Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Market Sniper! (by Biffermas)

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In the realm of competent, coherent traders, few compare with Market Sniper.  He stands out in many aspects beyond trading, notably real estate, disaster preparation, precious metals, macroeconomic issues, etc.  Because my trading plan and approach to the markets have both benefited immensely from his input, I chose to focus this interview on trading.  I could easily conduct 3-4 more pieces discussing other aspects.  He is a great teacher to have on the Slope, and I feel very fortunate to have him around.

Biff:  Did you have a previous career in a typical day job?  How did you get into trading?

Ideas1-300x300 Market Sniper:  I have always had an entrepreneurial nature. Both my parents were university professors. Sociologists.  At a very early age I decided not to pursue academia.  From the age of 13 on, I was making more than my father through various endeavors including a gardening route which I sold to a Japanese gardener at the age of 15 for $25,000 as my father had accepted a Fulbright Grant to teach at Ain Shams university in Cairo, Egypt.  I worked my way through University of California, Los Angeles with a combination of the GI Bill and a great part time job for the Los Angeles Times in newspaper production.  I was already doing some real estate by then as I bought my first house at the age of 17.  Upon graduation I was hired on by Aetna Life and Casualty as a workman's compensation field representative.  I managed workman's comp claim cases. I left them and went into the house painting business with a partner. During that time I had discovered real estate in a big way and started buying, fixing and selling houses.  I got to the point where I decided to get a salesman's license just to save part of the commissions.  I originated the concept of the 100% commission real estate office where the salesmen rented my broker's license for a fixed fee per month. That operation was bought out by what became White House Properties.  I was already dabbling in the stock market with mutual funds at that time. In 1984 I decided to become a stockbroker with EF Hutton.  I had both Series 7 (stocks) and Series 3 (commodities). During that 2 year period I did everything you’re not supposed to do and lost substantial sums.  I went back to real estate then and swore off stock and commodity trading forever.  I revisited that decision in 2001 and decided to devote full time, first to learning and THEN to trading.

Biff:  What were the major trading errors you committed that made you swear off stock and commodity trading?

Right-way-wrong-way1 Market Sniper:  Trading errors. LOL… you name it, I did it. NO trading plan, NO methodology. Also when positions went against me, I was stubborn and averaged DOWN.  It got so bad, I was trading my commission checks.  I did have the good sense NOT to tap into more than $100,000 of my capital so the on-going blow up was not as bad as it might have been.  Towards the end I did have a couple of very "lucky" breaks.  I found Larry Williams and bought an S & P futures mechanical trading system that did VERY well.  I also had the good fortune to have had an insider as a client that traded off that inside information.  In those days, you got caught doing that, they just took your profit away!  At the end when I gave it all up, got back close to even. I was down nearly a million dollars.  Redeemed myself with my clients as well.  Trading other people's money can be the pits.  When your right, it was THEIR idea. When your wrong, you’re the A-hole.

Biff:  Since you re-entered the markets in 2001, has your trading style been consistent?  What changes, if any, have you made to your trading plan over this span?

Study Market Sniper:  Great question!  My first step after making the decision to get back involve with the markets was to set aside a 6-month study period.  Fourteen hour days, damn near every day.  I did not even paper trade.  What I did was get a hold of a tremendous amount of reading.  First, to truly understand what goes into price and what creates it.  An area most traders do not really understand.  I read everything I could get my hands on about Jessie Livermore, including his hand drawn charts.  I read Jack Schwager's Market Wizard books.  Then I read everything I could find on trader psychology.  Mark Douglas had just published Trading In The Zone and I also had his previously published book The Disciplined Trader.  I tattooed BOTH books on the inside of my eyelids.  Next was the search for method.  I looked at a lot of different things.  Martin Pring's Technical Analysis was a great help with that.  Also, everything that Larry Williams had put out as well.  

