Thursday, March 26, 2009

My Respectful Disagreement About Your P/L

Andy Swan is a trader, a friend, and a funny guy.  

He's proven himself in the market and in business as one of the sharpest tools in the toolbox.

And I respectfully disagree with him on this point he made today:
"The best way to take emotion out of trading is to stop caring if you lose and STOP WATCHING your P/L numbers." Source: "Emotion in trading must be killed"
This sentiment may have had its genesis in the following thread:
@ToddStottlemyre @IRON100 Interesting conversation. I trade w/stops of course but watch a real-time P&L -allows me to trade 8-10 positions
Here's my view on the importance of the P/L in trading:

By no means am I saying cut your trade if you are down a penny.  That said, nothing tells you more clearly how you are doing than your P/L.  Unlike your emotions which say to you, " . . .  just hang in there buddy", your P/L is constantly spitting out the truth:

I am winning . . . or I am losing.  Period.

P/L is at the core of money and risk management and without knowing what is going on in real-time you are on a path to failure.  

Granted there's more than just looking at it and stopping trades if you dip into the red.
You not only need to know your P/L you need to understand it with answers to these questions:
How much can I risk losing per trade?
How does each trade affect the total risk of what I am willing to lose per day?
Know these answers, understand the odds of the pattern to be traded in the market, and you're ready for anything the market throws at you.  Maybe there's no disagreement afterall - we both wind up at the same conclusion from 2 different paths: No emotion, no surprises - all reaction.

Monday, March 23, 2009

Zag vs Zig on Relative Strength & This Stock Pattern Strategy Will Reward You

Below is the original Trader's Tips article submitted for the just released April issue of Technical Analysis of Stocks & Commodities 

TRADERS’ TIPS

April Issue

Your emotions are often a reverse indicator of what you ought to be doing.” John F. Hindelong

For this month’s Traders’ Tips, we offer a stock trading strategy based, in part, on the High Relative Strength ideas proffered by Gerald Gardner.  Specifically we show two tendencies in this current market:

  1. Look just beyond the short term when using Relative Strength (i.e., holding opportunities for at least a day)   
  2. Fade those stocks that display strong Relative Strength – in this market the odds tell us it just pays to do so  

15 Minutes can tell you a whole lot about the rest of the day.  When finding stocks with a very high 15 minute Relative Strength Index reading of 80 or more, one would assume that strength suggests the uptrend will continue.  Not so says the OddsMaker, Trade-Ideas’ “Event-Based” back testing system.  

You can use Relative Strength in stocks to profit, just fade the trade.  

Hold the short position for one day and look at the results we generated below. The strategy is based of course on the Trade-Ideas inventory of alerts and filters found in our flagship product, Trade-Ideas PRO.  The trading rules are modeled and backtested in its add-on tool, The OddsMaker.

Here is the strategy to profit from High Relative Strength in stocks:

Let’s define terms first.  Here is the Trade-Ideas Online Help explanation of the Relative Strength filter
"This filter refers to Wilder's Relative Strength Index (RSI), using the standard value of 14 periods.  The server recomputes this value every 15 minutes, at the same time as new bars or candlesticks would appear on a 15 minute stock chart.
This filter does not use pre- or post-market data.  This filter is only available for stocks with sufficient history; if a stock did not trade at least once every 15 minutes for the last 14 periods, the server will not report an RSI for that stock."
We look at all the U.S. exchanges for stocks with a price range from $35 - $65 exhibiting a minimum 15 minute RSI value of 80.  The Heartbeat alert in Trade-Ideas simply lists all the stocks that pass this short list of filters.  That’s it.  

How do we trade this pattern?  A successful trade in this strategy means we sell short all the opportunities that appear.  We also do not use a stop loss for this system (but this is a higher risk tolerance setting than you may desire. Experiment with the backtesting results by placing various stop loss values and see why we chose not to use one).  We enter anytime during the market session at the time of the signal and hold the trade until the open the next day.  The results speak for themselves for the 3 weeks ending 02/09/2009: a 68% success rate where average winners are almost 50% larger than average losers.

Provided by:
Trade Ideas (copyright © Trade Ideas LLC 2009). All rights reserved. For educational purposes only.  Remember these are sketches meant to give an idea how to model a trading plan. Trade-Ideas.com and all individuals affiliated with this site assume no responsibilities for trading and investment results.

Description:  “Profit From High Relative Strength Stocks” 

Type or copy/paste this string directly into Trade-Ideas PRO using the “Collaborate” feature (right-click in any strategy window): 


You can also build the strategy from Figure 1 below.

