Thursday, July 31, 2014

The Big Win

The will to win, the desire to succeed, the urge to reach your full potential... these are the keys that will unlock the door to personal excellence.Confucius

Most new traders dream of making the ultimate trade, the big win that will set them up for life. Perhaps by chance, you just happen to hold a large position in a company that the masses have decided is going to go through the roof, and the price shoots up for no sound reason. 

Whatever the circumstances we all dream of making that big, exciting trade, the killing. Ask many seasoned traders about their biggest winning trades, and they will recount those few times where luck was on their side. Although no story is the same, many of the tales of success concern holding a huge position and being at the right place at the right time. As fun and exciting as these stories are to hear, you must put them in proper perspective. Planning on making a few lucky trades is much like hoping to win the lottery; it may happen, but it isn't something that you should count on. The most prudent way to make money trading is to work at it consistently, and through hard work and persistence, make steady profits.

Profitable trading is carefully planning your entry and exit strategies, your risk control, your money management skills. These strategies will not make you rich overnight, but they will help you make small steady progress over time. Some trades will be winners and some will be losers. Once you develop rock-solid trading skills, you will make steady profits and the odds of hitting that big one will increase with your skills. Eventually you'll see your profits begin to grow exponentially, but none of this will happen if you continue to fantasize about making the big winning miracle trade.


It may be fun to daydream of how the markets will move in your favor and make you a millionaire from a single trade, but that's unlikely to happen. In addition, hoping for such a lucky event is bound to distract you from what you actually need to do to become a consistently profitable trader: You need to learn to trade systematically, objectively, and consciously. Only then will you make the profits you desire.

Tuesday, July 29, 2014

Ranking the World by Relative Strength - 4 Time Frames

Relative strength is an important and often misunderstood investment thesis. In 1998 UCLA professors Narisimhan Jegadeesh and Sheridan Titman did some tests utilizing relative strength over several different time frames. They found a direct statistically significant correlation between relative strength and later price performance up to 12 months later. The most consistent period for defining the initial relative strength was six months.
There are numerous academic and research papers out there, do a little research to find them. Other proponents of relative strength include but are not limited to: Bill O'Neal (I B D), James P O'Shaughnessy (What Works on Wall Street), and Charles Kirkpatrick (CMT) and author of several technical analysis and trading books.
Today I'll rank International markets by relative strength over 4 time frames. Compare to the last time I ran this screen April 10 of this year.  HERE!  The sort is by 3 month relative strength.

Monday, July 21, 2014

Sector Watch

While everyone seems to be concentrating on the S&P 500, the NASDAQ 100, or one of the Russell Indices. These major averages consist of many market sectors and it is the sector rotation that often keeps them moving in one direction or the other. Major averages also top and bottom, sector by sector, not all at once.

Using our relative strength analysis to define over and under weights along with market perform here is how the Morningstar sectors look at the moment:


Ask yourself if you are bullish would you be better off with a major average or a sector ETF representing one of the overweight sectors? And of course vice versa if you are bearish? 

Friday, July 18, 2014

Comparing Yourself to Other Traders

When you are content to be simply yourself and don't compare or compete, everybody will respect you. Lao Tzu
You have been trading for only a short while, let us say two years or less. Perhaps your performance isn't spectacular, but it isn't too bad either. You've made a decent return. Are you satisfied? Or have you been reading "Market Wizards" and reading posts on trading websites, and you can't understand why your performance isn't better. "Why are my profits so small compared to everyone else? I must really be a loser," you think. You have just made an understandable, but fundamental mistake. You have compared yourself to other traders, noted that you aren't doing as well, and have concluded that you are inadequate. Although comparing ourselves to others can help motivate us to do better, it can also be very discouraging in that it tends to be more detrimental than beneficial. Avoid making such comparisons.


Why do we compare ourselves to others? There are a variety of possible reasons. Perhaps because our parents or teachers taught us that we should do better than our peers, and gauging the relative performance of others is the best way to do that. It could be that many times, we don't know what "good" performance is and it makes sense to see how others are doing so as to get an accurate picture of what is acceptable. It makes sense to wonder about other trader's performance. Most novice traders quit within a year. Many are curious as to whether it is even possible to achieve profitability. (It is possible, but it is extremely important to understand the conditions under which consistent profitability occurs). If you are "new" you should know that some traders are able to maintain a consistent level of profitability only after years of hard work and skill building. Knowing that trading consistently is feasible will motivate you. If you know that it is possible to make a profit, you'll work hard because you know that there is a certain payoff in the end. Often, however, comparing ourselves to others can do more harm than good.