Seasons When I started trading with actual money, I started with an $8,000 futures account. The "plan" was to get it to $100,000 as fast as possible.  IF the money got blown up, replace and repeat immediately.  This is NOT a recommended way to go, by the way.  At first, I leaned very heavily on seasonal trading.  It is what took that account to 100K in 43 trading days.  To Larry Williams, I owe a debt of gratitude for that.  For my money, Williams is perhaps the premier seasonal trader out there.  I then took a two week break. a vacation, to settle down.  I did know that what I had done was to create a "few" bad trading habits.  Most of all was poor risk management.  After vacation, I calmed down and put together how I would manage risk going forward.  Within a year, I found that pivot swing trading was the me
thod that resonated with me the most.  To this, I added a lot of the work of John Carter for specific setups that were outside the pivot methodology.  Basically, my method has evolved over nearly a decade, from pure seasonal trading and chart pattern recognition to basically a pivot broad market futures day trader.  I use John person's methodology whether trading equities, futures and FOREX.  It works for me in all markets that create a chart and in all time-frames I chose to trade.  To that, I add specific setups such as trading the opening gap, extreme TICK fade trades, etc. Still on the constant lookout to discover trading edges (merely the higher probability of one outcome over another).

Biff: Poor risk management is the central cause of market blowouts for so many people, and is either absent in their trading plan or neglected.  Will you talk about your approach to managing risk?

Risk Market Sniper:  First we need to differentiate between you trading business plan (yes, trading is a business) and trading plans.  Risk management is part of your business plan and its elements are then utilized in your trading plans.  Your business plan should include the amount of trading capital you are willing to risk in any single trade.  This can vary widely as this is an individual decision.  I have found that the more trading capital you have, the amount (as a percentage of the capital) I am willing to risk decreases.  I would HIGHLY suggest that even for a small account, that percentage should NOT exceed 5% of trading capital.  To risk a higher percentage courts trader ruin.  You should already know the expectancy rate for ALL your trading setups.  Each will be different.  Expectancy rate is found over a long series of trading a particular setup.  It should also be discovered for the broad methodology you chose to utilize as well.  It is simply the expected return using that setup/methodology over the long haul.  Included would be the maximum drawdown (longest series of negative outcomes) for that setup/methodology.  You need to find that maximum drawdown.  You can have a long-term positive expectancy but can have trader ruin long before realizing that long term expectancy.  If you lose 50% of your account, you need to get a 100% return on remaining capital to get back to even.  Risk management then must incorporate correct trade sizing.

Biff:  Can you give us an example of this structure applied to a hypothetical trade?

X and o Market Sniper:  Let us say your setups calls for buying a certain stock at $100 per share.  Based on your methodology, your stop loss is $95 per share.  At $95 dollars per share, the market is telling you that you are on the wrong side of the trade.  Let us use that mythical $100,000 account.  Your trading business plan says that you NEVER take more than a 5% loss in any individual trade.  How many shares do you buy?  Potential loss is then $5,000 per your business trading plan.  Based then on this example, the maximum trade size is 1,000 shares.  Inappropriate trade size is a major reason for trader ruin as well.  You will need to know what your entry strategy and exit strategy will be per your trading plan.  Do you buy all 1,000 shares at entry?  Do you scale in?  If scaling in, what triggers additional shares being purchased? The same should be included in your exit strategy in your trading plan.  Other than stop loss being hit, do you scale out as the trade moves in your favor? Is time in the trade a factor? 
I personally manage risk by sizing different trades differently depending on the strength (long term expectancy) of the trade setup.  The weaker the setup, the smaller the size.  The predominate time frame I trade in is for a session.  Going to cash at or before close is another method of managing risk.  For swing trades that are directional, I tend to use long options.  By their very nature, your risk is limited to capital in the position.  Risk management is all well and good. However, if you do NOT have the discipline to honor your stops, it will not do you much good.  The point, as a trader, that you should aspire to is to become just a trade execution machine.  Your trading plan already incorporates all eventualities.  We do NOT get any smarter once we are in a trade. Experience shows we actually become dumber!  STICK to your trading plan!  As the trade setup appears, you execute that trade according to your plan.  At a certain point, you should be so confident of the trade expectancy, it no longer matters at all the outcome of any particular trade!  When you get to THAT point, you have become a professional trader, extracting capital from markets at will.

Biff:  With the increased role of algorithms and computerized trading has your style changed? Do you engage in automated trading?

Market Sniper:  The increased role of "black" box trading has really not led to any change in how I trade. Since I went to mostly day trading before HFT started to hit the big time.  Most HFT is to capture the liquidity bonus anyway.  Now, if we are talking about upward market manipulation, that is NOT algo or black box generated. 

