Wednesday, October 26, 2011

Shenanigans

This last 6 months has been one of the most difficult trading periods I've experienced. I haven't lost money but nor have I made it. I was away for nearly 6 weeks and I certainly could have done better overall, having become slack with my disciplines, but nevertheless it's been tricky. Much of the action has been driven by politics and the seemingly insurmountable debt problems. Stock specific stories are mostly ignored and valuation standouts don't seem to gain traction because future earnings are discounted massively on the basis that world trade must suffer from the strong chance of another GFC.

I've been thinking about what kind of trading is appropriate in these conditions. Anecdotally, quite a few traders think that no trading is appropriate right now and they're waiting for better conditions. They could well be right but my thought is to get back to what I was doing in a much more disciplined way before the last 6 months. That is to take entries where my stop is very close, to use a dollar amount to determine the position size and to trade only one swing. As an example, if I was to buy a stock at 105 and my stop was at 101 then I'm risking 4 cents a share. If the amount to be risked on the trade is $1000 then the position size is 25,000 shares. (25,000 * 0.04=1000). In addition, if the trade goes my way, I stop out once momentum has stalled, using either a very tight trailing stop or a straightforward exit on a doji bar.

The other part of this updated trading plan is to make trading as stress free as possible and to limit the time I spend doing it. I no longer want to do any intraday trading as it's a small part of my income for the largest chunk of time and energy. In the same vein, I've been thinking about other elements of my trading that I don't like and working out how to get rid of them. One of the worst situations is to have entered a trade which quickly goes wrong. With that in mind, I'm leaning closer to trading as late in the day as possible. If I have to stop out the next day, it's much easier to handle and far less likely to snowball.

There are other aspects too. I'm weighing up the problem of stopping out. What if I'm a few cents from a stop? Do I sit at the screen all day just in case I need to act or do I simply stop out on the close with some sort of disaster protection for the position that bursts through the stop? In that situation, do I still stop out if the stock has gone through my level but retraced? These are all common situations that I deal with on an ad hoc basis and maybe that's the way it should be but I'm pondering whether it's more efficient and less draining to have a clear plan.

Monday, October 24, 2011

Brewing up theories

A lot of people in Australia don't tip in restaurants, it's not traditional and the thought is that the staff is well paid and merely doing their job. It's a nice idea but they're dreaming, because 25 years ago this country made the decision to move to a more laissez faire type economic system and the gap between rich and poor has widened. More problematically, the gap between people of the same sort of background has widened too. For example, educated or experienced public sector and service workers have fallen far behind their peers in the private sector, or those who are business owners.

Twenty years ago, an American work colleague who had bought a motel in Australia was observing that the young, unqualified motel cleaners were earning $14 per hour while his middle aged bookkeeper got 20. I remember him wondering why you'd bother to miss out on earnings or leisure while you went to college in order to gain such a small financial advantage. The situation has changed dramatically since then with the award for cleaners being just under $20 per hour while a bookkeeper, on a contract basis, would get a minimum of 50 or 60 per hour.

The economic liberalisation has brought the community the promised gains but the cost to social cohesion is rising. At the moment, it's a murmur rather than a shout but it seems as if change is on its way. These movements often seem to be global and maybe Occupy Wall Street and even the Arab Spring (popular uprising because of a huge gap between rich and poor) is the most dramatic part of an upheaval in how society is feeling. The protests against capitalism seem reasonable when the wealthy have been protected from the GFC at the expense of the public. Certainly the financial TV channels I watch seem to misunderstand how capitalism workers. They appear to think capitalism is the same thing as the economy. It's not. It's the engine not the car. Someone has to steer, to apply the brakes, step on the accelerator, build in safety features etc etc.

Addressing the obvious imbalances is probably going to be enough in Australia where most people are employed but I doubt if it will be so painless in Europe and the US.

 

Apart from that, the day has seen a big bounce back of 2% at 12.30 pm as hopes rose for the EU summit despite an impasse between France and Greece over the extent of the hit that banks will have to take on Greek bonds.

It's seen me stop out of a couple of my short positions and ponder the usual problems of when to get out of a trade. Essentially, the shorts were largely counter trend positions so there's always a case to be made to get out once momentum has stalled rather than when the writing is on the wall.

