A Trade A Day

I have been lamenting the Fed’s insistence on playing to wallstreet. Sometimes I wonder if someone at the Federal Reserve has a personal vendetta against the value of the dollar. I know Mr. B and company are just trying to right this ship that is the U.S. economy. God bless them. I’m glad it’s not my job.

Today however, I felt like the Fed was in my corner. And I just wanted to say Thank you!

I had my eye on a potential bear trap in DIA. Trapping is a very simple concept. You want to see several days of strong moves in one direction and then you want to see the market gap in the opposite direction. It’s my bread and butter. I think if I had to I could make a living trading that pattern alone. Let’s take a look at how this one played out.

The first part of the setup is to find a stock that is trending in one direction and has had several strong moves in that same direction. Take DIA into consideration:

Once you have your stock, it’s a matter of putting it on a watch list and monitoring for gaps in the opposite direction. It just so happened that today was a great day for traps. Selling had been unabated of late and the Fed’s injection of liquidity probably accelerated some short covering.

Here’s the intraday chart using a 15mn:

I just took it over the high of the day.

Trading Traps is not a silver bullet. Bull and Bear Traps certainly do fail, but getting the gap in the opposite direction of the trend is an edge. The reason for this comes back to one of my primary trading concepts: Emotion equals opportunity.

All this means is that when things get crazy and people think the market is going to heaven/hell, the astute trade can make money with less risk by being able to see the trend change. It happened in 2000 and as recently as 05 in the major market indexes. It happens everyday with Bull and Bear Traps in individual stocks. You just need to keep your head above the euphoria/panic to trade it.

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I have a love/hate relationship with the Forex “market”. I had always wanted to give forex a try, so about a year ago, I opened an account with Oanda.com, now fxtrade.com. The account size was very small, $300. I’ve been trying to see past the hype for a better part of a year, but in all honesty. I’ve only made one trade.

The trade worked out well in that it made money, but one trade does not a system or career make. So I’m still in the evaluation stage. I know that forex markets are supposed to trend well and the leverage is nice. But I think there could be something useful here that doesn’t get any hype. Allow me to explain.

With fxtrade.com, you can size your trades. What I mean by this is you can adjust the “lot size”. You don’t have a specific size to the contract, so you can control how much you risk.

For traders that would be under-capitalized in other markets, this is a great feature. You get to feel the pain without killing your account. For the person who wants to learn how to trade. More specifically, how to manage their emotions when there’s money at risk, I don’t think there’s a better way. Let me give you a specific example:

My fxtrade account currently sits around 1K(No, I didn’t make it all from that one trade, I added some to it). According to my trading rules, I only risk 1% to 2% of my trading stake on any one trade. 1% of 1K is $10. Now, you may be thinking “big deal, $10 bucks is nothing”. That’s my point exactly. You can size your trades to the point you emotionally can handle the loss.

I do the same thing with stocks, but the drawdowns and account minimums can be a hurdle to some would be traders. And Futures? Forget about it. The only way I can size those bad boys is with more capital.

I’m not completely sold on Forex. I think there is too much hype about profit potential and leverage, and the cost of entry is so low that many people lose their meager trading stake because they don’t take it seriously.

If you’re interested in trading, willing to take it seriously and don’t have a lot of cash, I think it’s a good way to get started.

BTW, I know we’ve all grown accustom to reading disclaimers about risk and loss. It does bear repeating, but I’ll take the legalese out of it:

Trading is a losing game. Odds are, you will lose all your money and maybe more. The same goes for forex. Even though you can open a forex account for $250.00 doesn’t mean you should. If someone says only invest/trade money you can afford to lose then they are delusional. Who has money they can afford to lose?

Oh and I am not an affiliate of fxtrade. Fxtrade has no affiliate program, I should know, I looked. I use it. I like that you can size your trades. There are other forex brokers I could have “featured”, but I think if you’re going to go the forex route, especially with a small account, you should be able to manage your risk.

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Have you seen the amazing bull market in commodities? Let’s take a look at a few charts:

Been sleeping under a rock? Oil has been on a rampage!

Gold looking good. Some experts are predicting $3500/oz!

Soy! Soy! Soy! Even Milhouse could make money in this market.

When I first graduated from college, I got a job as a commodities broker. I remember talking about corn under $2 bucks and how so many farmers were going to go out of business. Well, not so much now.

Check out wheat! It’s not going to stop…no really, it’s not going to stop.

So, I know the overall market kind of sucks right now. I was looking for shorts tonight, but I didn’t really find any good setups.
Taking a look at these beautifully bullish commodity charts makes me feel better. Trading futures is not for the under-capitalized. I would recommend 4 or 5 times your maintenance margin in your account for each contract you trade. I know it seems like a waste of capital, but you’ll thank me the first time a market is locked limit against your position for a few days.

See you tomorrow!

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I thought it would be interesting to share my first blowup with you.

Since I was thirteen, I’ve had a love of the stock market. I’m not sure I can tell you exactly why. Maybe it’s the thought of making money out of nothing. Perhaps, it’s the ego boost that goes from making money from your decisions. I don’t really know. Suffice it to say, that I have always enjoyed stock market investing.

And it was investing that lead to my first blow out. You see, I was not a trader. I didn’t learn anything about technical analysis or market timing until much later in my stock market career.