Figure 1 below shows the configuration of this strategy:

 



Where 1 alert and 3 filters are used with the following specific settings:
  • Heartbeat Alert; no additional setting
  • Min Price Filter = 35 ($)
  • Max Price Filter = 65 ($)
  • Min 15 Minute Relative Strength Indicator Filter = 80
The definitions of these indicators appear here: http://www.trade-ideas.com/Help.html

That’s the strategy, but what about the trading rules?  How should the opportunities the strategy finds be traded?  Here is what The OddsMaker tested for the past 3 weeks ending 2/09/2009 given the following trade rules:
  • On each alert, sell short the symbol (price moves down to be a successful trade)
  • Schedule an exit for the stocks at the open after 1 day
  • Start trading from the open and stop at market close
The OddsMaker summary provides the evidence of how well this strategy and our trading rules did.  The settings are shown here in Figure 2.
  

 






The results (last backtested for the 3-week period ending 02/09/2009) are as follows:

 


Understand these backtest results from The OddsMaker by reading the User’s Manual:  http://www.trade-ideas.com/OddsMaker/Help.html



UPDATE SINCE PUBLICATION:

The market is always adapting and changing - what works for a couple of weeks can easily change.  The most recent OddsMaker results show an advantage when these trades are taken to the LONG side.  This makes sense given the fragile 'bottom' and recent bullish corrections we've had of late.

Q: Thanks! Where does that leave me with this strategy?
A: The market is at an inflection point and this is not the best strategy for Phase 1 (Accumulation) and Phase 3 (Distribution) as my friend Brian Shannon calls these non-trending periods.  Wait for the market to confirm a direction: if its down that use this strategy to sell short opportunities. If the market's direction is up use this strategy to go long.  The point is that this strategy is a trending market strategy.  Don't use it if the market can't decide where it's going.


-- by Dan Mirkin & David Aferiat, Managing Partners, Trade Ideas LLC
www.trade-ideas.com, dan@trade-ideas.com  


Wednesday, March 18, 2009

We Found Your Trade-Ideas T-Shirt. Let Us Know Where to Send It.


Yes, you lost your old one, right?


Maybe it was too many uses as the car wash rag - hey, a thousand uses is fine with us.


Since we launched Trade-Ideas way back in January of 2003, every subscriber receives a free T-Shirt.  

Was your shirt lost in the mail?  
The wrong size?  
“Borrowed” by your spouse?  
Worn out from too many trips to the gym?  
Stained from too many Jell-O shots or that Jell-O wrestling bachelor party? (Thank goodness no pics taken that night).

Whatever the circumstances.  You read this blog, you like Trade-Ideas - have a T-shirt on us.

Please contact marissa@trade-ideas.com if you need a replacement.

UPDATE: The first 3 people to proudly display their Trade-Ideas T-Shirt in their profile picture (on Twitter or anywhere else) will receive 100 credits to use The OddsMaker, our backtesting tool.

Sunday, March 15, 2009

No Bonus AIG. Come and Sue Us for It

The outrage ongoing on about the AIG's contractual bonus payments to its executives made its rounds on the Sunday morning news programs and is the subject of many twitter chatter.  Here's a typical representative comment:
where would the bonus monies come from (obligated by contract) if $AIG had met its maker like it would have ex-taxpayer money?
If AIG did go into bankruptcy, they'd get cents on the dollar.

One rationale for these payments is that they are for retention purposes. But these are the same people with the poor judgement that got them in to their mess in the first place. Why retain such talent?

Just because AIG legally owes its executives the money, doesnt mean it needs to be paid immediately or that they need to be paid before other critical needs.  Namely how it will use the governement bailout money.  This includes what monies AIG has paid foreign counterparties. The point here is that no one can be made whole, so how will the haircuts and losses be distributed among counterparties, AIG, shareholders, and yes its agents: management executives and employees.

So here's a solution: we're a nation of laws and adjudication.  Delay these bonuses. Let affected executives sue for their money if they need it anytime this decade. In this way AIG scores a badly needed PR win in taking its bad calls and responsibilities seriously and it delays in the short term government money going to exceutives as bonuses for their 'accomplishments'.

The judicial system is a fine place to allow these executives to make their case for why they need this payment now, why they should treat AIG as if it were not already in bankruptcy, and what performance goals were met to merit such bonuses in the first place.  We still uphold the rule of law and the power of contracts - we're just, per contract, allowing other processes (like adjudication) to take priority.

Thursday, March 12, 2009

Get Experimental. Trade-Ideas Releases Beta of its Latest Version

"It's the book to end all books. Until I write another one" - Stephen Colbert on the publication of his book , I Am America, And So Can You.

