Archive for August, 2007
Reduced Trading Timeframes
August 27, 2007 at 11:17 am
With so many sharp and sudden reversals taking place recently, it’s certainly the kind of market in which one can easily overstay their welcome. They say that “bulls make money, bears make money, but pigs get slaughtered.” Well, this is no market for pigs. That trade you just nailed might suddenly reverse and erase all your gains. In the trading world, you always have to stay vigilant with your trading capital, but that’s particularly true right now.
Lately I’ve mentioned quite a few times to members at TheStockBandit.com how reducing trading timeframes is important in the current market environment, and I want to just take a moment to explain what I mean by that. It’s certainly not a phrase which is exclusive to me, but what does it mean exactly to reduce your timeframe as a trader?
To me, there are a couple of ways to do it. The first is to simply reduce your holding time for the types of trades you like to take. Whether you’re trading the long side or the short side, this tape is offering opportunities for you but you have to be very quick or else it’s easy to give some back. Reducing your trading timeframe can simply mean to book profits quicker once you start to get that good move you planned for.
Another way to reduce your trading timeframe is to zoom in on the chart. If you typically look at the daily charts but you’re finding very little to work with, zooming in your timeframe to watch the intraday price action might offer more setups. Of course, you’re looking more under the microscope, which means you’ll also have to expect smaller moves as a result. However, the same chart patterns which work on the daily charts can be found intraday and they tend to play out the same way. Breakout plays, buying pullbacks to support, and short selling at resistance can still be done on the 30-minute or even 5-minute charts. This can offer a continued flow of trades if you still have the itch for activity.
Regardless of your timeframe though, remember to stick with a plan. When headfakes are as prevalent as right now, frustration can set in more easily and cause you to overtrade. Know what you’re going after on a given day, and only take the trades which fit your criteria.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
Trading vs. Investing: Two Kinds of Good Markets
August 20, 2007 at 8:48 am
“Regular” people I know (non-traders) are “invested.” They have 401k’s with company stock and mutual funds. They have managed money trying to outpace the market. They look at performance stats of money managers and funds before depositing their hard-earned dollars in such places.
And then they wait.
They hope.
They need.
They wait for the market to climb. They hope for an advance. They need a bull market. They want the little ticker at the bottom of their news screen to show a green arrow beside the DJIA or the S&P 500, or else they’re losing money.
They’re fully-dependent upon the market to produce their gains for them. For them to profit, the market must rally over time, and historically it has. As goes the market, so go their returns. But they have jobs and other demands on their time during the day, so they’re not interested in nailing a move right after an economic report or energy inventory number is released. They want their funds to grow over the next 10, 20, or 30 years from now so that they can quit their jobs and retire comfortably. I can understand that, so I don’t fault them.
A Trader’s Needs Are Different
Me? I’m not one of the “regular” people. I’m a trader and therefore entirely different.
I wait for opportunities. I hope for good chart setups. I need volatility.
Whether the market is up, down, or flat for the year doesn’t begin to tell the story of my returns. I’ve had fantastic days when “the market” was down after nailing some shorts. I’ve had huge days when the market was flat. And sadly perhaps, I’ve had pathetic days when the market screamed higher without so much as a minor dip! 🙂 That’s how trading works, and I wouldn’t, uh…. trade it for anything. I absolutely love it, and I can’t wait to see which opportunities will surface after the next opening bell.
But I must admit that “the market” does impact my trading. The most notable influence on my trading is whether a trend is underway or not. The presence or lack of a trend will impact my directional bias, my timeframe, and even my activity levels. Volatility is another piece of the puzzle, as too much of it will curb my aggression and not enough of it may remove me from my screen altogether. Volume is important (as I recently noted), because I need quality executions and enough liquidity to get into or out of trades without added slippage.
“Good” vs. “Bad” Markets
To me, when “the market” is good I see lots of high-quality chart patterns. In a “good market” I know I can risk a little to make a lot more(by swing trading), even though I’ll be wrong sometimes. A “good market” isn’t necessarily an up market, but it is on the move and giving me waves of activity which I can attempt to time and profit from. I only need a piece of a move to make my day’s pay.
A “bad market” to me is of course not necessarily a down market, but one which is offering few opportunities or poor risk/reward trades. “Bad markets” mean less activity and a greater focus on preserving my precious trading capital while I wait for better conditions to arrive. Needless to say, trading heavily in a “bad market” means spinning my wheels or losing ground, and those are things I specifically want to avoid in my trading plan!
