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.

Trading The Opening Gap (by Market Sniper)

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Trading the opening gap is a contrarian trade. You are looking to trade in the opposite direction of the gap. You will look to "fade" the gap. The stock market open at 9:30 Eastern time is a time, usually, of high emotions. You are looking to take advantage of those emotions.

What creates the opening gap?

The obvious answer is the price differential between the previous day's close and the next day's open. If your trading the broad market futures indexes, due to GLOBEX, there really is no opening gap. Trade resumes 15 minutes after the close (the close of pit trading and electronic trading for those is 4:15 pm eastern time and trading resumes in GLOBEX 15 minutes after that close at 4:30 pm eastern time) and continues until the open outcry (pit session) with the market open at 9:30 am eastern time. The gap would then be the price differential between 4:15 pm and 9:30 am next day. In the ETF's and individual stock issues, at the present time, there is no trading after the close at 4 pm with the exception of a often VERY thinly traded after hours session for a four hour period. If you are trading in the after hours, word of caution. Your broker may shut down your platform for trading one hour prior to close of the after hours session. You will then be required to call your broker and have him close out your position. That will possibly cost you extra on execution of such an order.

For stocks, the opening gap is created by an imbalance of of buy and sell market orders at the open (also known as MOO which is Market On Open orders). If there is an imbalance of buyers, the NYSE floor specialist and the electronic market makers will open the price higher in an attempt to balance buyers with sellers, Since they are charged with maintaining an orderly market, they will most often sell  stock into the imbalance so as to maintain that orderly market. This would make them net short on the open. The reverse would, of course, hold true if there was an imbalance of sellers, they would then supply stock at a lower price and they would be net long at the open. This is important to the understanding of why gaps tend to fill.

Why do opening gaps TEND to close?

The easiest explanationis because NYSE floor specialists and electronic market makers are in business to make money! If the specialist and or the electronic market makers have a net position either long or short, they will seek to move price in the direction of their net position. If short, they will seek to move price down and if long they will seek to move the price up. They accomplish this because they have vital information that you do not. Since they make a market, they have the resting orders! The NYSE specialist has, in his "black book" ALL the orders by price and size away from the market. He has the stop orders! So if he is short, he can move the price lower to trigger sell stops and thus move price lower so as to cover (buy back his stock short position) at a profitable price. If he is long the stock in his book, he will seek to trigger buy stops by moving price higher so as to, again, exit at a profitable price. There are many market maker games also that are employed to move price. This can be a special study all its own. To obtain more in depth understanding of this I recommend Richard Ney's two classics: The Wall Street Gang and The Wall Street Jungle. Also, a fine book by Joshua Lukeman, The Market Maker's Edge.

When do you fade the gap?

This is complex. All gaps are not created equal! I will briefly outline how I view each gap and give you some additional resources. My basic methodology is derived from the pioneering work of Scott Andrews, also known as The Gap Guy. I was a student of his and even was in his trading room for a few months. Since I now have all the data he does and have added my own refinements, I no longer subscribe but it is a very good place to start. Here is the link to his site. http://www.masterthegap.com/ Scott breaks the gap down into 10 zones. Five for up gaps and 5 for down gaps. Here is his zone "map" http://www.masterthegap.com/public/Gap_Zone_Map.cfm Now to utilize this, you will need to know the historical probabilities for each zone for that day based on the combination of 1) day of the week; 2) day of the month as well as identifying pattern risk. If your planning on using Scott's services, you should be aware of the stops he employs in his trades. It is 5 ES points or 30% of the weekly ATR whichever is greater. Be sure this fits within your risk management parameters. Not a futures trader? No problem. You can trade ETF's, stocks and if you are knowledgeable and very nimble, you can even trade options off the gaps! To give you an example of some historical probabilities by day of week for successful gap fills derived from the work of John Carter:

