Sorry for the delay everyone, i have been on the road for several weeks, and neglected the blog! Back in January’s blog  “Abracadabra!!”, I outlined my thoughts behind the upcoming reversal, or market correction. Fortunately, the market had a sharp  sell-off which allowed me to profit nicely by simply following my plan. As the market dropped, I added to the position, while moving my stops to protect profits. A slight divergence in the two instruments caused one to be stopped out, while the other continued to run in my favor. We will look at charts shortly! The 2 positions that I was in: QID (the double short QQQ ETF) and SDS (the double short SPY ETF). The primary reason for choosing these vehicles was the asset diversification within the ETF itself. I have been burned with HUGE gap downs on my swing trades in the past, and can’t stomach them anymore! These ETF’s eliminate some of the diversifiable risk, mimic the market movements, and have leverage (which does increase the risk). The important part of this trade for me, is to have it all written down, and know exactly what i’m supposed to do in every situation. The entries are key, but the Stops are Paramount!  Sunny, one of our readers, asked me how I determine my stops, and how I set them. Normally, when choosing stop losses, I am using a combination of support and resistance as well as using ATR to get a good feel for how much that security is currently moving. With both of these instruments, I set a hard stop (not a trailing stop) at about 1.5x the daily ATR. It was certainly a wide stop, but needed to handle the volatility of the leveraged ETF’s.

Lets Start by looking at the QID trade:

|Read the Rest of the Entry…

Everyone wants the crystal ball to see into the future! In doing research for this blog I visited some interesting websites that actually claim to have ways for you to achieve this! From crazy chants to sacrificial rituals, there are a myriad of things that you can do that people claim will give you the gift of future sight. One that I found interesting, and reasonably simple was this one:

1. Fill a cauldron or large, black iron pot half-full of fresh water.
2. Add a handful of buttercup or marigold petals.
3. Light incense of wormwood or burn the herb thyme.
4. Stir the cauldron/pot gently three times while chanting: “Into the threads of time i cast my thoughts to catch a glimpse of what will be. O gods of Asgard, bring into my mine the lovely gift of prophecy.”
5. Look deep into the cauldron and you will receive messages.

Seriously?! Anyone believe this garbage? The only message you will get will be from the doctor at the Psych ward! Look folks, my parents gave me the name Merlin to give me a competitive edge, and I still cant see the future! All I can do is apply what I have learned from the markets over the last 12 years,  create a plan, and act on the plan. For the last few months I have been eagerly anticipating a market correction. Each time the market has meet my entry price, pulled me into the trade and abruptly stopped me out as it blasted to higher levels. Yes, I did lose on all of those 3 attempts, however the losses were relatively small, and I followed my plan perfectly! You can see the trades below on this chart:

|Read the Rest of the Entry…

I hope that this finds all you readers happy, motivated, and ready for another great year of trading. 2009 was certainly a roller coaster of a year with ample opportunity for profitable trades, and I don’t see why 2010 should be any different! Having taken the last 2 weeks of the year off from trading, I welcome the new year and am eager to get started. But not all movies start off quickly!

I have made a point through the years of taking my first few trades of the new year very cautiously. Monday had some nice moves, however I was a little hesitant on pulling the trigger. I will show you what I was looking at shortly. The real reason that I missed my opportunity was that I just couldn’t get up in time! For those of you trading in Europe or on the east coast, you should not have any problems with this! I however live in California. While this may conjure up visions of swaying palm trees and Pamela Anderson strutting the beach in a red unitard, to me it represents one of my least favorite things in life: Waking Up Early! Equity markets open at 6:30 am, and I have found it increasingly difficult to get up.  For over 5 years i lived in Italy which is a Traders Paradise! In Italy, the local time is 3:30 pm when the US markets open. Now that i could do! I even have a map on my wall, with all the respective time zones around the world, identifying the ideal places for me to live… Somewhere between Brazil (11:30am) and Thailand (9:30pm)!  You can see from the image below, the red areas are not appealing to insomniacs like myself! I know, trade Forex right?!?!

|Read the Rest of the Entry…

In my twitter post Tuesday, I stated that as of December 22nd i’m done trading for the year. A few hours later, around 7am Pacific time, I recieved a many e-mails inquiring as to why. You guys waste no time! For me it is abundantly clear why I routinely take the last 2 weeks of the year off. However, it has been something that I have studied for the last 11 years also.  So lets explore the reasons behind my extended holiday break.