If you’re a trader, I’m sure you can relate to this. Listening to talking heads on TV blab endlessly about where the market will be by the end of the year is a waste of your time. Always be measuring whether the conditions are ripe for your style of trading, and only take action when they are. Don’t get seduced by big point moves in the averages or fear that you need to just buy something in order to participate in a run. Stick to your method and know that your discipline will get you through bull markets, bear markets, and everything in between.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
Bulls in Pain
August 16, 2007 at 9:35 am
Bulls continue to suffer, and they are anything but content at the moment. Short-term support levels have been breached, lower highs have been created, and bounces have thus far merely served as selling opportunities for limping bulls to raise more cash. It’s really getting ugly out there, and their accounts and egos have been badly bruised!
Over at TheStockBandit.com, we closed out our last long position back on 7/24 and have exclusively been swing trading the short side ever since. It has paid off nicely with some big quick moves like over $9 profit in ESI in 6 days and more than $10 in FWLT in 2 days. The fast money sure beats staying long and wrong! However, we can’t just load the boat on the short side until some relief comes in from this nonstop punishment of the bulls. A bounce will come, and at this point it’s too late in the current decline to press. Waiting for new bearish chart patterns to emerge will pay off much better than jumping the gun here and chasing stocks lower.
As I said 11 days ago, if ever there was a time to be sitting in cash, this is it! There’s absolutely zero reason to try to arbitrarily call a tradable bottom, so don’t fight this downdraft.
Catch some short sales when you can, and otherwise wait for the storm clouds to clear. Eventually they will, and Wendell will have his day again. But for now, he’s certainly not content!
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
Insider Activity
August 13, 2007 at 10:27 am
One thing I get asked quite a bit about is insider activity. People want to know if a stock should move up on insider buying, or if it should go down on insider selling. Many will ignore perfectly good chart patterns if the insider activity doesn’t suit them, instead deferring to what company execs are doing over time rather than catch a swing trade for a multi-day move.
My personal stance on the topic is a simple one: I ignore it. Here are a few reasons why:
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There are lots of reasons to sell. Maybe junior is going to college and a corporate executive wants to free up a little cash to pay tuition. Maybe they’re buying a summer home or a boat or a collector car. Maybe they’re even afraid their stock will go down. But don’t jump to the worst conclusion when you see insider selling, because you never know their motives. And even if insider buying is taking place, that sure doesn’t mean the stock will soon reflect that optimism. Corporate executives can and will be wrong often, so don’t bank on higher prices even if you see insider buying. They’re not the ones moving the stock anyway.
Good chart patterns should still play out. A bullish chart is based on recent supply & demand in the stock, so if the pattern confirms I’ll take that trade with managed risk. If it never confirms, I never take the trade and there’s no harm done. But what happens over time with insider activity isn’t what will drive the stock. Institutions (big funds) move the stocks, so if they’re accumulating or distributing stock, the chart will show it.
My timeframe is days, not quarters. Even if Joe Insider has been selling (or buying) shares for a while now, why would I care? Suppose it is based solely on where they think the company is headed, even if they’re correct it’s going to take lots of time to play out – usually several quarters at a minimum, and I’ll be long gone by then. Because stocks fluctuate, there will still be good moves taking place most likely in both directions, offering chart-based plays in the meantime for active traders like me.
Good trades still boil down to the charts and managing your risk. Don’t jump to any conclusions that a CEO or CFO is going to nail trades in their company’s stock. They aren’t traders, they’re businessmen! If you’re a short-term trader, insider activity should be the last thing on your list of things to consider before buying or selling any given stock.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
How Gaps Change Motivations in the Market
August 10, 2007 at 8:19 am
With so many gaps hitting the market in recent days, it’s the perfect time to discuss them a little bit. Not only are they occurring in individual stocks as a result of earnings announcements (which is typical and expected), but we’re seeing a lot of them in the market indexes with the recent news flow adding to the volatility. Of particular note is how many of them have filled.
Before I get to the heart of this article, let’s look at an example in case you’re not quite sure what I’m talking about. Here’s a look at a 5-minute chart of the NAZ on Thursday morning, which gapped down some 40 points from Wednesday’s closing levels. It ended up rallying back up to fill the gap soon afterward, and even turned positive for the day after about 90 minutes.
(Click for full-size image, courtesy of TeleChart)
The Mechanics of a Price Gap
So how do these price gaps even come about? Well, they occur from a buildup of orders overnight which create an imbalance between buyers and sellers. Market makers and NYSE specialists have to take the opposing side of the public’s orders (they buy when you sell and vice-versa), so to offset this risk they do it at higher or lower prices, depending on the imbalance. When the public is buying en masse, market-makers will sell but at higher levels. That’s how gaps are created.
