Learning to Trade

Motivation

A.J. — Wed, 23 Sep 2009 17:02:54 +0000

Great speech on motivation. I think it’s implications are huge for trading.

http://www.ted.com/talks/dan_pink_on_motivation.html

Financial incentives resulting in a negative impact on performance. How can I decouple my actions from financial incentives?

Autonomy, Mastery, Purpose. Intrinsic motivation vs. extrinsic.

September 21

A.J. — Mon, 21 Sep 2009 12:45:46 +0000

“Markets operate through an inefficiency engine that sets up good trades at key intersections of price and time. In between these points of light, the tape can be volatile, choppy, and downright treacherous. You need to adapt to this feast and famine cycle, or perish trying to fight it.”

Here comes another week of trying not to fight the market. I’ve had a couple of interesting conversations this weekend with some of the larger traders in the office, cliffs notes:

-Trade smaller dollar stocks, they show support and resistance ant cleaner levels and have better follow through.

- Bias long positions (makes sense in an up trending market)

- www.finviz,com

- bullish flags, pennants and wedges with horizontal support should be my first looks when scanning charts

Learning Discipline

A.J. — Tue, 15 Sep 2009 14:41:48 +0000

No post yesterday, I took the Series 63 and applied with a whole mess of recruiters.

While going through that drudgery though, I was contemplating the problems that I see constantly recurring in my trades; impatience and a lack of discipline. As I’ve gone back through my past trading logs, I realized that trades which I had analyzed and had good reason to be in normally worked out, it’s the trades I jumped into without great rationale that killed me almost every time. So, to keep myself from trading recklessly, I’ve come up with a pretty simple system:

I give myself 5 trades to make. If after those 5 trades I’m profitable, I get to keep trading. If I’m in the red, my day is done and I’ve got to work strictly on analysis and trading ideas for future trading sessions. We’ll see how it works. More to come.

Edit: Today’s trading went well. Having to be profitable after 5 trades gave a good weight to each decision. I definitely was more patient and the outcome was good. Break even on the day but I felt good about it. I’m excited about the day tomorrow.

Obedience Is Key

A.J. — Fri, 11 Sep 2009 15:44:45 +0000

I’m 100% sure that trusting God will make me a better trader.

Before you get up in arms about that statement, please hear explicitly what I am not saying: namely that trusting in God will make me a profitable trader. I don’t believe that at all. But being a better trader… that’s something that will happen. Here’s why:

Fear is eliminated. Pride is eliminated. Greed is eliminated. End of story.

If I’m founded in Christ, I have nothing to gain… I’ve gained it all. I have nothing to lose… earthly possessions are but a pittance to the love I’ve received. I have nothing to prove… Christ is my only focus and the only one worth serving.

I have much maturing to do.

Plan Your Trades, Then Trade Your Plan

A.J. — Fri, 11 Sep 2009 14:20:38 +0000

This morning I came in with a couple of stocks I really liked in UIS and HPQ. I had think long term, these two are headed higher so my plan was to get in and let them ride. Pre-market I identified a few stocks to play and decided entries and exits. I felt that I had set myself up for success. As of this point, I’ve ripped up over $100 on 3,000 shares traded. So what happened?

I didn’t trade my plan, that’s what happened.

FDX came out with good news and proceeded to rage up 2 points, I wisely avoided jumping in on the move up as I watched it fade back multiple times in ways that would have certainly stopped me out. I wasn’t however immune to jumping in once the commotion settled down. Needless to say, FDX pulled back after I entered which wouldn’t be a big deal but I committed a huge trading sin… I didn’t cover. I rationalized away the down ticks… we’ve gapped up big… downtick… the news was great… downtick… it moved the spiders when it came out… downtick… surely we won’t fill the gap today… downtick. Once I finaly covered I had taken a .35 loss on 100 shares… and the market hadn’t even opened yet.

This is where frustration set in, with myself entirely. I wanted to get the money back… I had a good plan, today was going to be a solid trading day. So I pressed back into FDX and… *gasp* did the same exact thing. ARE YOU KIDDING ME? Rip up another $40.

So there we go. $80 in the hole for what? Just some heart ache. Other trades set up fine but didn’t work out. I’m not frustrated with all of my trading today, just the fact that I got sucked into the call of “easy money”. Remember… there is no such thing.

So what’s the lesson? It’s the same one the market has been beating into me since day one. (Apparently I’m a slow learner.) BE PATIENT, DON’T GET SUCKED INTO “MOMENTUM”.

And with that I’m off to do something physical… All this frustration needs somewhere to go, I’m hoping it doesn’t add more gray hair to my head or give me ulcers.

Easy Does It

A.J. — Wed, 09 Sep 2009 17:37:04 +0000

Today was a relatively light trading day for me. I’ve had some pretty good trades in AIG which just came from patience. It’d be funny if it weren’t so infuriating but my worst trades always come from the same enemy; boredom, or maybe restlessness. I feel like I must be trading every moment of the day… it’s just not true. So I’ll continue to study during the day and trade only when the best setups present themselves. I think that I will be more than able to learn effectively even if I’m not constantly putting money on the line.