We'd say it alternatively, "It's the upgrade to end all upgrades. Until we release another one".

Exactly.

Announcing v2.3.5 in beta release.  Here is the link to download this tested, but still beta version:  

As readers of the blog know, we offer this special invitation to beta-test Trade-Ideas Pro Version 2.3.5 ahead of other subscribers and its formal release sometime soon. It is our intention to show our gratitude for your support and use of Trade-Ideas.

"Finally a reason to become literate" [about trading]

Some significant  changes:
  • You already know about the improvements we've made to The OddsMaker and all the additional new alerts and filters that have not required a new download: http://www.trade-ideas.com/WhatsNew.html

  • The external linking works better on some newer computers - now it's easier to connect Trade-Ideas to any platform you're using (activate the linking by double clicking on a symbol in a strategy window)

  • The main menu (which shows your internet connection status) now contains a list of all windows.  This is helpful if you have too many windows to show all at once

  • Improved networking support - keeping the pipes clean

  • Multiple changes to the TD AMERITRADE Automated Trading Bot, including improved graphics and more fault tolerance
"Finally, a book you won't want to burn"

There's alot of hidden improvements too that relate to latency and some internal plumbing. Keep in mind 2 points:

No matter which platform you use (e.g., browser, TI Pro), you can always access any new alerts and/or filters we add. These are automatic to subscribers because both applications make a "call" to our servers for the latest list whenever someone interacts with our alert window settings via 'Configure'. When we add such alerts or filters, you receive them instantly. Note that The Odds Maker, however, is a feature found only in TI Pro.

This beta version lacks additional improvements and features that the final release will include. This is by design since we plan to include user feedback and solve any issues that may appear with heavier traffic and use. No flaws appear in our own testing of this beta release. However, should you find anything unusual, please let us know at info at trade-ideas.com. We'll also take any praise there too!

Stephen ... any last words?

"It's the Bible of books"

"240 pages of genius. With pictures!"

"The best-written book I have ever written"

Thanks.  We could not have said it any better than that!

P.S.

"Read the book you'll want to have thrown at you"

He must be talking about our User Manual!


Help Us Choose the New Makeover Design for Trade-Ideas.com




Some exciting changes are coming to Trade-Ideas - specifically this blog and our entire site.  It's a makeover that promises to:
  • Easily allow people to navigate to information they need on the site
  • Explain what we do with more clarity to new visitors
I've already shown the set of 4 makeover designs from which we are considering to several people on Twitter who follow me.  (Thank you Andy Swan, Jeffrey Lin, and the others)!

I certainly want to include input from you, dear reader, who get value from the blog.

So please leave me a comment below with a way to reach you (preferably email) and I'll take 20 minutes of your time (with an invite to see my desktop) and ask you which design you like the best and why.

Once we settle on the design layout, we'll finalize the copy, change all the sub-pages and unveil the new site!

Thanks in advance for participating in these changes.

Wednesday, March 11, 2009

Following This Bear Swing Set-Up Netted a 84% Win Rate


Improved OddsMaker Models Swing Trades

Noticed anything?  We changed The OddsMaker by expanding the range of the backtest and introducing longer hold times with which to model trading rules.  The details of the enhancements are in the User's Guide.  This post demonstrates via an example strategy how the changes improve the universe of possible trading scenarios a trader can imagine for a given strategy.

The results page shows how the new features in The OddsMaker improve important trading decisions.  Although active day traders think in minutes the majority of active investors still see days and even weeks as very short investment time horizons.  The OddsMaker's insight into the viability of longer term trends helps swing traders improve their decisions and at the same time helps intraday traders uncover powerful strategies in a time horizon with probabilities of trading outcomes which they feel more comfortable.  Let’s take a look at a relatively simple yet powerful example:  

The Set-Up Explains How to Keep Trading Despite 'the bounce'

In the alerts window below we are looking at stocks that are moving up at least 25 cents in the last minute and at that same time they are approaching the opening price for the day.  We call this window: 


(Click on the header to open this strategy).  We use 1 Alert subject to 6 Filters:

Running up now; Filter=0.25 ($) Running Up Now = $0.25

Min Price=10 (Dollars)  Min Price = $10

Max Price=50 (Dollars)  Max Price = $50

Max Distance from Inside Market=0.01 (%)  Min Distance from Inside Market = 0.01%

Min Daily Volume=200,000 (Shares / Day)  Min Daily Volume = 200,000 (shares/day)

Min Up from the Open=-0.05 ($)  Min Up from Open = -$0.05

Max Up from the Open=-0.01 ($)  Max Up from Open = -$0.01

This time we are going to backtest to see what happens if we hold this trade for 10 days; exiting at the close after 10 days.