Each trader has his or her own personal history that he / she brings into trading. People differ in terms of personality, investment capital, life experiences, and the market conditions under which they trade. Any or all of these factors can influence one's trading performance. It makes no sense to beat yourself up because you haven't achieved a level of performance equal to someone else who may have had advantages that you didn't have. The only person you can compare yourself to is you. If you make any comparisons at all, it should be against your own past performance, not someone else's. You should only examine your past performance in relation to similar market conditions. If you made a 30% profit in the up trending market of the past year, for example, you shouldn't berate yourself for performing less well in prior not so trending markets.


Successful people in all fields avoid making comparisons to others. In the end, the only person's opinion that matters is your own. If you believe you are doing well, then that is all that matters. So when you find yourself comparing yourself to others, stop. Look inward. It is just you, the markets, and no one else. The more you can focus on your own standards, the more profitable you'll be.

Tuesday, July 15, 2014

Emerging Market ETFs - Narrow Range Days

Narrow range patterns come from Tony Crabbel's book, " Day Trading with Short Term Price Patterns & Opening Range Breakout". The NR4 (Narrow Range 4) and NR7 (Narrow Range 7) patterns are quite popular with short-term traders. An NR4 pattern would be the narrowest range in four days, while an NR7 would be the narrowest range in seven days.

Seems as if I have been reading a good deal lately about analysts recommending to people with a 3 to 5 year time horizon to get into emerging markets. I do not know about a 3 to 5 year horizon but here are a few ready to breakout or break down.
Studies and Statistics from Bulkowski (The pattern site):

Screen run last evening against my database of Emerging Market ETFs


Thursday, July 10, 2014

Are You Trying to Become the Ultra-logical Mr. Spock?

The nature of trading demands that you have an objective and logical approach. If you are experiencing extreme elation after a winning trade and likewise extreme disappointment after a losing trade, then you are riding and emotional rollercoaster: Up and Down, Up and Down. Your account balance is probably doing the same thing jumping Up and then Down. Many go the extreme of picturing and trying to become an emotionless being, such as the ultra-logical Mr. Spock from "Star Trek." That's fine just realize it isn't very easy. After all how can you not get at least a little excited after a win and become just a little disappointed after a loss, its human nature, it's natural to feel that way. And that's the point, it is not easy to control your emotions, it takes lots of practice, but it is possible to control your emotions in order to achieve your objective, a logical mindset that is conducive to profitable trading.

Probably the most significant way to control your emotions is to use proper risk management. If you're risking money you cannot afford to lose, or you're risking too much of it, you will feel pressure. However if you minimize the amount of money you risk on a trade (think position size for instance), you'll be able to tell yourself that the actual downside is bearable; you'll know you can easily survive the worst case scenario. It will also help a great deal if you have a detailed trading plan and keep a log of each trade with clearly spelled out strategies for how you entered and how you will exit.

Emotion control and discipline require energy, both physical and psychological. If you are under stress because of external life events such as a death in the family, a new home, problems at work, or with your spouse, that will eat up a great deal of your energy and make controlling discipline and emotions a much more difficult, if not impossible task. Don't underestimate the powerful influence stressful events can have on your life. If you are feeling extreme stress, take a break from trading until those issues are resolved. You will save yourself untold additional hours of stress from the markets and in all probability saved a good deal of money from making careless errors.

If you feel you must perform flawlessly on every trade, you will also feel pressure. You will become easily fearful and disappointed by minor errors or routing trading losses. Accept your limitations, you're human after all, you'll feel more at ease. You can't do more than is humanly possible no matter how much you'd like to. Patience and practice build the skills you will need to be a consistently profitable trader.

Tuesday, July 8, 2014

A Ready to Use Money Management Excel Spreadsheet

I am fond of saying that trading is NOT about being right or wrong! Trading IS about managing money.
To prove this to our members a few years ago, on a percentage of account basis, I presented my trades in a Microsoft Excel Spreadsheet.  Recently I had a request to resurrect the spreadsheet for others to use. This work and trading is from a few years ago, therefore the equities, ETFs, and options have been removed from the spreadsheet. It's purpose was to illustrate money management principles not trading prowess although it turned out to be a pretty good year.


