier - for me, anyway.

In terms of the sitting, I absolutely know where you're coming from. I'm not the type to take profits quickly per se. It's more being a bit too aggressive trailing my stop sometimes. The other day that cost me big. I only made 4 points on a trade that could easily have been worth 20+.

SSK said...

Hello Brett, I agree with you on the trade setups. I relate, (I guess you could call them somatic markers), when I was a kid at Kmart when they ran the blue light specials, I used to run over to see what it was, I can see the blue light in my mind, experiencing excitement when the opportunity for buying at the low or selling at the high, when that is the correct thing to do occurs. If I am prepared and I know that the asymetrical opportunity fits within my predetermined reference points, it is like finding your favorite item in the blue light basket. That was a great article on Somatic markers in trading decisions. Thank you!

Hello John, I agree with you, I haven't yet figured out a good trailing stop strategy yet. I was thinking maybe 50% stop after 5 points? That way if you have broken out of a typical up and down rotation that occurs during most 30 minute interval periods, and and the market is moving from the high or low back to its mean or the other end of value, you have a good chance of staying with that move, that lately with these 30 point daily ranges offers opportunity. Not that I have exploited these yet, but its on my mind! The caveat would be that if you were still in a multi period consolidation, like the lower volume cluster of friday before the L-M period break upwards, you would bag 50% of most of those moves if you were trading that volume cluster area.(1328-1335) An example from friday, If you were selling the H-K-L periods highs, and buying the F-G-J lows that 50% rule would have served you well,at least on the G buy or the H sell. You might have taken a chance to get out on a limit at the double tops or bottoms during the J or K retests. If you also bought the L period low, you would have been in the trade all the way to the mean of the previous 5 day distribution, up near the close. I am limiting my trading to 3 trades. I would like to avoid the type of trading that I just spoke about in the value area, and focus on asymetrical opportunities during those 3 trades. That is an exersise that I think will force me to be more selective. I think we had long liquidation during the day, with short covering into the close. I think there is going to be some trade happening in that M period range (1335-1355 during the premarket or on monday) I am working on my execution, as that has been a problem. As I grow in experience, the application of theory is getting better, in my mindspeak I identify market opportunites correctly, but fail to execute what my mindspeak is telling me, even after I make a recording of the thought and publish it! If I had someone just follow my comments and enter limit orders and walked away, I think they would do pretty well! I am though working on solving those things, as I think the left analytical side of my grey matter is over powering my intuitive side and taking trades that are low reward and high risk, and were never part of the bigger picture, hence the three trade limit per day that hopefully forces a taming of that occurence. Thanks for your insights into your trading as I enjoy reading your rejoinders. Best, Steve ~SSK~

LiggerPig said...

What John said about trailing too agressively was me on Friday afternoon, only I got 4 and a half points on the big end of day rally!

To be honest the market has been so choppy I've been taking tiny profits when available. Though my problem is I often don't care what the trend is and curse myself at the end of the day, particularly when the market is down say 30 and I've been looking for the turn.

All week I've been posting targets and yet not comfortable to hold the positions to anywhere near them. I have to read all my thoughts again this weekend to find out if my confidence is cracking or whether it's the volatility I can't handle or something else is going wrong in my head.

Was so relieved not to have been caught short Friday. Personally, I think a lot of traders are scared and getting caught up in the chop.

At the back of my mind is the thought that ES was headed below 1320 for Friday's close had it not been for the "news". We'll never know but I would ask if you have any view on that?

Ziad said...

I can relate to what everyone is saying. With regards to liggerpig's comments on taking tiny profits whenever possible, I think much of that can be attributed to the extreme swings in volatility we've seen of late. I don't think it's necessarily always a wrong thing to "cut profits short". In specific, if you see that the market is acting erratically and regularly reversing strong moves that "should" continue, I think it makes sense to take any decent profits you can get. I think it's a form of risk control to protect profits in these irregular conditions, as uncertainty and thus risk (of not only loss but also of losing profits in this case) is greatly heightened. During January, I personally had several trades that were 8+ point winners and looking very healthy that totally reversed on me in the blink of an eye. That has caused me to become more cautious with my profits.

However, I think it's important to not overdue the caution, and to make sure that you remember it's only a temporary thing that only lasts as long as you see abnormally wild volatility as the norm. In the past couple of weeks, although we have seen good volatility, it has been much more "normal" trending intraday movement in my view. That led me to relax my caution on the profit exits, and I thus caught HALF of the day's range on Thursday with a nice short that I let ride. To me, the market had been acting more normal of late and so there was no reason to bail quickly.

That brings me to my final point, which is something that Brett and John alluded to. I think the maxim that the hardest things to do are usually the most profitable applies the most to profit exits. Unlike most traders, I rarely use trailing stops even when I have huge gains. It might sound unwise to let large amounts of profits disappear while trying to go for a certain target, but what I find is that while it's the hardest thing to do, overall it's the most profitable. If I am riding a nice trend trade that has not had any significant reactions to make LOGICAL stop points that would tell me the trend is reversing, then I won't just trail an arbitrary stop. I'll let it retrace as much as it needs to if things still look good from a general standpoint- no matter how uncomfortable it may be. And in the early going of a high reward trade, I won't move my stop to break-even quickly if a revisit to that area would not invalidate anything. So many times a trade may be up 6 points, and I'll let it come back to Break-even and possibly into slight negative territory if conditions still look good, and most times it pays off well as the trade goes on to be a big winner instead of a scratch had I been too cautious. I believe that these things have been tested quite a bit by mechanical traders, and the finding is that while trailing stops, partial exits, and quick moves to BE feel good to do, overall they cost in terms of profitability. Of course that doesn't mean I don't take quick exits; most market conditions call for just that. But when things set up for possible trending, I try to do everything in my power to force myself to not be cautious and let things ride freely and this is something I continuously condition myself to do (because man is it ever hard!!!).

Brett Steenbarger, Ph.D. said...

Hey John,

Very interesting; so much is a function of our experience. I'm always comfortable fading trends once momentum/strength weaken; it's jumping aboard a move after it's been under way that I find difficult. But you're right: many of the best trades require acting counter to the herd.


Brett Steenbarger, Ph.D. said...

Thanks all for the excellent observations!