Once they’re in place, the next question is how do they get filled? Well, since many of them lately are occurring on emotional reactions to the news flow, most of the traders who would act on the news are the ones creating the gaps. After their orders build up which create the gap to begin with, there are very few traders leftover placing subsequent orders in the same direction, thereby limiting the extent of any follow through. As a result, the path of least resistance shifts to the other direction, meaning the gap now has greater potential to fill.
Psychology’s Role in Gaps
On top of the mechanics of how the gaps are created and filled, there’s also a lot of psychology at work which is adding fuel to the fire. Traders who are already holding positions in the direction of the gap are greatly tempted to take those profits, which means on a gap up that they create selling pressure as they move to book gains. The overnight windfall of “free money” motivates them to ring the register, and that only accelerates how quickly the gap may fill, especially when combined with the natural mechanics of a gap. Additionally, downside gaps are often viewed by those with cash on hand as an irresistible sale, unable to pass up the thought of buying “cheap” stocks. Their buying, along with the covering of short sellers, drives prices higher to fill the gap.
There is never a shortage of interesting dynamics at work in the market, and price gaps are a study in the psychology which can help us learn a lot about why things move the way they do. If you catch a gap in your favor, play it close to the vest and squeeze out of it whatever you can, but if it begins to fill just remember how momentum is shifting and decide quickly whether you want to battle it or not.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
A Market for Spectating, Not Speculating
August 9, 2007 at 10:35 am
Boy, is this market crazy or what?
Just since yesterday afternoon, we’ve seen a huge rally, sharp selloff, steep bounce into the closing bell, giant gap down and an immediate big bounce. Stocks are literally all over the map!
It’s quite a show, and I’ll venture to say that most traders are better served spectating in this market than speculating. If you’re not nimble, it’s incredibly easy to get burned, because just like springtime weather, it can change quickly out of nowhere.
Stay careful out there, and don’t be shy about protecting that capital while these violent swings play out. We covered our lone overnight position in ESI this morning for a nice gain on the short side, but at the moment we’re sitting in cash at TheStockBandit.com. It has served us very well to stay cautious in recent weeks, but once things smooth out a bit we should see much better conditions for more aggressive trading. While you wait, enjoy your front row seat to the show and don’t succumb to the urge to overtrade this market!
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
Conviction vs. Conditions
August 7, 2007 at 10:04 pm
I love trading with the wind at my back, so when the market is strong I’m a buyer, and when it’s weak I’m looking for short sales. In general, it serves me well to trade this way, but inevitably there are times when I wish I had thrown caution to the wind!
Take last week for example. VRTX was setting up with a very well-defined bull pennant pattern, but I was cautious with any bullish setup due to the overall market weakness. The environment was bearish, so even as I saw this bullish setup I wasn’t very interested. The pennant even formed on decreasing volume, which is exactly what I like to see with this pattern, and I still passed on it. Here’s a look at the chart I showed to members at TheStockBandit.com last week as a stock of interest, although it was never listed as a trade candidate:
(Click for full-size image, courtesy of TeleChart)
As fate would have it, VRTX took off and has still not looked back. Here’s how it looks after Tuesday’s bar:
(Click for full-size image, courtesy of TeleChart)
Each time I saw it hitting new highs intraday on Tuesday I felt pangs of regret and guilt for not being in the trade. As it climbed higher and higher, I felt more and more foolish for not having bought such a sound pattern! What was I thinking?
And then it hit me: that isn’t my trading style! Taking trades which fly in the face of general conditions isn’t what I’ve built a trading career on. Rare are the times that trades have paid me well when I did throw caution to the wind. Catching this trade would have meant bending my rules, and while that may have paid off for me this time, making a habit of it would no doubt prove costly.
And suddenly it was alright that the stock had taken off without me. After all, I don’t have to catch every single move, plus the reason I wasn’t in the stock to begin with was because I had followed my discipline – not because I ignored it. My game plan doesn’t involve swing trading strong stocks in a weak market, and VRTX fit that description. Particularly when market emotions are running high, I’ll defer to general conditions over my conviction on a given trade, and that has saved me many dollars over the years. I’ve missed out on the occasional strong move (like VRTX) as a result, but my discipline when things get ugly has allowed me to protect both my capital and my objectivity while others are losing theirs.
So while it can be at times frustrating to miss out on a great move, sticking with your game plan and letting your discipline guide you will over time pay off very nicely. The occasional stock will laugh in your face and you will at times feel crazy for having let it go without you, but good trading will involve missing out on some moves. Put the odds in your favor as often as possible, and only trade when the conditions suit your style.
I hope you’re trading well this week!
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]
