Daily Archives: December 9, 2009

More Drivel (by Nathaniel Goodwin)

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I've been wasting most of the day browsing perezhilton.com and was about to check out some of my favorite adult sites, but then I thought my time would probably be better spent looking at some charts.

Something I like to keep in the back of my mind right now is called the Fan Principle.

In corrective / intermediate trends, which many think we have been in since March (if you believe in the new "bull market", just skip this post), where the advance has pretty much been a straight-line orderly return; the Fan Principle might be a good tool to gauge when the correction is over.


First we need to find three good trend lines to make our fan, ones that contain the price action. After fan 1 is broken, prices come back but does not penetrate it. Then fan 2 is broken, price comes back but does not penetrate it. Now we are looking at fan 3. Once fan 3 is broken decisively usually on higher volume, the top has probably been seen according to the Fan Principle. The move creates some sort of "rounding top".

Fan_Principle
Just like anything, there are exceptions to this rule and it doesn't mean we can't have more strong rallies over the next few weeks. Just one more thing to keep in mind as we move sideways here. "Long-term" investors should really take note of this; it is giving us warning signals.

I told my mom to speak with her financial adviser, and maybe pull some of her money out of the market (I've been telling her that since June-July and she says I sound like a real douche when I say this). Mom never listens to me, but at least she agreed to meet with him again.

Developing as a Trader – The Trading Plan (by Biffermas)

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16 Investing without a trading plan is like storming the
battlefield without pants, carrying an empty gun.  Swaggering into trades with George W. Bush “gut feel” combined
with bold action has no place in a trader’s arsenal.  When things turn against you on a trade, your
objective mind can no longer be completely trusted, and a solid trading plan
will provide the script to bail you out with minimal damage, provided you follow it!  The most unreliable portion of the trading plan is the person executing it!  Commit to your plan.

At a minimum, a trading plan includes a trading strategy, a
money management parameter, a position size element, and a psychological component.  When writing your plan ask yourself the following question, “Based on my plan, would somebody be
wise to give me money to trade?”

This trading plan is catered to my unique brand of
psychological dysfunction and should be used merely as an example.  It’s based on personal trades and episodes of losses on my part, hence the heavy emphasis on psychology and stops.  I feel that every trading
plan is personal, and everybody should develop their own system based on their
own strengths and weaknesses.

When I began writing a plan several years ago it was heavily slanted towards setups and entries, with arbitrary stop losses that were not based on anything other than a % loss; very bad design by an enthusiastic beginner. Setups are the most versatile and fun portion of trading, but probably the least important element.  A simple coin flip to determine a long or short entry could be effective if combined with proper money management.  Nobody wants to hear this, but I feel traders should focus on the downside risk before dreaming of the upside.  Every point below has a personal experience attached.

Initiating positions / position sizing

  • Any reasonable technical entry is acceptable, long or short.  The KISS principle applies, and entries should be as close to obvious technical exits as possible.  The closer to the stop, the larger the position size can be.
  • Don't anticipate reversals and market movement in general.  Wait for a clear signal.  Favor failed breakouts or breakdowns.
  • Focus on individual stocks rather than futures, etfs.
  • Option trading or 3x leveraged etf's are banned.
  • Position sizing is based on distance to the stop, with no more than a 2% total account loss allowed. Example: if the logical stop is 10% away from entry position, adjust size to allow less than 2% of total account loss if thesis failure occurs.
  • Time horizon on any trade is optimally 1-7 days.

Closing successful positions (this is my weakest area)

  • Minimally, the target should be 2-3 times the downside risk.
  • Close position before ideal target is hit.  Don't gun for top tick.

Closing losing trades / risk management

  • Stop losses are firm, and cannot be negotiated to a lower support zone. 
  • No position can result in a loss greater than 2%.
  • Recognize you will be incorrect very often, smashed upside the head, water boarded, beaten up, humiliated… and you're still playing the game correctly.
  • There's nothing terrible about admitting you know little or nothing (it's true!).  You have incomplete information and compete at a disadvantage to larger traders.
  • When analysis is done and the trade is placed, stop analyzing!  Thinking with clarity is only possible before the position is opened.  No analysis is objective beyond that point.  Emotional analysis on open positions falls into the "human nature" category and is the enemy of successful trading
  • There's no excuse for avoiding obvious losses.  Only a fool hides in the trench hoping everything will work out fine (the very definition of the "slope of hope".)
  • Distribute eggs over many baskets
  • Never open positions around earnings season.  Close current positions before earnings.
  • Restrict total leverage to 200%
  • Don't try to "get even" through increased risk taking following a loss.
  • Don't trade when feeling beaten, bloody, and exhausted.  Use your creative outlets to repair your brain and refocus.
  • Avoid gurus.  They know nothing and have an agenda (worse than knowing nothing).
  • Never forget the math.  A solid 100% gain is lost by a sloppy 50% loss.

Most important point!

Remember, you might be a ornery and disagreeable chap, but dozens of people love and depend on you. Think of them, and strive to make them proud.

Where It’s At

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One of the most treasured parts of my mornings is sitting down at the breakfast table with the New York Times; I read this in today's editorial section:

1209-teardown


 I just want to use this to show we're on the other side of the looking glass. The proposal here – from a former Treasury Secretary – is to pay the unemployed (brought low by the housing heist) to tear down houses (likewise brought low by the overabundance of houses). I thought the whole "green" angle was a nice kow-tow to the latest fad. Well played, Mr. O'Neill.

Incredible. But I am highly confident things are going to get exponentially stranger over the next few years.

China – Still Short this Pig (by Gary Tanashian)

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A few weeks ago I did a post on Slope looking at the topping action in China etf, FXI.  Well, I am still short this market (via FXP, along with shorts on silver and financials) against my remaining gold stock longs, and I am being as patient as I have ever been with short positions as these markets continue to roll.

The FXI chart is now doing some interesting things even as it has made no conclusive move below the supportive SMA 50.  Specifically, I noticed that the sequence of higher highs has has been broken on the latest short term peak.  This has not previously happened during Hope '09. 

Fxi

Now we await a lower low which, along with the lousy MACD would cause RSI to threaten its support.  A reasonable target on a breakdown would be around the SMA 200.

Have a great day all.  Gary from Biiwii.com and Biiwii.blogspot.com