Over the past 11 years that I have been actively trading, I realized that it is not just my ability to understand the market, but rather my ability to understand myself which is my key to success. When I was on the trading floor out in Irvine, California, I spent countless hours studying the successful traders and their habits. I discovered that the good ones, were usually gone around the holidays (4th of july, thanksgiving, Christmas etc.).  Why? Well, the obvious thing is that they wanted to be with family. That is the no brainer! But there is a ripple effect from that. When the good traders are not participating in the market, we lose volume, the fuel that propels the markets. In classes at Online Trading Academy, you will learn the importance of having volume. On a normal day, we can anticipate price movements based off of a normal ebb and flow of buyers and sellers. When volume declines significantly, this creates uncertainty. It is this uncertainty that creates necessary volatility. In the following image you will see a good example of this.

The last month has been very low volume relative to the preceding months. Notice the volume at the bottom of the chart with  consistent down sloping peaks. If you remove the spikes at the end of October, you have a nice trend of declining volume. Currently the average daily volume for the SPY (the ETF which tracks the S&P500) is 170 million shares a day. In the last month, we have only hit that number 3 times. This is telling you that people are just not there like they were before.

Having studied my trade performance for many years, I noticed my performance lags around year end also. Can you put 2 and 2 together on this one?! Part of the reason that I have exhibited poor performance at year end is simply that there is not the same amount of participants as normal. Why would this be significant you ask? Well, if you don’t have enough people to fuel a rally, what will happen to that rally? It will most likely die! I say “most” likely because I have seen some ballistic rallies around the holidays, but more often than not, markets linger and do not provide a lot of opportunity. We all want the high probability trades, and I feel that the odds of that diminish around the end of the year. Look at the second chart here.

This is a zoom in of the S&P500. Right away you can see a Whole-Lotta-Nada!! Just as a rally seems to start, it fizzles and goes the opposite way! Case in point is the stock picks that I have been posting on Twitter. Up until mid November, I had a pretty good track record, with some serious home runs (FIRE on 9/3 http://bit.ly/F0fBv & RIMM from 9/24 http://bit.ly/5GuPF). But recently, the only thing that you could have done effectively is day trade. The choppy, whipsaw action would not let the market really run, and allow a nice swing in prices. Sure there were some things that ran greatly, but they were hard to find.

So what would you rather do?! Try to force a trade in a risky environment, that will most likely stress you out, cost you money and ruin your holidays…
Or spend your time with family and friends enjoying your time on this great green earth?
The markets are not going anywhere, and there will alwys be another time to trade. Right now, its time to celebrate.
Happy Holidays everyone,
See you in the New Year!

Merlin

“This market occurrence causes traders profits to shrink, stops to be hit more frequently, and levels of frustration to rise.”

Wouldn’t it be great if Jeopardy had  “Common Trading Problems” as a category!? If you had a buzzer on your desktop right now, many of you would be pounding away for this Jeopardy Question! Since mid November, the markets behavior has changed a bit. And this minute change is causing grief among many traders. As i mentioned on Mondays blog, you just have to be aware of what is going on and adjust your approach slightly. In order to understand what is happening right now in the markets, we first need to look at where we have come from to get to this point.

In the following chart you can see the Nasdaq 100 ETF (QQQQ) from March of 2009. During this unprecedented run, most of you reaped substantial rewards and were happy to boast! I have received MANY e-mails from students flaunting lofty returns, some as high as 400% in 2009. Simmer down kids! Always be humble! The market doesn’t like bragging!

|Read the Rest of the Entry…

Over the past few months i have received several e-mails from students frustrated about their poor performance, or problems of continually being stopped out. Let me assure you that you are not alone! Before i address the causes of such performance issues, i want to look at another profession which draws many parallels to trading. American’s past time: BASEBALL! I grew up an avid San Francisco Giants fan, attending many games and donned as much apparel as i could muster. Worshiping players who could hit the ball over .300. In hindsight, hitting the ball 30% of the time seems like a gigantic failure! You’r actually failing 70% of the time! However, when you look back over the last 144 years that baseball has been played in the United States, you realize that the best in the history of the sport hit just over .300. In fact, since 1865, only 13 players have hit over.400, the last of which was Ted Williams in 1941. That’s 68 years, with players like Don Mattingly, Wade Boggs, Cal Ripkin, Rod Carew, Albert Pujols, Alex Rodriguez, and nobody has hit over 40% of the time.

|Read the Rest of the Entry…

A few weeks back, Gary asked me if i would comment on Government intervention, Plunge protection, and who the real criminals are on wall street. For those of you know me, you understand that My trading philosophy is built around my distrust of the financial markets! As a matter of fact, my personal mantra about the markets is “Non mi fido di nessuno”. In Italian, this translates to “I don’t trust anyone.”