Figure 1: The new OddsMaker configuration window with expanded backtesting ranges

 

The results are quite compelling.




 



Figure 2: The backtested results using the expanded ranges of the improved OddsMaker



Compare the results above (Figure 2) to the results below (Figure 3) which show the backtest before the enhancements in time.


 






Figure 3: Results from the previous version of The OddsMaker



The previous version allowed a maximum hold of 1 overnight period (i.e., until the next day's open).  Going farther in time simply gives the trader more confidence to see the trend.  

Conclusion

We've made this improvement based on our customers' feedback.  Traders cannot afford any blind spots in their trading and their tools should reflect adjustments they make based on alerts, filters, or even timeframes.  Now it does.  The ability to hold a position longer gives a larger set of traders with longer time horizons the same ability to ask better questions of their trading plan. The enhancements to The OddsMaker also shows intra-day traders other risk and reward scenarios, so that a trader uses probabilities instead of ego to make decisions.

Related Article

Swing Strategy: Reversed MACD Crossover System



Monday, March 09, 2009

Scans that Feed the Bulls & Bears on FOX Biz

This post is for @TALENTED BLONDE who posted on Twitter this morning, 


I decided to feed her a possible storyline for this afternoon, developed by interacting with the StockTwits crowd the last couple of days.

It goes like this version of a Harper's Index: (Data as of 1:50pm EST, Mar. 9, 2009)
So given that there are no high flyers in the air, I came up with one, new definition of what the best of the rest looks like:

  • NFLX - NETFLIX INC
  • CECO - CAREER EDUCATION CORP
  • HANS - HANSEN NAT CORP
  • CYCL - CENTENNIAL COMMUNCTNS CORP NEW CL A NEW
  • DSP - SP ACQUISITION HOLDINGS INC
  • TNDM - NEUTRAL TANDEM INC
  • GLD - SPDR GOLD TRUST GOLD SHS

These stocks all have a Maximum Current Debt of $5M (million) and a Minimum Market Cap of $500M (million) and are ranked by the highest amount from their open today.

Hope it helps.

Friday, March 06, 2009

Follow This to Find the Bounces in the Market Ahead of Everyone Else

Across the Twitter comes all sorts of traders trying to guess where this beast is going.  Of course the goods ones just size up the chart and let it tell them what's going on - using their risk management skills to live and see another day.
QuantBot @day54 oh, now crammer is calling bottoms since hes helped blow up everyones accounts? LOL $$
Plus I had some good IM posts with friend Andy Swan asking what event might serve as a catalyst for a turnaround?  I said just let GM fail and give the market the red meat it wants and America the chance to have new companies step in and build new, clean vehicles.  Yeah simplistic. Something said over a cocktail.

The real trader response: "Whatever 'It' is, I'll believe the bounce/rally when I see it [on the chart]".

So let's build something in Trade-Ideas that can monitor what a bounce looks like.

Candlestick Version

Here's a quick and simple set-up of how a candlesticker would look for a bounce.  Tinker with the filters to better model your trading universe.

"15 Minute Bounce w/+ Market Direction" - http://bit.ly/JgiLC

Important caveat for me: Now more than ever if you are hunting for anything resembling a stable bounce, make sure the markets are in your direction when the alert happens.  Thankfully Trade-Ideas includes these directional filters for the S&P, Dow, and NASDAQ on multiple timeframes.

Another way to hunt for the bounce is to look at Moving Average crossovers - either on day periods or intraday periods.

Moving Average Crossovers Version

Here's a quick and simple set-up of how a MA crossover would look for a bounce.  Tinker with the filters to better model your trading universe.  This also uses Trade-Ideas' market directional filters.

"15 Minute Bounce (20p MA over 200p) w/+ Mkt Direction" - http://bit.ly/10kR0v

Click on the shorten links to these strategies.  From the browser that opens take the http:// address and import it into Trade-Ideas PRO using the Collaborate feature.  Then begin applying your risk management rules in The OddsMaker to see what odds you have in making profitable trades.

Believe me these will come in handy when whatever event you decide heralds the turnaround eventually translates onto the charts.  Happy hunting!


UPDATE: As if on cue - minutes after posting this message the markets stage a nice 30 minute rally into the close, Friday, March 6, 2009.  This being the best explanation I read:
thehawaiitrader Classic... bears don't want to hold into weekend, hence cover.
These strategies all started popping into the close - proving they'll not only catch THE Bounce, but the smaller bounces too.  Nice.


