Friday, January 27, 2012


The experiment is painfully over and now there is a crime scene left behind. If only that hot blonde cougar from the show could have been here during the investigation! I had mentioned that over the years I had many ideas that were very promising that turned out to be no good. I would have to now classify the stock trading system in that category. I had been saying that I thought this was the best climate I could have ever had to try it out live. We have a runaway stock market, and it has been issuing sells against that trend in individual issues. One of the things about systems is that you have to just follow the rules. You take the trades as they get spit out. Prior to this week there had not been a closed out trade that lost even though CTAS had been upside down, it was still an open trade. That was closed out earlier this week, and now I just got clobbered on two others. I admit I did not follow the rules on the exits, I just covered the trades at the market and tore up the system. The main reason I did this was simply, the flaw in the logic of this approach had been bothering me from day one. Trying to fade trends when they are really rolling, with fancy with and squiggly lines, is just a losers game. I know this all too well, but apparently not well enough.

The Achilles Heel with this method which I stated right from the get go was no stops. When you get into runaway markets, having no stops is a very dangerous game to play. I wanted to see with real money and the best filters I could develop mechanically, if I could dodge some of these bad trades. The systems showed great results, but the draw downs were big within some trades. Now that I have taken two separate 1% losses, I consider this system to be a bust. I do seem to recall a comment a bit ago about how I never mention the bad trades enough, this should cover that. You could argue that this is not the average market condition and that would be true. However, these conditions develop about 12 to 15% of the time. That is certainly often enough to warrant not trading like this.

I mentioned a few changes I was making to it that showed promise, and one of them is where I am going with this. I will keep plugging away with real money on these changes. If and when it becomes consistently profitable with real money, I will consider offering it as a service for subscription. However, those changes require discretion. The Black Box is toast. At this point that is a long ways off. This is where straight shooters like me set themselves apart from hucksters who take advantage of subscribers. I will always only offer things that I use myself with real money. The trades will always be trades I am in. This is the only true way to be able to look yourself in the mirror during times of draw downs. If you the seller of the signals are actually losing along with the subscribers during draw downs, then you are true to your word. There are not many people that do it that way unfortunately, but I am one of them. I remember one phone call I had with a client in the old days, when my Bond System was being used by subs. She had just lost about $700 on a one lot trade with one of my signals. She was new to trading, and of course was concerned. The best answer I had for her was that I had been in the same trade and lost $7000 since I was trading 10 lots. That seemed to make her feel better. It did not make me feel any better, I was still pissed I lost 7k. However, it did give me peace of mind that I made every trade with my own money that I put into the service even though I did not promise that I would. It was how I slept at night.

The one take away from this is that although my new COT Synthetic tool is great for picking spots to look, it cannot really be used mechanically. This is the case with every single technical tool I have ever used. We just can't get away from making judgments about things, and we should not be trying to do so. Life is a judgment call, so is trading. For those who want to know about mistakes and the results of them, it does not get much better than this. The mistake I made here was the premise of overbought and oversold. Yes those are sound concepts, but you have to be very careful with how you go about using them. I am now going back to using the new COT tool to establish a list of stocks to look at my other tools for entries in. It has spit out several for today, but once I looked at my short term tools, the list is down to 4. I will only enter them on weakness should we dip.

As for the futures markets, I am watching Heating Oil today for a short entry. I have not shorted the energy markets yet and I am glad I have not. I would  have been stopped out yesterday had I done so, although the trade which would have been in Crude, would have been a scratch.

I  have marked on the chart where I am looking to short Heating Oil today. I doubt we are going down there, I am expecting a quiet day on Wall Street today, but you never know. We are still extremely over bought and could fall hard for a day or two at any time. What I do like about this setup is a couple of things. First, we have really followed the seasonal here, almost every single swing has lined up perfectly. When I see this I pay more attention to the seasonal indication. I do know this party will end and it will veer off at some point, but until it does, I will heavily consider it. The other reason is I get a sense the public is really expecting a big move up in Crude Oil right now. Although they may be right, the fact that stocks have rallied this much and Crude has not come along for the ride, tells me there is underlying weakness. Of course Crude and Heating Oil are not exactly the same markets, but they do generally trade in the same direction.

The next chart shows more than what I can type in words. It is a chart of the ES on a daily basis, with one of my short term tools I use. Now you can see why I have no trades to look at, what a mess. This tool does not look this flat too often. In fact, I cannot recall the last time I ever saw this type of look with it.

I try to use this to help me trade swings, when it is flat like this, there is just nothing to do but guess. I am not a good guesser. I can mess around with scale and get this to show my a triple divergence against this move, but I like the scale to be constant. In it's natural state, this is just telling me the trend is strong and not to do anything.

Here is another trade I should have been in that I was not, and it appears I saved myself from watching a good win become a scratch also, just like with Crude.

I have marked the two entries I considered that I did not take. The truth be told, I blew this and should have done both of them. However, had I done so I would have been taken out for a scratch on this huge bounce that as I type this is even above where I have the arrow. The price did not reach down to where my targets would have been, so I would have still been in when this bounce happened with a stop at break even or a little better.

For those of you that have sent emails about how much you are trading this month, and how well you are doing, I applaud you. I mentioned that during these low periods of volatility, I do not trade as much, so kudos to you. This is a tough business, we should always feel good for other traders when they do well. Do not get into the mind set of resenting others for doing well, that is counter productive. I remember a quote from the Market Wizards book that was funny but rang so true. "Why is it that our greatest joy is when another man is getting screwed?" That is a paraphrase but it gets the point across. It is funny, but it is also a sad comment on how the human psyche works. Get outside of that thinking. Celebrate others success, negative thinking will get you nowhere.

It appears my interview I mentioned is going to come together in the near future, last chance to submit topics for discussion. This month I am not sure I could spell my own name properly, but in general I know what I am talking about.

That's it for today, have a good weekend.


Robert said...


what are your thoughts on gold now.A few weeks ago in your gold article you believed gold was in a giant bubble and the price was due for a big time correction.
Looks like Bernanke has given gold a green light and the price is really going to take off
Still think gold is going to correct as you indicated in your article .
sure looks like gold/silver are headed up for a big move thanks to the Fed and Bernake printing money .
as they say QE to infinity

Chris Johnston said...

I am looking to sell this rally somewhere but do not see a short term entry setup at this point. I mentioned in one of the posts that I was hoping for a sharp rally like this to set up a big fall, so we are getting it.

The bubble view is just a big picture view, and really has nothing to do with trading. This is the most hyped trade I have ever seen by far in my lifetime, and that along with the technical things I watch are why my big picture view is bearish. The FED can trump everything as we have seen, so perhaps they will continue to drive down the dollar and push up the metals, it would not shock me.

I am just stupid I guess