How to Change my Financial Future - 2/24/13

I credit my friend Ram for this contribution. It is well worth sharing….

A good setup idea can change my financial future forever.....

If I do not understand the concept behind setup selection I will struggle for many years.

Scanning for stocks is not going to help me.  Preparing elaborate watch lists is not going to help me.  Unless I understand setups as key to profitable trading I am unlikely to make much money.

IBD method might be about momentum/growth but ultimately it boils down to setup and IBD has very strictly defined setups.

Same way any successful trader has well defined setup and then they exploit it day in and day out in favorable market conditions.

If I have well defined setup, I would be able to instantly recognize good opportunities and enter or exit them.

If I have well defined setup, I will be able to prioritize ideas and not waste time on marginal stocks or others ideas.

If I have setup oriented mentality.  I will ask everyone who posts trade idea to find out what setup generated that trade.

If I have well defined setup I will know instantly your entry, exit stops rules and not be a clueless person post entry.  I will not be asking others what I should be doing.

If I have well defined setup, I will not be easily influenced by any and every new tactic people talk about or sell as the new thing.

If I have well defined setups I would not be making new rules and adjustment every day.

If I have well defined setup I don't need CNBC, Cramer site, or any other distraction. All I need is software to generate my setup idea and my own guidelines

Setup selection is the only way to eliminate the problem of cognitive load involved in trading.

Sooner I understand the better it is.  Key to "profitable" trading is setup selection.

In the  beginning  I must master just 1 or 2 basic setup.  It will take me 3 to 6 months to perfect it. 

I just need one or at best two well defined setup ideas to make lot of money in the market.

A good setup idea can change my financial future forever.....

How to Blow up your Trading Account – 2/24/13

After hearing how a friend of mine lost a large part of his trading account last week, I felt down. How do you blow up a trading account? By studying that, we can consider the opposite side and protect ourselves from such a catastrophe.

The market has no heart and does not care for you or your problems. If your trading system is trend following and generates 45% winning trades, with a 1.75:1 win to loss then a random Monte Carlo simulation will show that we will have 5 losing trades in a row soon enough. The lower the win %, the more frequently we have higher consecutive losing trades. Now if I traded a large part of my account and each loss was 20% of my account, I would not have much of an account left after 5 losing trades. Therefore I have to contain my loss to no more than 2% of my account. This may be a very small amount of money and unfortunately most people starting off with small accounts cannot follow this 2% rule. Consequently when bad times hit, they see a huge dent in their account. Under capitalization, or poor money management as we would call this, is the primary reason why accounts blow up. The desire for fast money in an under capitalized account is the primary culprit.

What if the trader is incredibly good and seems to have a very high win % like 75%? The market says that chances are your few losses are going to be huge. Your Win: Loss ratio could be 0.20:1. This means your system is going to generate lots of small winners, giving you good feelings till the huge loss comes by and knocks you out periodically. And again, if you think you have many winners in a row, it could give you over confidence and a large loss could easily become even larger if you “hope” that it will turn around in your direction and add to losing positions. More about that next.

Perhaps the quickest way to blow up you account is a method I have perfected using paper money trading accounts! I see a trend up and start trading against the trend expecting it to mean revert. As it goes against me further, I add positions against the trend. Soon I blow away my money management rules and have a much larger position than I ever planned to. Worse would be to double up on positions. The market remains in the trend irrationally longer than my account can handle and pretty soon there would be margin calls and trades automatically closed by the brokerage house due to insufficient funds in the account. I have done this repeatedly with paper money in day trading I will admit; and learned never to do this with real money.

The lesson learned that I must execute one day, and this is the real secret to making big money, is to do the opposite. Start with a modest position but as the long trend continues, add to positions on a dip in the direction of the trend and take some small profits along the way as it hits minor peaks. Pristine promotes this method also. If it is huge long trend, at the end of the trade you will be very happy with the profits in your account. If it is a small trend then any losses or profits would be small.

- Remember if we do the opposite, then we will certainly blow up our account at one point or other…

.

So here are the key steps to blow up your account:

1. No stop losses
2. Technical trading combined with hope and pray that it follows Fibonacci or other reversal levels
3. Trading too large positions for the size of the account – poor money management
4. Betting against the primary trend and adding to positions as it goes against you
5. Letting emotion get the better of you and not taking the small loss
6. No diversification or hedge

I hope we will always do the opposite.