Wednesday, March 04, 2009

How Twitter Put 2 Partners Together: The Sum Greater Than Its Parts

Thanks to Finz.tv for the chance to talk about Trade-Ideas.com in a recent interview.  It all started with Twitter.

Twitter is an amazing tool.

I hear it explained in many different ways. The most popular description - the one cited by its founders as a way to describe what you are doing in less than 140 characters - doesn't explain why I use it.

I explain it to those not using the tool that it is analogous to be a fly on the wall to the most interesting communities you otherwise would never get the chance to witness. I like to follow thought leaders in various domains - this mainly includes traders but by no means is this exclusive to just those in the markets. I follow chefs, artists, venture capitalists, and of course @THE_REAL_SHAQ. Many of these people actual sound-out concepts they are forming in their world on Twitter. They do so to get some initial feedback that often serves to further finish their original idea into a fuller thought. Often times the Twit happens first and the blog post follows later. Regardless it is entertaining and enlightening to be there at the first instance of these 'brain droppings'. Just clean your shoes often.

Note: I gave a presentation on Twitter for our Annual Partners meeting in San Diego which you can view here.


Twitter put me into contact with @TraderAlamo and @JeffreyLin, the founders of Finz.tv, and what started as reading Twits blossomed into a lunch and taped interview in the Meat Packing District of NYC. How could such connections have occurred in the past at this kind of speed? Impossible unless serendipitous. Beyond the opportunities that lie ahead for our entirely complementary goals, there's the value gained from interacting with really talented and interesting people for which I'm thankful.

Here is the interview:

Trader Chat: Interview with David Aferiat of Trade-Ideas.com

(Transcript and comments included at the link)


Tuesday, March 03, 2009

Your Trading Plan Benefits from My Visit to the NYC Traders Expo

Our news is your news.  What's happened over the past week at Trade-Ideas can impact your trading plan, how you use Trade-Ideas PRO and its tools, or at least give you a new place from which to gather great market insight and a continuing trader's education.  

NYC Traders EXPO: 2 Surprises

I came away with 2 observations about The Traders EXPO this year:
  1. There were fewer big name exhibitors at the show.  E*Trade was completely absent and there was no OptionsXpress either.  Several large firms opted for smaller booths or booths just behind the front row (TD AMERITRADE, Scottrade to name a few).  One contra-observation to this theme: an explosion in random, out of nowhere Forex brokers - you'd think everyone who left to dabble in real estate has back to the markets to kill themselves learning Forex.

  2. An unexpectedly larger audience attended The Traders EXPO than in years past.  This was rather pleasantly surprising - especially I'm sure to the EXPO organizers.  It was one of the busiest events I can recall over the past 6 years.  I believe many people (as eloquently expressed by recent Schwab commercials) are upset at how their money is being managed for them and seek a greater amount of control over their savings and invested capital.  That's why I notice more of an emphasis on such "take over the helm" kind of tools as advertised recently by  TD AMERITRADE and ongoing (somewhat) by Scottrade.
Highlights: StockTwits

The event always provides opportunities to chat with existing partners as well as meet new ones.  This EXPO did not disappoint. One of the highlights was a very impromptu gathering by fans of StockTwits!  Tim Sykes, a couple of Kevins, an intern from StockTwits (who I understand has since found a better-paying gig), and JasonRaznick.  It was great to connect with good people who understand the markets and make their living (or hobby) there everyday.

Some of us stayed for the photo op:















Highlights: AlphaTrends

Another highlight from the event was the chance I got to sit in on Brian Shannon's presentation, "Multiple Time Frame Analysis Techniques" based on his recently published book, Technical Analysis Using Multiple Timeframes.  Here's Tim Bourquin's interview with Brian since I could not find the video of his actual presentation.  See his regular YouTube videos here.

Since I am in the middle of reading Brian's book, the presentation was very impactful at bringing home many of its lessons.  I was glad I made it for the whole thing.

Other Highlights

I had great meetings with TD AMERITRADE, Need to Know News, Pristine, AcquireMedia and a few other individuals that I met outside the event.  One such meeting was with a trader from Ohio who calls himself SpyderTrader.  He and I had several cocktails at Merchants Cigar Bar downtown while he discussed his profitable trading strategy that he documents and explains in detail on EliteTrader.  I've made a mental note to do what you should do when you come across someone who explains the approach to the markets: model it in Trade-Ideas.  That's what I plan to do when the world slows down for a second.

Take a look at his posts under the thread Equities Journal and his profile.