Monday             65%

Tuesday            77%

Wednesday       79%

Thursday           82%

Friday               78%

In John Carter's exceptional book, Mastering The Trade, he has an entire chapter devoted to trading gaps. Here are two of my basic rules as applied to ES gap fade trades: 1) I do not consider trading a gap that is smaller than 1.75 ES points and 2) if for any reason I do not trade the gap, I do keep it in mind during the trading session if, according to my trading methodology, a trade is triggered in the direction of the gap. Many gap fill trades can come out of other trade triggers during the session. In pen gap trading individual equities you must be aware if that gap was caused by some announcement directly related to the company you are trading. Was it caused by an earnings announcement or something else directly related to the company? If so, perhaps you should pass on the trade. Could be a gap and go situation! Even if you do not choose to include fading opening gaps within your trading plan, awareness of it can yield other dividends. It can set up price action for the rest of the day. The price reaction to the gap if not filled (gap and go) can give you an excellent heads up for a trend day, etc. I have a little pdf that I found about trading around the opening range (of which, a gap can be a large part of). I would be glad to forward it to anyone who wishes it. It is titled Trading The 10 O'clock Bulls. Email me at Dutch at WeJustTrade dot com if you have not gotten it.

The purpose of this post is not to encourage you to fade the opening gap willy-nilly or without discrimination. You must trade it or choose not to trade it based on your own plan. Do your homework on the subject, see if it fits within your trading psychology, methodology, etc. It is one of my top setups, if not the top setup as, with my own refinements, when do I fade the opening gap, I have better than an 80% positive expectancy for the trade. Awareness and understanding of the opening gap should be a part of every trader's tool box even if you choose not to include fading the opening gap within your trading plan.

Trading – Part Two: The Nuts and Bolts (Market Sniper)

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Here is the link to the first in this series of proposed posts on trading for review.

http://slopeofhope.com/2009/12/setting-up-your-trading-business-an-overviw-and-part-1-developing-a-successful-traders-mind-set.html

This post deals with your business plan, your mission statement and your statement of personal belief. The nuts and bolts of building your trading business.

Many lump trading plan and business plan together. It is my opinion that they are different. Parts of your business plan will be incorporated into you trading plans. Your business plan is the overall framework of how you plan to run your business. Your trading plan would be a specific trade or trade setup and how that trade is entered, managed and exited. Trading plans will be dealt with in another post.

Business Plan

Here are some things that can and should be addressed in your business plan:

1. When will you trade? Of perhaps more importance, when will you not trade? Some suggestions: do not  trade when your tired, going through emotional stress, under the influence of alcohol or drugs for example. I also have rules such as after three losing days in a row, take the next day off. After a huge day (I have a metric for that), take the next day off, etc.

2. What will you trade? There is a lot to be said for becoming expert in ONE trading instrument. For example, I know a trader who ONLY day trades INTC (Intel). He has for years and makes a very good living doing that with a $100,000 account. Something to think about for you stock de jour day traders. Every single stock has at least one guy that just trades that stock. You want to go up against that?

3. What kind of equipment will you use? How will you maintain contact with your broker in an emergency? Power failure, etc.

4. How much trading capital will you risk in a single position? How much in a pure directional play? How much within the same sector/market. etc? At what point in draw down will you suspend trading?

5. What methodology, if any, will you seek to use to trade?

6. Are you going to trade as an individual or as an entity (LLC, corporation, etc)?

7. Schedule your time for trading activities away from actual trading (study, chart analysis, etc). In other words, get some kind of schedule or rhythm.

8. what kind of time frame are you going to trade in? Day trader means NO overnight positions in day trades! Big error in day trading is to carry over positions to the next day. IF your trading by plan, you will never allow that to happen. It is essential that you match your time frame to your lifestyle. Do NOT change your lifestyle to accommodate a trading time frame! That seems logical but some decide to become day traders and up and just quit their day job. NOT a great idea unless you have already become a consistent trader. By that I mean, consistently extracting capital from markets regardless of time frame traded!