16 Year Old Actress and the Mcubed Day Trader

A friend of mine from Mcubed sent a link to the Yahoo interview by Macke with Rachel Fox - a 16 year old actress and stock day trader. Oh – did I mention Mcubed… that stands for a group I proudly belong to – Mcubed stands for whatever the members want it to stand for. I kind of fancied “Michigan Money Makers”. There are about 8 of us. One or two are less active than others. We used to get together on a regular basis every two weeks on a Saturday morning at Panera Bread. We sat and drank tea or coffee with a PB delight and chatted about what each one was doing on trading. That is how I learned more – like trading the Forex, funds that paid higher dividends, rapid day trading, using Metastock more wisely, different softwares and programs, trading books, about brokerage houses and on and on…

Well Rachel made 30% supposedly, day trading last year on 338 trades. That is certainly an accomplishment for a 16 year old who is also a somewhat well known actress. She has a new trading blog that I must admit is a lot snazzier than mine. I am jealous; but she is in show biz and probably pays someone to sharpen it up and make money from it… Give her some credit though. But I do wonder if she knows the technicals well enough to be safe. She uses overbought and oversold levels to go in the opposite direction. Hope she uses some loss control rules as those things work well till they don’t, and the so called irrational market takes your money away. I wish her the best though and more power to her.

One of our Mcubed members is a dentist who always loved day trading and wants to earn his living being a day trader instead of a dentist. He is single, resilient and has had some tough knocks. For example he has traded small accounts and grown it, only to lose the whole account more than once. Still his passion for trading has brought him back into the game again and again. Recently he took his account from $2,000 to $10,000 in one week. And last week he grew it from $10K to $14K. That is a growth of 40% in a week, and I won’t mention what % the $2K to $10K grwoth was…. He is trading e-mini futures mostly I think, although he also likes to day trade options on stocks like GOOG and AAPL.

The method he uses is a complex array of indicators including market breadth. I think it has become like driving to him. For most people the question would be – how can you keep up with so many indicators? But when we drive, that is exactly what we do and do it without even thinking consciously. His single weakness is money management as he is leveraging his account too far and eventually that causes it to go bad on him. Positively, his number of winners to losers is very high. I think he can compensate for his money management by sheltering some of his winnings in a different account in order to protect it from himself, and keep it for a rainy day.

                                                          (Day Trader's paradise)

Guess I started thinking about the actress Rachel and wrote more about my unnamed Mcubed friend – the dentist. Here is an idea – go in for a dentist visit, but before that give him $1000 of your money to trade. In a week he can make you more than what the dentist visit would cost you – but plan on the money as high risk so you are not disappointed.

I believe his trading is phenomenal and I don’t expect to replicate it. But each one of us has a passion for something and if we stick to it in a controlled way, we can make it! Day trading remains a dream to me. To be independant. Make money using a laptop from anywhere. Be no one’s slave. Work when you want to – my dream is to get up late, grab a lunch. And day trade between 1 and 4 pm. Is it easy? No  It takes a steely mind to handle the losses that come in rapid succession and be able to shrug that off and stick to your trading strategy. Maybe one day….

Can the U.S. Economy Muddle Through? 2/9/13

Talk by Dennis Stearns, CFP, Stearns Financial Group, Chapel Hill, NC

My Rating: A

Dennis Stearns presents his data, charts and ideas in a very well thought out manner, and I enjoyed his talk immensely. The last time I heard him was in 2012.

Dennis started out by first summarizing 2012 and asking “Is it a sugar high or is this a lasting Recovery? Bonds are no longer the chocolate and vanilla category but there are Tutti Frutti, Rocky Mountain and many other flavors; and bonds hit outside the park last year with 10-15% returns”. He is now more cautious on bonds and exited positions, and selling bonds would be the order. It was a wake up call for me. Despite the down signals on my TLT and TIPS charts, I have bond positions as a hedge in my 401K. I will close those out soon.

Dennis echoed the U.S. energy independence theme that he mentioned in 2012, same one he told us at his last presentation in 2012. The media and markets are underestimating the U.S. energy trends. Natural gas and oil explorations will make the U.S. the largest energy producer in a few years, surpassing Saudi Arabia and enabling the aggregate GDP to jump another 1 ½%.