Top right hand corner: Percent of Account Equity you are willing to risk on any one trade and the number of open positions you are willing to maintain.  They are set in this example at 3% of account equity and maximum positions at 6. Your requirements may be different just change those two cells.
  • Beginning Capital =100 which one looks at as a percent.  Columns 1,2,3,8,and 9 are self explanatory.
  • Column 4 is the amount of equity committed to this trade.  100 divided by 6 equals 16.67%.  For this spreadsheet I'm using equal dollar amounts in each position, if you have other means by all means use them.
  • Column 5 is just showing the number of currently open positions.
  • Column 6 is your perceived risk on the trade basis the stocks price. i.e. bot at $15 stop at $13 - Position Risk is 13.33%
  • Capital at risk is column 4 times column 6 - that is the percent of your total account.  A test in this cell makes sure that number is less than the 3% placed above.  If it is higher the cell is flagged with a message.
  • Column 12 takes the gain (loss) and adds (subtracts from previous) column 4 times column 11.
  • Something learned from Victor Sperandeo's Trader Vic books is that any time you move above 100 in the account you remove half the amount above 100 from trading during this accounting period.
If I had set 4 open positions then we would be committing 25% on an equal percent basis.  While this is a manual input here is what happens to the spreadsheet: In column 7 we would have many "Flags".  What this is telling you is that with a 25% commitment you are violating your 3% rule. Something must change, either the 3% or the percent commitment.
This is not to say that the portfolio risk shown (3%) or the maximum positions (6) is correct for you.  I believe one of the problems in this business is we tend to ignore YOU!.
If you wish to download this spreadsheet as seen and make changes to suit your individual needs
Download the Excel Spreadsheet HERE!

Wednesday, July 2, 2014

The Winning Trader is the Disciplined Trader

Discipline is the bridge between goals and accomplishment. Jim Rohn
If you read enough you've probably heard the saying; "The winning trader is the disciplined trader". What that means in its basic form is you outline a specific trading plan and you follow it. Sounds simple enough, however people differ in terms of their ability to maintain self-control and discipline, especially in difficult market environments. In Neil Simon's play the "Odd Couple" Felix Ungar and Oscar Madison illustrate perfectly the stark contrast between the disciplined and the undisciplined. Felix was the neat freak, everything had its place and everything belonged in its place, Oscar on the other hand was sloppy and impulsive. But even though Oscar was undisciplined he showed signs of discipline in certain areas. Oscar was a well known sports writer and he had to show an acceptable amount of self control and discipline in order to put out his column every day. So even if you are an undisciplined person in terms of personality traits you can show discipline when completing specific tasks. And of course we are talking about the specific task of trading / investing in the markets successfully.

The lesson here is that you don't have to be disciplined all the time. You only need to be disciplined when you are putting on or taking off a trade, not during all your waking hours. Just understanding this can take some of the pressure off. Secondly it is a good idea to have a detailed trading plan written down. Specify exactly what signals will tell you to enter a trade and what signals will tell you to exit. Many traders make the mistake of leaving some of these factors unspecified and unwritten, they just "wing it". This approach will cause problems for discipline. When you don't know what to do specifically, that breeds sloppiness which leads to the loss of self control. As an added benefit to writing down your rules and writing down your reasons for each trade is that you create a log, a journal, which over time you can refer back to and learn from. You will be amazed over the next year what you will learn not only about trading but about yourself. I can't tell you how many times I've looked back and said to myself - did I really think that back then?

When you are getting ready to trade make sure your energy level is high and your stress level low. When you are tired and worn out you have little energy left to focus on managing your tasks. Be relaxed, rested, and energized. If you aren't you'll tend to make careless unnecessary mistakes!

It's healthy to be skeptical and overly cautious while planning your trade, but once you have outlined your trading plan, you must execute it with confidence. You can't question it. You can't second-guess your decisions. You must execute your plan as if you are absolutely positive it will succeed. You can mull over its success later, after the trade is through. So don't minimize the importance of self-control and discipline. The more disciplined you can trade, the more profits you'll realize.

Reprint from a May 2005 PrudentTrader Newsletter