BLD is one that I traded quite well but the last part of the trade was a triumph of hope over probability. Here's the chart.

chart

I got short at a good level (365) on the assumption that it might make a lower high. The swings are overlapping now so I wasn't necessarily expecting a new low. Last Tuesday, the stock accelerated down and closed at 340 but the next day there was support and a minor breach of the high of the previous bar followed by another indeterminate day. I bought half back at 338 on that day, last Thursday but should have bought it all back. I bought the last half this morning at 356 so missed out on around 16 cents on that portion.

Friday, October 21, 2011

Change of rhythm

The market tone has altered so that early gains have faded away despite a turnaround and a mildly positive lead from Wall Street. I'm pleased with that because I'm short and trying to leave well enough alone. There have been no obvious opportunities to add to those positions and I've bought back a few shares here and there. There hasn't been a lot of movement anyway. BLD is hovering around 340 and yesterday I bought half back at around 338 as the stock bounced from the mid 330s again. LYC is also digesting the big fall from Wednesday afternoon and has had a minor bounce which appears to have run its course.

chart

TOL came close to stopping me out by trading just below my stop at 480 but is now at 459. I don't think I wrote about IPL but I'm short at 341 and although the stock is at 328, it's unclear whether this is the bottom of a minor pullback or whether there's further weakness to come. I bought a third back at 327.5 average but I'm waiting for confirmation one way or the other.

chart

What's encouraging me to hang in there with the bearish positions is that the overall market had a very fast 400 point plus rise so there's room for further falls. There is also the outside possibility that this move was a simple c wave and new lows are on the cards.

chart

Thursday, October 20, 2011

Disconnect

There's been something of a disconnect between the performance of gold and some of the gold miners. Here's the spot gold price. There was a desultory rally and now further weakness.

chart

Regis mining is one of those stocks which has outperformed the price of the underlying.

chart

I'm short at 294 with a stop at 302. Funnily enough, there's a strong chance that I'm simply trading a c wave pullback before another look at 305 or higher but the lower short term high at 300 looks reasonably well tested over 3 days and something like 275 to 280 is doable in the short term. Just a quickie then.

LYC is interesting. It tanked yesterday afternoon on talk of a failure to get approval for a processing plant from the Malaysian authorities. I bought some of my short back at 110 and was close to getting more at 100. There was a late recovery and the stock has held at around 110 this morning. The approval process is not complete and an answer is not expected for a few weeks but there must be some thought that "where there's smoke there's fire" because otherwise the stock should have rebounded. Still short and happy to buy more below 100.

chart

Wednesday, October 19, 2011

Walking and looking

It's a mildly positive day for the Asx 200 with a bounce of 27 points at 2.28 pm. The index has chopped around between gains of 0.5 and 1% all day after the US market rallied, helped along by reports of a much enlarged European rescue fund which turned out to be false. Despite that, US futures are down under 0.5% in overnight trading. The DJIA made a marginal new high after having appeared to have topped out the day before so I'm glad that we haven't followed suit although it could happen tomorrow, of course.

It's another day of watching for me and I've occupied myself by going for a walk to one of the local art galleries and having a look at the 19th and early 20th century works. I noticed that my eye sight was sharper on the way back than on the way there. It probably sounds strange that I should be aware of it but I have a weak prescription for short-sightedness and I try to limit how much I wear my glasses, wearing them only for driving and watching TV. When I left the office, I noticed that everything seemed a bit blurry but the return journey was quite different. I think it's because staring at the screens gets boring for the eyes while looking at interesting art is a tonic. Certainly, the advice for tired eyes is to vary your focal distance; look at close and distant objects just as you would if you were living a less "civilised" life.

I though I might be obliged to cut yesterday's new short position in TOL but it's only up a cent at 472.

I've been short Boral since last Thursday. I got set at 365 on what turned out to be a retracement rally and yesterday the stock traded as low as 334. I was tempted to buy back at 335 but decided that I need to develop the habit of leaving well enough alone. The stock is the outperformer among my short positions but although it has traded through yesterday's high, the little down trend looks as if it should have further to run. Ideally, it would make a new low but realistically, the slow turn it has been making implies that it might have bottomed. Hence, I'll be looking to square up at about 330 if it turns down again.

chart

Tuesday, October 18, 2011

Staying away

I'd placed my bets to the short side over the last few trading sessions as there was no decent pullback to buy and the upswing had taken the market back towards the top of the recent range.

chart

Yesterday was tricky because the market recovered to a new swing high but today the strategy is paying off. I'm hoping for another day or two of market weakness like we had in mid and late August.