Dennis discussed the US debt issue and expects it to stay in the 72% to GDP range, rising a little more due to the increase in baby boomers Medicare participation; but capping out and slowly reducing to the 60's over the years. The high cost of Medicare is the cost of tests and care for seniors in their last 6 months. There are major innovations in the works to enable more rapid and faster tests. He does not believe the US is in a decline like the Roman Empire.

The consumer balance sheet is also improving. The household debt service in 2001 was 14.1% and in 4Q12 has dropped to 10.4%. Credit card companies are extending credits again and the home markets in certain areas are improving. Housing is bubbling, although somewhat unevenly. Well earning young professionals who are making money in the 6 figures are buying higher priced homes. The rebound in housing may offset the fiscal drag. Confidence is going up and we are more likely to see an upside surprise.

Bond markets will not yield a favorable yield in 2013 and as mentioned before, Dennis said they have exited their positions. He likes to leave the party early when it is going real strong.  He feels the same way about TIP, inflation adjusted bonds. I am attaching a chart on TIP showing my own exit signal on it from technical analysis.

He pointed out that the media has now started calling out many black swan events and he refers to them as black ducks instead. When he sees the media waving white ducks, that would be a good time to exit.

Emerging market funds, and US high quality stocks are likely to provide the best return possibilities in 2013.  Stocks like PEP, UT, JNJ, ABT and also KO, PG. Stocks like HD have already had a great run up and I got the impression he liked it but better to let it pullback first. The US small stocks return will likely be subdued. He does not like to buy individual stocks in emerging markets and opts for funds. I am attaching a chart on EEM (Emerging markets ETF) using my trading system on it. After a nice run up, it just generated a down signal, and I will hold back entering it as of this writing.

“Things are getting better and not worse, although there is inflationary risk”.

“We like to buy the Ugly Duckling”

Dennis believes in the US and innovation. Although some manufacturing has been shipped overseas, manufacturing is moving back. Advanced Manufacturing is experiencing a powerful resurgence in the U.S. that could, combined with energy independence scenarios help revitalize other parts of our economy and kick off the “Deployment Phase” highlighted in the 2012 edition of Stearns Financial Trends”.

In summary, plan on a modest upside year but keep the hedges in place. 
What I wonder is how much of that upside has already taken place in the first month of this year?

401K Monthly Analysis – Bulls keeps Running 2/2/13

SPY keeps roaring upwards. I keep telling myself every week that I have no idea where the market is going and that I must follow my own technical chart directions as it will make riches beyond my dreams... my own money tree...  and better than any of the talking heads on TV or those who sell market predictors. What gets me off my game is listening to someone else instead of shutting everything external out and doing my own thing. 

My wife made an interesting comment yesterday regarding a subscription offer I was considering. The offer was to follow signals that would generate a minimum of 20% yearly gain in your R/IRA type account, with a target performance based on the last 10-11 years at over 40% yearly gain each year. A small sum like $100 becomes $66,000 in that period when allowed to compound. The charge for the service? Only $16 per month. Yes I am rounding off from memory but the amount was very reasonable. I was considering subscribing not because I cannot devise a system myself; but because it would be a hedge against my own mechanizations. My wife says – you know people who sell things don’t have the performance – if he could make that much money why would he bother selling it? Maybe she is right. Maybe… but what if she was wrong and here was the golden goose? I have chased golden geese before. Never once were they close to being what they promised. Still, I know this source and somehow trust the back testing….

Back to the markets and my monthly 401K analysis. First, my chart on SPY nailed the move up. It generated several great signals for entry, starting from 12/4/12 and the last one being on 1/8/13. When I look at my previous employer based 401K account, the funds to be in are T Rowe Price Intl Disc, Fidelity Invst Divers Intl and Spartan Ext Market Index. The Vanguard Explorer Admiral is next.

With my current employer, the choices are WFA SPL Midcap VL, Royce opportunity, Fidelity Invst Divers Intl and Fidelity Growth Strategies.

Attached below are charts of SPY (ETF), WFA SPL Midcap VL and Fidelity Invst Divers Intl mutual funds with my trading systems on them.