This is by no means an exhaustive list but just some ideas to get you started.

Mission Statement

Before attempting to understand markets, you must understand yourself! This is your personal goals and mission. You must have a guiding purpose to your life! Most people do nothave any kind of purpose to their lives and wander through life aimlessly, blown around every time the wind changes. IF this describes you, your chances of being successful at trading will be severely limited by your lack of a defining mission in your life.

Mission statements are not fun for most people and most traders will not evaluate their lives in conjunction with their trading! Here is the typical response…well, my mission is to make a lot of money. That does not get it at all as that is not a mission! It is also not a strong motivator! If it were, why are wealthy people such a minority? Your mission as a trader is totally and completely impacted by your mission in life. Determining your life mission is one of the most powerful and important things that you can ever do.

How else can you define what is important to you, interact with other people and obtain self satisfaction as you go through life? How much you can live your life fully and with joy is determined by your mission in life! Here is what you must define: 1) What are your guiding principles and what do you value? Answer those two questions and you will have more knowledge about yourself than perhaps you ever have before. This is some of  the hard work required to become a successful trader. The work few will undertake and maybe now you begin to see why most fail at trading?.

Statement Of Personal Belief

Certain key beliefs which have absolutely nothing to do with markets will determine your success in the markets. These are beliefs about yourself. What do you believe your capable of doing? Is trading and/or success important to you? How worthy of success do you believe yourself to be? A weak personal belief system can undermine and even kill your ability to trade even a great trading system or methodology. You must believe in what you are doing and be doing something that you believe in. Nothing short of that will suffice. This is where the rubber meets the road. Where your mission in life meets trading.

Statement of personal beliefs, by their very nature, are very personal. I will share with you mine. It was written many years ago and is as true today, for me, as the day it was written.

"I believe I possess all of the abilities innately (inside of me) to become a top trader. I believe I have the ability to learn from myself and from others the knowledge and skills to the excellent trader that I am. What I do as a trader is honorable as I supply liquidity to markets. Without people, such as myself, markets would not exist. My ability as a trader helps me, my family as well as my country and humanity as a whole."

I hope this has been of some help in your journey as a trader. Remember: remarkable traders do remarkable things. Separate yourself from the crowd. You deserve what you earn through hard work.

Purchase and Storage of Precious Metals (by Marketsniper)

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Due to the recent "increase" in the "price" of gold and silver, I have been receiving numerous questions about them of a practical nature. Where to buy, in what form to buy, how to store, etc

What To Buy

This will be an individual decision. Questions you will need to answer are: 1) Why am I buying precious metals and taking delivery of them and 2) how long will I be keeping them?

IF you're buying the metals as a trading vehicle, do NOT buy the actual physical metals. Trade them in paper form. Plenty of ETFs available to do that. IF you are buying the precious metals as an alternative and a hedge against paper money here are my suggestions. IF you have no precious metals at all, start with silver. In silver, start with sovereign silver coinage. For the United States, that is pre-1965 dimes, quarters and half dollars. These are normally sold by dealers in $1,000 FACE bags and often lesser amounts (1/2, 1/4 bags and even $100 face). For the full face bag, there should be 726 oz of actual silver melt. However, due to worn, circulated coins, the accepted amount is 715 ounces of actual silver per $1,000 face bag. For an actual conversion on a per coin basis, this is very handy for actual melt value.

http://www.coinflation.com/silver_coin_values.html

As with any market, there is the bid price and the offered price. The spread on actual physical metals can be quite wide. What you want to buy is the cheapest metal in readily recognizable form. With silver, you have sovereign coinage. When dealing with bars, whether it be gold or silver, always purchase hallmark bars! These are bars fabricated by well known mints and authority such as Credit Swiss, Swiss Pamp, Johnson-Mathey, Englehardt, etc.

