Thursday, October 27, 2011


It is days like today where I distinguish myself from most blogs on the markets. In an age where most never admit to ever having lost in a trade, I am going to review a couple of awful trades I just made, where I got out of them, and why I exited them. The first trade is the 10 Year Notes trade I mentioned I was in. I also said at the time that I had small size in it and that time would tell if I would be happy or glad about that. Time has now given us the answer, I am glad! Also, I decided to front run my stop and get out way before we got to it. Typically this is not something that you should do. However, you have to think your way around the playing field, and I saw something developing that I felt invalidated my trade, and I was not going to stick around just to give the house more money and feel good about myself that I honored my stop.

This business is about minimizing losses and maximizing gains, not about being right. I noticed after the entry bar that got me in, which was that big outside bar that closed right on it's high the day the stock market went down 200 points, that some pretty strong divergence was forming with the POIV indicator. Even though this indicator has been speaking quite a bit recently, it typically does not. It is the nature of this indicator to typically confirm current price action, diverging rarely. When it does diverge I pay attention. Once I saw this with price confirming it by retracing sharply as stocks rose, to me it was a no brainer to pull the plug on this last night. Readers know I have been very bullish starting about 2 weeks ago for stocks, and I was now seeing confirmation of the moonshot there taking place. It has become clear I was dead wrong about even a short term pullback. If you remember the chart I posted over the weekend, it  showed virtually no pullback was going to happen if history was to repeat itself. 

There was certainly no reason to be long in the Bond markets with a huge stock rally taking place. Ironically, the catalyst on a very short term basis appears to be a deal with a bunch of countries with no money, lending to others that have no money and no ability to pay it back. This is why logic at times can kill you in the market place. Common logic would tell you that making a deal to allow someone you just loaned money to recently to default on 50% of it, is not good news. Aah but in our world today it is!  So with this back drop of a stock rally and a bond decline, I knew I had to be careful about short positions in general. Recently I mentioned I was bearish on the Energy markets. Unleaded Gas in particular I mentioned the other day at the end of my post, was setup for an entry. As is typical, when I say that, I do it. There are some exceptions and some game time over rules that take place, but in general the setups I point out I trade. In this case you can see where I entered this trade.

The good news was that initially this trade went right in my favor, and I mentioned the other day how strange it was to see Crude up big and Unleaded down 300 in the same day. There obviously was some spread trading going on with big volume that day. When Crude sold off hard late in the day, the Unleaded Gas rallied hard, that was proof of some type of spreading going on. However, the risk on risk off nature of our world right now is that most commodities rise when stocks rise and fall when stocks fall. As I watched this frustrating trade just go nowhere when it should have fallen off a cliff in my mind, I noticed something going on similar to the 10 year notes. The POIV was diverging, in this case showing strength by diverging substantially upwards on the 2 bars with similar lows. When I considered this along with the stock ramp up that was going on, I quickly decided to head to the exits. In this case I got about $600 a contract out in profit, whereas with the 10 year I lost about $375 per contract.

Overall, two crappy trades, one win, one loss, but a net gain of a small amount. The point of this is just to show that you have to think on your feet in this business, and also I do have losing trades, lots of them. Show me someone else that admits this.

I had been looking at a pattern in something I use that is not shown, which indicated if we traded below Wednesday's low on Thursday, a short entry could be taken in the NAZ. My opinion was that the market was going up, but I don't trade on my opinions. I trade based on my patterns that I use. Well pre-market open we are up huge, so this trade is off the table. The travel amount on this trade is way too far. The market would already be really over sold by the time it reached the short entry point if it went down that much. It is time to forget the short side for the time being. I do have some things looking forward that could potentially give a mid November short term sell signal, but balls to the wall for now. This market has been difficult to say the least recently, but it has for the most part conformed to the seasonal bias for a rally. As I have said over and over, cast aside your opinions on our economic situation, the markets and the economy are two separate animals, never more so than what they are now. My short term indicators are not confirming this rally, so I won't be trading the long side of it yet. At times these indicators diverge against market trends for months, one of the problems with any technical tool. It is knowing when to ignore them that is the art of trading. At this point I am just sitting on the sidelines in the stock indexes.

This last chart is Soybean Meal, a market that appears to possibly be setting up a long entry. I have to confess that I am not wild about this one so I do not know if I will do it or not. Everything else has launched, yet the Grains are kind of stuck in the sand. I generally don't like playing laggards so I am contemplating this one. We do have a pretty clear trend line drawn in here, and the seasonal is up here, so it is a matter of looking at my confirmation tools and they are not glaringly saying must do yet. They are however telling me I could do this one. Well that is the wonderful world of trading isn't it? Another judgement call is at hand.

I hope I have made my point today which is mostly that no matter what you use to trade, you have to be constantly on your toes and thinking about what is happening. We trade because we think we can predict what will happen next and make some money from doing so. However, sometimes things go wrong and you have to think your way out of a few messes. Today I went through how I just did that and came out ok. Keep your losses under control, the wins will more than take care of them if you do.

On a house keeping note I know someone who I think had good intentions and was not spamming, sent some links about maximizing blog traffic. I did not let that comment through just because I was not completely sure. However, the name at the bottom was the same as someone who does make comments here, so I apologize on this. I have no idea where this blog will take me, or where I will take it over time. For now I am just interested in posting each day and hopefully helping people. This is not a money maker on any level, so I am not going to pay for traffic. It does seem that as time goes on more and more people find it. I don't know how they do, but my traffic is steadily increasing and that is good enough for me. Thanks for the thought.

Good Trading

1 comment:

ya said...

Chris, Thank you for your insightfull blog. Trading diversified set of markets on a short term basis seems to have many appealing characteristics. However many questions arise so your answers (public or private) are highly appreciated.
Minimum & Optimal account size suitable for this style of trading?
Annual rate of return you were able to achive?
The biggest drawdown? (% of capital)
The longest unprofitable period?
Total return over time?
I think your results over 25 year trading carrer can be very illustrative. Thank you again