A new year, a new market: Flexibilty and Patience

Happy new years and cheers to hopefully a trending market. The last 2 months of sideways action have been hard for those who tried to initiate positions in hopes of capturing market moves.

After these 2 months with decent drawdowns (losing trades), I realized the importance of flexibility and patience. I viewed the risk reward favorable for a downside market pullback/retracement (a move in the opposite direction of the longer term trend) during November December months, even though the market is undeniably in a longer term uptrend since the March lows. I didn't see any stocks that had great setups to the upside, plus the number of stocks making 52 week highs were steadily dropping, signaling weakening leadership in the market. Add on the fact that many stocks were forming potential downside patterns (GILD, RIMM), the strongest stocks in the market seemed to have lost upside momentum (AAPL, BIDU) and financials lost their steam (look at GS, WFC, BAC) and I believed I had a case for the downside. There were a few days in which I believed I had the upper hand in being short (Nov 30th, Dec 4th) but everytime the markets approached the lows of the range, selling volume would dry up and the market would trend up ever so slowly (a range is when the market is trading between two prices for a period of time without advancement or decline beyond these two price points). Of course, I had to lose on the shorts I put out and had to reevaluate my trading. Taking a break from trading after several losing trades in a row is a good system to help in reevaluating your trading and your views on the market. After evaluating my trades, which were executed according to my plan, I realized that maybe my market bias is just plain wrong and regardless of the conditions I see, the longer-term uptrend trumps over all these factors. I decided to stop trading for the remainder of December and let the market tell me its direction.

Fast forward to today, and I have entered into a long position today because the SPY and QQQQ have finally broken out of their ranges.* If I had not been flexible with my views, I would not have been able to participate in the beginning of what hopefully is a continued uptrend and would have been sitting on the sidelines. Patience would have saved me a decent chunk of change if I observed it during the sideways action. As an aggressive swing trader, I am always looking for the first buy, sell point to enter into a position. It sounds all dandy, but the downside to being so aggressive is that I am wrong a lot more often than those who wait for confirmation. A confirmation would be a subsequent move in the same direction with relatively high volume. Just look back to Nov 30th and Dec 4th. Even though both days had potential to be a turning point in the market, there was no follow through (confirmation) in the following days to suggest any more downside. I will not change the way I trade but I now have learned that if things are not working the way they should in the market, I can either be patient and wait it out, or trade with less position size. Patience is still a skill I actively try to work on and thus far has been a worthy challenge.


As per Steve's request, here is an example of how I use a stop loss. Let's use my APOL failed short as an example. I have inserted a Yahoo Finance chart to provide visual aid.

I entered into my position Dec 8th, which is the fifth candle after Dec 1st. This is a momentum pattern so it either works immediately or it doesn't. I entered below 54.25, which was the day before's low and set a stop at 55.15, the previous day's high. The day afterwards I was promptly stopped out above 55.15. I normally give the stocks more room, but because this pattern either works immediately or it doesn't, I gave it less than 2%. I entered into a big position, gave the stock no more than 1 point to prove to me that I was wrong and in the end, I was wrong. Now it is entirely possible that the stock could have breached my risk parameter (stop loss), I would be out of my position and it could have crumbled afterwards. Then that would have been my error in judgment. But it hadn't panned out that way and I have saved myself much emotional and financial pain. The point is, anything can happen, so you must use your stops. If you want to give a stock more room, use less position size. If you are experienced enough to decipher a momentum trade versus a trend trade, then you can give the stock less room and use more size.

Feel free to post comments, I will respond and appreciate every one.  Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss.

*SPY is a S&P 500 ETF, QQQQ is a Nasdaq ETF and even though both are mostly accurate reflections of their respective futures, it is more a function of institutional sentiment of those indexes. ETFs are exchange traded funds, which are newly introduced financial vehicles which allow participants to enter into futures, commodities, bonds and baskets of indexes that were not available to regular investors. They are traded on the markets daily just like stocks.

The Maiden Post: The "Feel"

Let me first start off by telling you about myself. I am Henry Chen and I still have a lot to learn about trading. I have been trading the US equity markets for close to 2 years. But even if I were to be a 15 year veteran, there will always be new occurrences in the market, and thus, new opportunities to learn.

I am not a fundamental trader, I cannot predict future trends in certain sectors; I leave that up to the great minds in institutional funds. I am a trend follower, someone who "rides the bucking bronco," as deftly said by Bill Dunn.

So why should anyone read anything written by someone who isn't a market veteran? Because I do not feel that there are enough blogs out there to address those who want to be traders but are not in the line of work already. I went into trading as a curious, but naive individual without a clue as to what it really entailed. I wish to inform those who are interested in this field what challenges lie ahead of them and what I have done to overcome them. However, because I mostly will be discussing the mental aspect of the game, a challenge all types of traders face, anyone and everyone can benefit from reading this blog.

But enough about me, I want to talk about the popular conception that some people are just born to be traders, that some just have this "feel" about the market. It is true that there are those who have a fine-tuned sense on what they see on their screen. But this comes through experience, through observing and participating in the market countless times. This is not an issue a newbie should worry him/herself over. Think about this, would it make sense for someone who hasn't swung a baseball bat, worry about whether he can hit home runs?

My friends, who are not traders, bring this issue up more frequently than I care to address. My response is the same everytime: Do not worry about it. "Feel" is a reaction, subconscious or not, that a very experienced trader has to what the market is showing them. This can only be acquired through experiencing various situations and patterns over and over again, like going to the batting cage to perfect one's swing. Even so, how many traders have this ability anyway? I can certainly tell you that the "regular" traders vastly outnumber the "feel" traders. So, there is no reason to even think about this issue in trading. If you have it, you will know down the road. If you don't, join the rest of us!

When you start out, there are so many aspects of the game you have to wrap your mind around, it can be overwhelming. From bids and offers to defining risk and from setting your stop-loss to mentally preparing for the inevitable losses, it is important to prioritize what you want to work on. Worrying about an issue that you cannot control at that point in time will needlessly waste your mental capacity during a crucial time in your career. It is widely known statistic that close to 90% fail or quit becoming traders. And the easiest prey for the sharks in the water are the newborns wading in the water, unable to swim by themselves yet. So do yourself and me a favor and concentrate on what you can control.

Feel free to post comments, I will respond and appreciate every one (reminiscences from experienced traders very welcome as well).  Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss.