One of our young traders did a nice job today of rebuilding his confidence.  He started off the month of August on fire seemingly unable to have a negative day.  His confidence grew and he began to take on more risk.  I noticed that when he had his first negative day of the month that he overtraded a bit in an attempt to get positive for the day.  What trader hasn’t done that before   Over the course of the next couple of weeks he overtraded a few more times and gave back a good chunk of his monthly profits.

Today, he drew a line in the sand with respect to his trading behavior.  One, he decided that he would only focus on THE MOST IN PLAY stock of the day.  And two, he would only take trades with very favorable risk/reward (greater than 1:5).  I am happy to announce that he put together a very nice day with a ticket average of around 70.

We were chatting after the close about the trades that he made and whether there were areas he could have improved upon his execution.  This type of post game analysis is very important and should not be confused with second guessing oneself or playing Monday morning quarterback.  The crux of your analysis should be related to sound trading rules that you have established for yourself and whether you executed on these rules correctly.

And for those who are curious as to which stock he traded just scroll down to the blog about our “Best AM Idea”.

This AM I tweeted that VMW was a long if it was holding above 80.  VMW got on my radar last night when I saw an article on the WSJ site that it was investing in the “cloud”.  For those of you who aren’t aware of the “cloud” it is the buzz word du jour with respect to technology firms.  Even if you aren’t a primary provider of cloud technology services it probably would serve you well to throw out a press release or two about how you are helping customers move there as it will cause a nice bump in your stock price.

Buzz words have always been important with respect to short term movements in stocks.  Back in the 90s “B2B” was all the rage.  Then there was “nanotechnology” and in more recent years “alternative energy” firms were just killing it for awhile.  Once you know the key words that are attracting the momentum players attention you should be on alert for trading setups that might occur in a stock that becomes associated with such buzz.

Back to the VMW trade.  The second tweet about VMW observed that we needed to see some real volume come in to confirm the up move above 80, which would be the precursor for a much larger move in the stock.  The reason why volume is important in this particular example is it would be an indication that some major momentum players were moving into the stock and most likely intended to push it higher in the days ahead.  But the volume never materialized and I was stopped out for a small gain when it broke its intraday uptrend.

Syposis

1. pay special attention to stocks on a day a story is released that contains key “buzz words”
2. indentify important support/resistance levels in the stock for potential entry points
3. only lay into the stock if their is significant volume driving it through key inflection points

Truth be told I am somewhat amused each morning when our intern AGray pops by my station seeking our “Best AM Idea” for the Open.  I am a trader and not a predictor.  As a trader part of your job is to identify the MOST important prices in a stock and if a stock touches one such price you are obliged to figure out what trade to make, if any.

This morning before the Open my mentee asked me about getting short EL below 55.  I said to him that seemed like a reasonable idea.  As Bella would say that was an incomplete answer.   What I should have said to him was that shorting a weak stock below support is a good trade BUT what happens if the support level drops and there are a ton of people prepared to buy right below the level?  What happens if EL quickly takes out the pre-market resistance level and finds higher ground?  I probably also should have asked him if EL had a history of bouncing after showing significant weakness.  By asking such questions I would be in effect prompting him to open his mind to a bunch of different trading possibilities.

It is great to come in with a bias and a plan before the market opens.  But please allow your mind to remain open to other possibilities.  If not, you will severely under perform as a trader.

There is a lot of money to be made in a stock that has been beaten down.  Generally, after a stock has been destroyed for some fundamental reason it will have some type of longer term bounce where traders can gather information from its price action over the course of several weeks.  In the case of RIG it bottomed back on June 9th around 42. There was very heavy volume on both June 8th and 9th leading to what appeared at the time to be a longer term bottom.

During the next seven trading days RIG bounced to the mid 50s.  It then traded down to 45.75 prior to bouncing up to the mid 50s again.  In the world of technical analysis this is called a “higher low”.  This higher low was violated two weeks ago on July 23rd when RIG closed at 45.23.  Things were not looking so good.  But the following Monday after trading below Friday’s low it reversed course and closed above 46 on good volume.  This caught my attention.