When it comes to gold, also go with the cheapest gold you can buy in readily recognizable form. Do NOT buy into the .9999 fine gold game. The Canadian Gold maple Leaf coin at .9999 fine gold has exactly the same amount of gold as is in the South African Krugerrand. The SA Krugerrand is a bit larger due to a small amount of base metals to make the coin harder.  A word about the Austrian and the Hungarian Corona. They are all dated 1915 and are authorized re-strikes. They actually contain .9802 ounce of gold and can be the best buy due to the least markup over melt on a percentage basis. I have found that the SA Krugerrand is also usually a good buy. The premium charged for the US and Canadian gold coins tend to be higher.

Where To Buy

There really is no substitute for walking into a bullion/coin dealer with cash and walking out with your precious metals. A number of things to keep in mind. Each state is different as to sales tax on your precious metal purchases. In California, for example, the amount was recently raised from $1,000 to $1,500 for sales tax exemption so check with the state where you live on this point. Also, the Patriot Act mandates that the dealer get a piece of paper from you identifying yourself.  I have yet to be asked for actual identification. Do the right thing.

For those where this is impractical due to location, I have had a very long and good working relationship with California Numismatics http://www.golddealer.com/ and Tulving http://www.tulving.com/goldbull.html Both of these firms I have and continue to trust.  Even if the cost is a bit higher at your local dealer, there is nothing more reassuring than to plunk down the cash and walk out the door with your metals purchase

Storage Suggestions

The optimum situation is to be a citizen of one country, live in a second country and keep most of you bullion in a third country. Since for most people this is not really possible, your are faced then with the safe keeping of your precious metals. I highly suggest that you do not keep them in a bank safety deposit box. The bank may be closed when you need to actually have the metals in your possession and there may actually be counter claims against safety deposit boxes should your bank go "out of business."

This last may be just a nasty rumor but the first reason should be enough to keep your metals outside the bank! For the average individual, you might take a look into some ideas for safe storage ideas around your home or apartment. A false electrical outlet box. Who but you would know? How about a false can of shaving cream? For those with a bit more metals than can be stored safely by such methods, short of becoming a midnight gardener and burying it in your back yard, look into private vault storage.

Hopefully, this has been of some help for those wishing to at least partially hedge their downside risks in very uncertain times.

A Dissection Of The May Employment Report (Market Sniper)

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In the spirit of the words of the legendary samurai swordsman, Miyamoto Musashi (Book Of Five Rings), "Think of what is right and true. Learn to see everything accurately", let us parse the number we have been given on Friday, June 4, 2010. Hat tip to John Williams of Shadowstats for methodology.

Employment increased by 431,000 jobs was the reported number. Of that 431,000 jobs, 411,000 were temporary census jobs created by the 2010 Census. These jobs disappear in a few months. The Bureau Of Labor Statistics says that 31,000 new jobs created in May were TEMPORARY service jobs. These 31,000 jobs were also included in the May figure.

Next we come to the infamous birth/death deflater. This attempts to measure the creation of new jobs due to the formation of new small business enterprises. In an economic expansion, there maybe some merit to this. In an economic contraction, it creates pure fantasy. Included in the May report was the fantasy of an increase 215,000 jobs due to this "factor."

Let us do the math here together. 431,000  jobs less the census temporary hiring leaves us with 20,000 new jobs. Subtract out the 31,000 TEMPORARY service jobs and we have a LOSS of 11,000 jobs. From this, we need to subtract out the birth/death deflater fantasy number of 215,000 jobs and we are now at a LOSS of 226,000 jobs! Now it really starts to get "fun." Though not statistically rigorous, a case can be made that in order to keep up with population growth, 150,000 new jobs must be created per month just to stay even. IF you were to add that number in, the jobs that were NOT there would be a negative 376,000.

Month of June. A month for joyous graduations. We should all have a moment of silence and send out good thoughts to the June graduates of 2010. They are coming out of our institutions of higher learning, most laden with student loan debt and will have a very difficult time finding part-time jobs at WalMart stocking shelves at a minimum wage.