Black I do engage in automated trading to some extent in FOREX markets.  I have used off the shelf FOREX trading robots.  These are mostly scalp programs. IF you’re the average FOREX trader, the dealer is actually trading AGAINST you. I had one account shut down by the dealer when I had scalped him for a bit over 42K using a robot. Since then, I have gotten a FOREX account with direct bank desk access.  IF your FOREX broker is NOT charging you a commission, most likely, he is the counter party to your trades. This is especially true with mini and almost always the case with micro-min FOREX accounts.  I have developed my own robot to deal with direct bank desk access.  Had to as most robots trade off the MetaTrader4 platform and is not compatible with direct bank access. I am also currently working to re-establish a mechanical S and P trading system originally
purchased from Larry Williams back in the mid-1980's that I will automate once I get the kinks worked out.

Biff:  Do you have any hobbies or other enjoyable distractions from your trading / real estate life?

Morgan dollar Market Sniper:  I am an avid collector of United States coins.  A life long hobby started at the age of 5. I collect only coins that were meant for trade and commerce (no proof coins).  I also further limit my collection to coin types that are no longer being minted.  Therefore, my penny collections stop at Indian Head pennies, Buffalo nickels, Winged Liberty dimes, etc.  I am particularly proud of my Morgan dollar collection, the coin I specialize in, including VAMs (different die and die pairs).  I also have a very good collection of early coppers (1/2 cent and large cent) but I do not collect them by Sheldon type. Lot of history in those coins!  Did you know that the United States has put out 2 cent coins, three cent coins (both in silver and nickel) as well as a twenty cent piece?  Also, before the nickel was a nickel and made out of nickel, they were called half dimes and had exactly 1/2 the silver content of a dime?  I am an avid reader of history and enjoy reading science fiction as well. I do some gardening with my gal which is her passion.  I also use casino gambling as a hobby.  The rest of the time I devote to my grandchildren.  Wish I had more time to travel as that has always been a passion of mine as well.

Biff:  What advice would you give an enthusiastic rookie trader to help avoid the grand pitfalls?

CautionThisMachineHasNoBrainUseYourOwnTH Market Sniper: 1. Work on what is going on between your own two ears while in a trade. Understand trader psychology.  2. Understand price and find a methodology that resonates with YOU.  3. Do NOT enter a trade without a full trading plan in place for that trade.  4. FOLLOW that trading plan faithfully while in the trade!

Biff:  Thanks for sharing your expertise with us!


Return of Three Peaks and Domed House (by Fujisan)

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Well, the winter Olympics is winding down and it's hard to believe that it's almost over!  I hope you enjoyed it as much as I did.

I learn so much just by watching and listening to these wonderful athletes around the world.  There are so much in common between the Olympics and trading and I absolutely love watching it.

Three Peaks and Domed House

In my posting Three Peaks and Domed House back in Oct 17, 2009, I have discussed a possibility of this pattern being developed and I like to revisit this pattern today.

As this pattern is so complicated that it's subject to the various interpretations and I came up with two different scenarios and the first scenario is "Three Peaks and Domed House" on the daily chart as illustrated below.  In this scenario, the peak 28 could drop as low as the peak 10.


Now, how does this pattern go with my Gartley/Butterfly pattern that I discussed last week?  Well, Gartley would stop right around 23.6% retracement level and this pattern will go much lower than Feb 5 low.  The only problem that I might have with this scenario is that I expect a drop after OPX because of SPX option open interests (see my last week's post for more details) as I expect SPX to be settled right around 1100 for March OPX.. If you are shorting the market with the March put options, please keep that in mind.

Domed House and Three Peaks

The second scenario is "Domed House and Three Peaks".  I see the entirely reversal combination within the Domed House as illustrated above.  This would be more comprehensive if you look at the hourly chart instead of the daily chart.  This pattern looks much more in line with my current market expectation and I will be watching the possible rectangle pattern formation for the coming weeks.  In this scenario, the peak 8 is supposed to come back down to the peak 1, which would create the double bottom.


 INDU Gartley Update

Well, this pattern still holds, and as we all know, one year anniversary of March 09 bottom is coming and I'm hoping that it brings some kind of volatility into the market.  I don't know if I could maintain my mental sanity with another month of sideway consolidation. 


SPY Gartley Update


Bullish Scenario

Now, someone asked me what would negate this Gartley pattern and here is my answer:  if the market closes above Feb 22's high, then, the market will most likely come to retest the recent high of Jan 19.