It made higher highs for two more days but failed at 47.96 on Wednesday.  I set an alert for 47.90 in anticipation of a possible move through 48.  When the alert was triggered this morning sellers rejected RIG at the 48 level the first time it traded there.  But each time RIG struggled close to 48 the pullbacks became shallower and shallower.  Buyer were gaining confidence.

Once above 48 RIG became a Trade2Hold.  The next major resistance was around 52 but based on RIG’s level of volatility I wasn’t really expecting a move much higher than 50 for today.  I took sales at 49.20 and 49.60 and got flat at 50.80.   I  will look to buy my shares back on a pullback tomorrow to around 49.70.

The market had a broad rally on Tuesday.  When we came into the office on Wednesday we cautioned our traders against chasing moves in stocks that could be a bit overextended when the market opened.  Our thought process was to look for safer long entries based on the prior day’s support levels.  I think you probably know how the rest of this story goes.  Most of our traders stepped in and bought stocks too aggressively prior to Tuesday’s proven support levels (this trader included), and were in a position of weakness when the “good” prices were reached.

Why would a trader step in at prices where the risk/reward is not great?  A large part of it is the psychological need not to miss the eventual expected up move.  The problem with this type of thinking is that it removes one of the most valuable trading edges a professional tends to possess.  The amateur retail investor/trader’s behavior can be gamed fairly well BUT if your behavior as a professional begins to mimic that of amateurs then your edge disappears.

By 10:00AM almost every market leader we were prepared to buy on pullbacks had hit their preferred entry prices but many on our desk were unable to participate because they had hit their daily loss limits or were close enough to their loss limits that they were hesitant to buy stocks that momentarily appeared to be weak.  Each of these stocks had multi-point bounces that would have provided very nice chops.

Most well trained traders have great ideas.  They can identify trades that offer great risk/reward.  Almost always under performance will come down to execution.

Basic Principle: If a stock moves quickly in either direction accompanied by a huge surge in volume then all trades placed in that stock should be made on the side of the initial move.

Examples:

MON (11/9/09)

TIVO (3/4/10) (5/14/10)

V (6/21/10)

GS (4/16/10) (7/15/10)

BP (6/9/10)

I foolishly decided that buying NTRS on a pullback to 48.50 this morning was a great risk/reward trade.  NTRS had broken its recent downtrend yesterday and closed at the high of the day on good relative volume.  In my many years of trading this has proven to be a high percentage play.  BUT during the past three weeks I have noticed that strong finishers, whether they trended up or down for the day, were tending to reverse the following trading day.  On several occasions I have even made a counter-trend Second Day Play to take advantage of this pattern.

Nevertheless while reviewing NTRS’ chart last night the 48.50 level looked so good to me that I decided if it pulled back to that level this morning I would get long.  I even had one of our interns include it as the “Best AM Idea”.  Of course the trade didn’t work.  In fact, it was a great short below that level and trended down all the way to the 47.30s prior to some late day buying.

I’m not going to guess as to what underlying factors are causing so many second day reversals but instead will focus on simply making the “reversal” trade as often as possible.  I have started a spreadsheet to track various attributes of the stocks that are trending very strongly on a particular day so I can closely track other recent trading characteristics of these stocks to develop a more detailed trading edge.

I have included a chart below of POT that is a prime candidate for this reversal trade tomorrow.  It would be preferable if it gapped above today’s high and I could short it on a drop below 91 and look for a move down to89.  My only slight concern with this trade not possibly working is that POT was accumulated as part of a general buying wave today in all the Ag name such as MOS, MON, and CF.

I will tweet further details of my trading plan in POT in the pre-market and after the open on my twitter account. @spencermagic

I was trading FCX this morning.  I noticed a clear buyer at 60.90 during the Open.  In the late morning the buyer dropped and I got short.  FCX traded down about 30 cents over the next ten minutes.  It then did a bit of a short squeeze up to 61 before trading down to its opening price of 60.20

From my perspective by far the best trading opportunity that occurred in FCX was one hour later when it clawed its way all the way back to 60.90.  What an amazing opportunity to get short and risk only 10 cents with 2+ points of upside.

Here is why I think this was the best opportunity presented in the stock today.