It's worth thinking about yesterday because out of 9 short positions held by myself and my assistant, we only had to stop out of 1. Previously, I would have spent the day agonising over every tick and persuaded myself to pre-emptively stop out of a few more of the shorts but this time I kept away from the screen and only checked hourly to see whether I needed to buy anything back. Mentally and emotionally I had accepted that the day was going to be unprofitable and I didn't try to fight that reality by trying to scrape a few dollars here and there or reduce the prospect of further losses by stopping out prematurely.

The market has not made a clear top so I'm aware that the positions may still need to be cut but that possibility is quite low after a couple of minor highs with no follow through just below previous resistance and a decent reversal day so far.

I didn't expect to get the opportunity to short anything more this morning but TOL was one of those stocks which didn't gap down. This is partly because it's charting better than many of the resource stocks but it still seems worth a go with a tight stop above yesterday's high at 480 and an entry level of 470.

chart

Friday, October 14, 2011

End of day or target?

I'm very clear that I no longer want to trade as I have been over the last few years. Watching every tick strikes me as stressful, counterproductive and an obvious sign of addiction. To that end, I've been thinking about how I can best manage my trades.

The first thought was to wait until the close of trade for entering and maybe also for stopping out or taking profits. It has the advantage of being simple and time efficient and it avoids the problem of getting a signal intraday which is then negated by a subsequent turnaround. The prices achieved might be less good although, over time, some of that might even out.

The first experiment was a short position in Lynas.

chart

On Tuesday's close of trade, I shorted some stock at 122.5 on the basis that it's a weak chart, the downtrend is probably incomplete and the rally looked to have an a-b-c, 3 wave shape. I'm still short this with the stock currently trading at 127, having touched 131.5 yesterday. My stop is above the Tuesday high of 135.

Because the stop is some distance away from my entry level (about 10%), I only put on a small position. That distance could have kept me out of the trade but there is a real possibility of a move to around 80 so the upside is good.

This got me thinking about different approaches. If I'm to stick to an end of day theme then I could look for a better entry because the distance to my stop is too large. Yesterday's closing price was 128 and that would have provided a more acceptable risk/reward.

However, my preference is leaning towards targeting a level because that's what I'm generally thinking about when I'm planning the trade. There are two potential entries in this case. The first one might have been on Tuesday. I had thought that 140 might be the peak of a retracement so I could have used 141,142 as a stop and looked for an acceptable entry which might have had me shorting at 132-135.

The trouble with this is that my stop level would be pretty artificial since the last significant swing low was at 147 and therefore a textbook stop might be triggered on a break of that level. Still, it's not an uncommon method to use a set dollar or points amount as a stop rather than a particular price point; it just takes more discipline to use.

The second entry would have been yesterday because once Tuesday's high of 135 was set, that became a useful stop and any retracement towards that could be used. For example, 130 might have been a reasonable guess and provided a slightly better entry than the closing price at the expense of not knowing whether the stock would go through your stop intraday.

I did sell some more stock but only at 127 after dithering so in the harsh light of reality, the end of day method wins here.

As I write this, the market is folding and has just made a sell signal on the 60 minute chart. LYC is at 124.5.

Monday, October 10, 2011

In two minds

I returned from my holiday a few days ago feeling very refreshed. Before leaving, I was worried about missing a big bounce and ironically, it's happened almost exactly as I've returned but I was too jetlagged to want to do any trading. Anyway, it looks corrective to me although very tradeable, obviously.

chart

I view this as wave c of a wide ranging correction. The first leg up from the early August sell off failed just above 4300 on September 1st, while the b wave down was a choppy overlapping affair which must have been very tricky to trade. This wave is much cleaner and I guess it's a question of judging when to buy any dip that eventuates because the strength of the last few days suggests another move like wave a.

I haven't done any position taking since I've been back because I became aware of how much stress I had been carrying. The stress was a product of pushing too hard at my trading so that something which is essentially enjoyable became a source of tension. There will always be up and downs with stock trading but I've worked on techniques that really seem to work for me and the lesson is to stick to those techniques. One thing I'm planning to avoid is intraday trading. I find it hard to be disciplined in the same way that I am with my overnight trading and it's a very intense sort of business so it eats up a lot of mental and emotional energy. It really doesn't add up for me on that basis.

That's enough for now, I might have a break for a day or two and write more when I'm clearer on my goals.