Ok, I guess I covered all three scenarios (up, down, and sideway) so I'm covered for next week. 

Good luck trading next week, everybody!  Enjoy the closing ceremony of the winter Olympics tomorrow (Sunday).

Japanese Commodity Markets (by OilPrice)

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There has been some unusual action on the Japanese commodities markets that demands a comment.


I mentioned earlier this week that over the last two weeks the Japanese have revved up several new structured investment products tracking commodities.


There are now some "seismic signals" registering in those markets, showing these new ETFs and trusts may be having an immediate impact.


On Tuesday, open interest in rubber futures on the Tokyo Commodity Exchange suddenly jumped 12% (touching off a flurry of prophylactic jokes from some of my coarser Asian colleagues). Rubber Contracts Chart


This is a large jump. In fact, I can't remember the last time I saw a daily move of this magnitude on a major commodities exchange.


Most interestingly, the majority of the buying came from trade and broker members of the TOCOM. These professional buyers usually account for a very small portion of TOCOM buying. The bulk of purchases almost always comes from non-commercial customers.


Trade and broker members are generally sophisticated buyers. The kind who would be dealing in the structured products TOCOM recently introduced. The big jump in rubber could be a direct result of these new investment options.


And rubber wasn't a one-off. Yesterday, open interest in TOCOM gold futures jumped 8%. Again, a large portion of the buying came from trade members. Gold Contracts Chart


One surprise is that trading in TOCOM platinum and palladium futures has been relatively subdued, despite the launch of new PGM-backed ETFs last week.


But there's been action in other parts of the world. NYMEX palladium futures had a wild week. Last Friday, NYMEX open interest in palladium jumped 2.7%. On Monday, it fell back 2.6%. Only to jump 4.4% on Tuesday and then fall 5.5% yesterday. On near-record volumes. Palladium Chart


This is extreme volatility. And it may have to do with speculation that the new Japanese ETFs will increase global demand for platinum group metals.


Something is certainly afoot. Keep an eye on this one.

Big Picture Review

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When one is feeling adrift, as I have been, it can be constructive to take a step back and look at the big picture. I thought I'd use today's post as an opportunity to review some of the general ideas I've put forth about the months ahead.

Nothing has taken place yet to challenge my long-term projection. Early this year, I did a a time analysis of when precisely the top would be, and it yielded the date January 16, 2010. That was a Saturday, so the next trading day – January 19, 2010 – has indeed been the top so far. In fact, the high that day – 1150.45 – was accurate to 99.865% of the target I had laid out fifteen months earlier. So, provided that stop stays intact (for years, actually), I'll remain comfortable with my general outlook.

I did a deeper dive into the whole realm of time analysis back on January 8th, and it suggested a target price of 7,960 on the Dow by July 17, 2010. Let me stop right here and say I think this is outlandish, crazy, and very hard to believe. Such a fall would resemble this:


The above seems crazy to me. I just can't see it happening, except for something extraordinary like a huge terrorist attack or a cataclysmic revelation in the financial markets. But let me temper my prudence by saying this, and I'm going to put it in bold just to be very clear: the one and only reason I cheated myself out of 2009's gains was because I didn't believe the insane course I plotted out could possibly take place.  Read that again. Maybe a few times. Because it was the worst trading error of my life, and it haunts me every day.

I did the analysis. It wasn't just right, it was breathtakingly right. And I didn't believe it. So I didn't act. And I am poorer for my own self-doubt.

Does that mean the above is guaranteed to happen? What, are you stupid or somethin'? But I am trying – I am really, really trying – to have a little more faith in my own analysis. Maybe I'm actually decent at this. God knows I'm trying my best.

We can modulate the drama of the above chart by recollecting the 2004 analog, offered up more recently. Both scenarios agree that, in a shorter timeframe (say, within the month of March), another bounce is in store, and as I've said repeatedly here, I am going to make a valiant effort to cover my shorts on just such an occasion, as I missed the identical opportunity back on February 5th.

I'll also say that it makes sense to me that the market has stalled here. There was very little to keep the market from recovering from its huge plunge in 2008, but take a look at the past decade. There is a mountain of overhead supply spanning years. I am highly confident the countertrend rally is over.


 So there we have it. My portfolio – and my psyche – are in better shape than they were last weekend, and I'm actually looking forward to March. Let's keep a close eye on the above parallels, as they may be helpful to us. Have a good Saturday.