But let’s take a step back and set the stage. It was the summer of my 16th year. The S&P was trading in the 400’s and Ron Insana was new to CNBC. After school, I came home to listen to Pearl Jam’s “Ten” and GnR’s “Use your Illusions I and II”. It was the beginning of one of the greatest bull markets of all time. It was a good time.

When I first started keeping what would become my “trading journal” I was 16 years old. I didn’t have a method at this point. I fictitiously bought shares of well-known blue chips: MMM, BA, IBM. It was a bull market so most of my “trades” made went up each day. I thought I was a genius. I had no trading plan. I don’t think I knew what “trading plan” was. All I knew was that I couldn’t wait to get my hands on some real cash.

Fast forward two years. It’s my first year of college and my Grandfather, magnanimously gives me $21,000. He wants me to put it in a CD. His goal is for each of his grandchildren to have $30,000 by their 21st birthday. I don’t remember what interest CD’s were paying back in the day. But Grandpa wanted me to put it in a CD so I would have $30K in 3 years. I had different ideas.

Before I had received the money from my Grandfather, I had a couple of grand in mutual funds. If I had just put that money in my mutual funds, in retrospect, that 21K could have become 50K or more by the time I was 21. However, I was destined for a different path.

I remember looking at my little journal and thinking I had the key to wealth. According to my journal results, it was too easy to make money in the market. There was no way I was going to put $21K in a CD when I could make 50% or more investing in stocks.

I ran into a problem. I was 18, so I had trouble finding a broker. Finally, I was able to open an account with K. Aufhauser, which would merge with Ceris Securities to become Ameritrade which would then become TD Ameritrade.

So I was set to begin my investing career. I had my method of buying NYSE blue chips, I had 21K in my account. I was ready to go.

Then I got a call from my Father. Dad told me about a stock that was set to explode. Of course I trusted my father. He must know what he’s talking about. He’s my Dad. Anyway, Dad had it on good authority that a company named International Taurus was going to hit it big. They had just received the results of their latest drilling, and they expected big results from some potential gold mines.

International Taurus was trading for pennies on the dollar. Literally, I think it was trading for .30 to .50. Dad had bought 1000 shares and he thought it was a good buy.

So, it was with those pearls of wisdom, I proceeded to call K. Aufhauser and place my very first order:

Me: Buy 10K International Taurus, please.

K.Aufhause: You want a quote on that?

Me: Uh, yeah sure.

K.Aufhauser: (something unintelligible)

Me: Ok, just buy 10K at the market.

K. Aufhauser: Ok, later schmuck! (Ok, they didn’t say that, but they should have.)

So a couple of days later, I received my fill in the mail 10K shares at $2! Huh? 20K?
Well, I remember looking at a chart of International Taurus. I’m pretty sure I bought at the top. I ended up liquidating the position a few weeks later for pennies on the dollars.

I have a few regrets about this experience:

1. Even though my method of buying NYSE bluechips, just because they were bluechips, was asinine, I didn’t even stick to that method when I actually got some money. I swung for the fences with a stock that trades on one of the most corrupt stock exchanges in North America, the Vancouver Stock exchange.

2. I probably had a few grand after my big purchase and sale. Knowing what I know now, I could have gotten back to even in a couple of years or less.

3. Despite the fact that we were in the beginning of the biggest bull market in recent history, I was not able to participate. There were so many great buys. If I had just put all my money in CSCO, MSFT, DELL, HD, or WMT, I would have made 10’s of thousands. Sure the logic would have been just as flawed as what I did, but who knows what I would have learned during that time.

Anyway, I liquidated my brokerage account with a few grand left, and I think I spent the money on a trip to France or something. Ugh.

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So, where I live in New York State, there’s an idiotic commercial running for the New York State Lottery.

Don’t get me started on what a bane government-sanctioned lottery is to society. Sure you have to be mathematically challenged to play it from the start. It’s a money-sink for the ignorant and the desperate. Those that would be better off using their resources to educate themselves and improve their financial situation are trapped in institutionalized gambling sold under the guise of a harmless game. One that benefits education and one you have a chance to win.

Complete Bullshit. Well the NYS lottery at least gave me some fodder for this post.

Take a look at the commercial in question:

1 in 9 odds of winning! You’re kidding me.
Well, using Chris Perruna’s handy expectancy calculator, I ran some numbers:

I set my account size as $100 bucks. Next I set my stop size to 100% because when you play lottery, you lose 100% of what you risk. This gives me a position size of $1 which is the minimum size of the game mentioned in the commercial above.

Now, you know most people won’t have the discipline to risk 1% of their equity in any endeavor. But let’s keep going.

So now, I ask the question: How much do you need to win to be profitable. Well, assuming your odds are 1 in 9, you would need to win close to 1000% more than you risked each time you did win. But get this, the minimum winning odds aren’t even 1 in 9 (that’s the overall odds of winning). The actual odds of winning the minimum win is 1 in 11, and it isn’t even a cash prize.

In order to actually win some cash the odds go up to 1:109. Lottery is a joke. If trading is a losing game, playing lottery is akin to setting your money on fire and watching it burn.

Look, if you have the most mediocre of systems, I would be willing to wager you can win 30% of the time. Download Chris’s calculator and see what is possible. If you can stick with your system, winning just a small percentage of the time, you can do amazing things with your money.

You just need to stick with your system. Adhere to sound risk management rules and trade with discipline. Otherwise you might as well play the lottery.

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