Long Time No See

A.J. — Tue, 08 Sep 2009 14:15:18 +0000

Been I while since I last posted. The break was intentional, not laziness. I found that I was getting incredibly wound up about having to report my stupid trades on this blog for everyone to see (read: the 4 visitors I get a day.) So it compounded bad days. Hopefully I’ve crossed that bridge. Here’s the reality; I’m going to make mistakes and sometimes they are going to be big mistakes. I think this is an important lesson to learn so that’s the post for today; I’m going to make mistakes and that’s ok. I’m a new trader with very little experience. My value is not found in my P&L at the end of the day. I could fail miserably at trading and it would be ok. Lesson for the day: focus on trading well and learning every day, the P&L will follow.

Short Interest

A.J. — Tue, 11 Aug 2009 19:43:13 +0000

This thought was sparked by Tim Knight’s book. The premise set forward there (and expressed by almost everyone else) is that after a stock has consolidated, its up move would be motivated by excitement and greed while its down move would be motivated by fear and panic. This makes sense in alot of ways. If everyone owns the stock from a price point of $40 and the stock drops below that point, a panic could set in with everyone selling off. I get that. But what if the owners at $40 are matched by short sellers at $40. Then a move down, while still fueled partially by the panic of the longs, would also run down fueled by the greed and excitement of the shorts. The reverse would also be true; an up move finds bulls buying more in excitement and short bears panicking out of their positions, the classic “short squeeze”.

The question of the day is this: Does increased short interest negatively affect a stock or does it simply contribute to volatility as now there are 2 interested parties on either side of the stock. (In the prior example, all of the owners at $40 have a matched seller at $40). Here’s what I’ve found while searching out this rabbit hole.

Investopedia weighs in: http://www.investopedia.com/articles/01/082201.asp

as does The Street: http://www.thestreet.com/story/10345483/how-do-i-find-short-interest-for-a-stock.html

The basics go like this:

-Short interest can be found for the past year on www.nasdaq.com or www.shortsqueeze.com.

-Short interest is described in % of float which is the # of shares sold short out of the outstanding share that are freely traded (not restricted in any way.)

-Short interest is also reported as “days to cover” which is the # of short shares outstanding against the average daily volume (it’s the number of days it would take for shorts to cover all of their shares assuming normal volume and only covering.) This number seems to be important if it gets high (over 8).

-Short interest is a good way to quickly tell general sentiment (lots of shorts = negative sentiment.)

I haven’t been able to find an oscillator or real time indicator of short interest, but I’ll keep looking. Other things… after looking and thinking about this issue, it seems that short interest is negative factor. After all, it is introducing parties who have an interest in seeing a stock fall where previously there were only individuals who had interest to see the stock go up. More to come.

Focus

A.J. — Tue, 11 Aug 2009 18:19:00 +0000

Yesterday I tried to trade while multi-tasking. Too many things were in my mind and I wasn’t able to really commit mentally to trading. At the end of the day I looked at my P&L and low and behold, it was a big red number.

Lesson learned; if I can’t focus on trading, I don’t need to be trading. Divided attention equals loss.

AIG Craziness

A.J. — Mon, 10 Aug 2009 15:34:53 +0000

Last week was a wild one for me. The whole week was a baptism by fire in the art of momentum trading.

Monday of last week, HUM burned me for $150. I got whipsawed in and out and fell to the call of “easy money”. Because my entry points didn’t have much conviction, my stops were weak and my targets were weaker. So that was Monday.

Tuesday I came back in promising myself I wouldn’t fall victim to the “easy money” trades (which as we all know aren’t ever easy.) For the most part, I was largely unsuccessful at avoiding this trap. Luckily, I capitalized on a good play in HUM that allowed me to flat the day after being down almost $100.

Wednesday AIG went bananas. The momentum plays in AIG seemed very obvious to me and I was able to have the biggest day I’ve ever had closing with a nice P&L.

Thursday I came back with renewed confidence and a couple of plays in mind. Smart trading in the morning put me up $220. By the end of the day though, my P&L showed -$90. That totals to a $310 loss intraday. It was a difficult afternoon to be sure, all due to “momentum” trades.

Friday I managed to exercises the demon of blind momentum trades and had a nice, relaxed day. The profit on the day was small, but my demeanor was much better.

So that was my week. Let’s talk about what it taught me about momentum trading.

1. Not all momentum trading is bad, so long as it’s done intelligently. Intelligently means a couple of things, maybe the most important is not making momentum trades when the market is lulled mid-day. Those trades normally aren’t on momentum they are just drifting.

2. Momentum needs volume and conviction in the movements (this really goes with the above point, but volume is important enough to stand alone.)