1. The 60.90 level is not at price such as a whole number where HFTs would be focused on pushing the stock above and below the level, in order to take money from the silly day traders who would be focused on such a level for no other reason than it is at the “fig”.
2. The stock has already proven it can have a significant move off of this price based on the earlier 70 cent down move
3. The risk was clearly defined by the earlier squeeze that couldn’t get FCX to trade above 61
4. The entry price was far enough away from the opening low that even if FCX didn’t break down today the risk/reward was better than 1:5 on the trade
5. There was a clearly defined downside target of almost two points based on Friday’s afternoon resistance of 59

US equity markets are completed dominated by HFTs.  I believe in peaceful co-existence and therefore will focus on trades where I know they are least interested.  They are faster than me so I find trades where speed is not determinative.

I have a fairly set schedule each trading day.  But on Thursday morning  my routine changes as I have a pre-work obligation that changes my schedule.  I generally arrive at the office one hour later than usual and do not run the AM Meeting.  This change in routine has had some fairly negative consequences on my trading PnL.  90% of the money I have lost in the past four week’s has occurred on Thursdays.

I became aware of this pattern last week and was determined to have a positive Thursday today.  I failed.  Reviewing my day has led me to the conclusion that I made two key errors that prevented me from making money.  The first was making too many trades outside of my primary trading stock.  The second was not getting back into my primary trading stock when I had an excellent opportunity.

My primary trading stock was DNDN.  It gapped down in yesterday’s aftermarket on some FDA news.   On the long term chart DNDN was already in a strong downtrend prior to the gap down.  DNDN is a heavily shorted stock.  I viewed the gap down as a chance for many shorts to cover as DNDN had come in about 50% from this year’s high.

When DNDN opened for trading today it had a powerful opening drive up to 29.50.  This drive took it about one point above its premarket high.  Then DNDN very quickly dropped one point to 28.50.  Pretty wild price action.  But it was still above its premarket high so I was not ready to give up on a possible bounce.  A buy program was turned on and it easily got back to 29.50.

As the market began to tank DNDN pulled back to 28.80 but held higher than its initial pullback.  It then traded above its opening high.  I was fairly confident that it would continue to trend higher to the 30.50 area based on my review of the long term chart.  But as stocks are want to do it first had a massive shakeout.

After trading above 29.50 in the next 15 minutes it traded all the way back down to 28.50.  Not exactly what I had been expecting.  I did a good job of managing my risk by lightening up on the way down and not buying any shares back before it reached 28.60.  But eventually it traded below 28.50 and I got stopped out of my position.

I wasn’t down much money in it but had taken some losses in poor trades in two other stocks.  I noticed that DNDN had only dropped 15 cents below the 28.50 level and within minutes had quickly popped back above that level.  So I bid for some stock at 28.52.  Unfortunately my bid only got hit for 100 shares.  It was almost 11:00AM and the market was extremely weak so I passed on trying to buy more shares at slightly higher prices.

Fast forward a few hours later and DNDN slowly but surely clawed its way back to the 30.50 area.  Lesson learned.  Never trade on Thursdays

For those of you who are avid fans of the NBA you have probably heard the stories of how Michael Jordan use to practice as a member of the Bulls.  He was totally cutthroat.  It was not uncommon for fisticuffs to breakout between him and some of the bigger players on the second unit during scrimmages.  He hated to lose that much!

One of our newer trainees has a Jordan like work ethic.  Of the dozens of trainees we have worked with during the past few years he is by far the most fully engaged in learning the craft of trading.  He wakes up 5:00AM each morning to make sure he can be at the office no later than 7:30.  He never misses a weekend video review session.  His daily trading journal contains copious notes, and he has a level of trading discipline I have rarely seen from a novice trader.  During his demo trading he traded as if he were trading live, never violating the basic trading principles he was taught.

I have no idea if he will become the next great trader.  But I do know that his chances for trading success are markedly higher than those I have seen screwing around trading 5,000 GOOG on the simulator, rolling into the office at 8:40, and entering notes into their trading journals as often as BP runs safety checks on their oil rigs.

Coincidentally his name is also Mike.  My recommendation to all those young guns out their who want to trade professionally for a living is to be like Mike!