My personal thoughts is this: Organized crime flooded cities like New York going back to the 1800’s. The purpose was power, dominance and monetary gain. The law cracked down on that, so it shifted to other areas. The 1920’s found organized crime in Prohibition, gambling and prostitution. The 1940’s embraced the creation of Las Vegas, with the likes of “Bugsy” Siegel, and countless others. Why? same ol’ thing: Money, power and prostitution. As corporate America attempted to legitimize Vegas, organized crime had to move elsewhere. And where is there more money and power than anywhere?!?!? You got it! Wall Street!

Fresh out of college i fell victim to the Efficient Market Hypothesis (EMH) by Eugene Fama. The belief that financial markets are “informationally efficient”, and that prices on traded assets (e.g.,stocks, bonds, or property) already reflect all known information, and instantly change to reflect new information. It implies that we all have access to the same information. After doing this for a while, you realize that things could not be further from the truth! The truth is that those with the better connections, or larger networks to manipulate with, have the information first. The more that i am involved with the trading world, the greater my distrust for the players involved. Every day you can read articles about some firm that paid out millions in fines for stealing from their clients and others, yet they never admit guilt.  For years i have called Goldman Sachs the largest organized fraternity in the world, as they have high ranking “former employees” entrenched in high profile political offices around the world. Recently, you have seen some media attention focused on this topic. Here are a few:

|Read the Rest of the Entry…

As a Testament to how quickly traders change their minds, i am revisiting my calls on Twitter this morning. After the economic numbers came out this morning, i said “Shockingly positive numbers for housing starts, PPI, building permits! Should set a very positive tone 4 today.” And if you look at the numbers, that really makes sense!

• Housing starts showed a 47k increase over expectations! and a 17% increase in a month! This is the kind of numbers that economists have been looking for to stabilize the falling housing market.  To sweeten the positive news, building permits also increased and exceeded all expectations.
• PPI was expected to double, from .3% to .6%. This would be an indication of inflationary pressure on the markets. Instead it came out at .2%! Not only lower month-over-month, but lower than anyone’s expectations! Lower inflation would support the argument to keep interest rates low, where as rising inflation numbers would, at some point, necessitate raising rates. And this would certainly not bode well for the markets!
• Capacity Utilization  and Industrial production dropped slightly, but those are not normally major market movers.

|Read the Rest of the Entry…

Since the end of March, the current rally did not really seem justified. I made 2 small position purchases for my accounts, with the belief that the markets were just going to have a “Bear Market Rally” that would last a month or so. Those 2 positions did VERY well, bringing in over 50% returns in less than 2 months. As we approached the Highs for 2009, 943 on the S&P500, i sold out of my positions expecting a retracement after this very sharp and parabolic rally. The rally from March to the beginning of May was roughly 40%! Clearly not a sustainable trajectory! My feeling was that the markets were running on hope, shrugging off bad news and embracing good news.  You can tell by the headlines in newspapers and TV that the media is helping to fuel this fire. I have seen many headline saying “Traders are Hopeful the market has bottomed” or “The recession is over!”.

|Read the Rest of the Entry…

Another 4 day marathon came to a close on Saturday as the Pasadena Online Traders Expo came to a close. For me it was a busy one as I had many presentations and speaking engagements happening. Thanks to all of you who attended my presentations. I hope that you received some good information, as well as a little entertainment. As is usually the case at these shows, attendees are bombarded with visions of grandeur and lofty claims. In talking with many of the attendees, both at the Online Trading Academy booth and at my presentations, i noticed something discouragingly different this year. Many of you voiced frustration and disappointment over the degree of sales pitch that was happening in the breakout sessions. Historically the presentations gave the attendee some good information to work with, and then there was a nice sales pitch at the end to get you to buy whatever that speaker was selling. It appears that this year was different. Very few of the people that i talked to felt that they got ANYTHING out of the presentations. Sighting that it was 90% pitch, and 10% useful information. I guess that this is good news for me and my colleagues who spoke at the expo, (Mike McMahon, Brandon Wendell and Stan Ehrlich) who pride ourselves on giving the audience something of value, and letting the quality of our information and lessons sell our educational services without a pitch!

|Read the Rest of the Entry…