The market did not believe the numbers on Friday either. It seems that the managers of the perception manipulation machinery are running out of tricks. MOPE (Management Of Perspective Economics) is beginning to fail.

I will leave you with the wise observation of Herr Doctor Joseph Goebbels, Reich Minister for The Ministry of Public Enlightenment and Propaganda. 

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”

The first sentence is often quoted. Once you read the complete quote, you will understand WHY the rest is usually omitted.

Seasonal Trading (Market Sniper)

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Seasonality is a very major force in markets. It can be seen in the stock market. "Sell in May and go away" is one expression of that seasonality. Seasonal influence can also be seen across all commodity markets and commodity spreads as well.

What is seasonality? Simply put, it is a seasonal price trend. It is the propensity of a given market to move in a given direction at specific times of the year.

Seasonality is not limited to the agricultural commodities since seasonality is not just weather and planting cycle driven. Seasonality can also be caused by many other factors including demand and supply for raw materials, consumption trends and cycles.

There are those who claim that seasonality either does not exist or that it does not supply actionable data on which to trade. Only history can judge that argument. I maintain that there is a very large body of evidence that not only does it exist but seasonality is very much alive and well in markets and CAN give you a very large trading edge. I maintain that seasonal strength and weakness is so profound that any trader that does not use them in their work or is unaware of them is at a very distinct disadvantage in their trading. In fact, the reliability of seasonality is so strong that it puts other swing trading methods to  shame.

There are many excellent day traders on this site. Traders in oil, the broad market index futures as well as stock and options day and swing traders. There are also traders here who cannot or choose not to sit in front of the screen during trading hours and watch every tick of price movement. Seasonal trading MAY be the answer for you. For the day trader wishing to diversify his trades into multiple trading vehicles on a swing basis to the trader who chooses to swing trade in a longer time frame, free from watching daily price movement, seasonal trading could be the answer. For the pure day trader, consider seasonality as one of your filters as to which setups you trade. You may wish to put less emphasis on a long day trade in a vehicle with weak seasonal tendency and vis-a-versa, for example.

Some filters I use in choosing which seasonal trades to enter are: 1) At a seasonal turn "window", has the vehicle acted seasonally up to that point? If it has, consider the trade, if not, pass on the trade and 2) I ONLY consider seasonal trades with 80+% probability. In the last 15 years, has the trade worked in at least 12 of those years?

Some words of caution. Seasonality is NOT a holy grail trading method! It is as fallible as any other trading method! You MUST use stops. At what price level is it no longer working? Use prudent trade sizing based on those stops! In  other words, according to your trading plan, use normal risk control in your seasonal trades. That being said, trading with seasonal tendencies is a sensible and stable approach to swing trading. Nice to have history on your side with an excellent positive trade expectancy.

For those of you who cannot or will not trade futures contracts themselves, futures options (futures trading account required) is one alternative. Also, here is a list of commodity ETFs for those who wish to go with that option. http://etf.stock-encyclopedia.com/category/commodity-etfs.html

In my pantheon of good seasonal traders is Larry Williams. He puts out an annual paper at the first of the year with his top seasonal trades for the year. He also has a mid-year update. These trades tend to work rather nicely. Also, Jake Bernstein does excellent seasonal work. John Person, Mr.Pivot, is also excellent with seasonal work. he is co-author of Commodity Trader's Almanac 2011: For Active Traders of Futures, Forex, Stocks & ETFs (Almanac Investor Series) by Jeffrey A. Hirsch and John L. Person (Hardcover – Nov. 8, 2010). This book is a MUST for seasonal traders and those traders who wish to incorporate seasonal influences in their trading plan.

Put history on your side. If your not looking at seasonal influence now in your trading perhaps you should.

Yours in that constant search for the elusive trading edge,

Market Sniper