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The Cat and Mouse Game of Newbie Traders

by on Dec.07, 2011, under Education

I recently ran across an excellent article by a young analyst at a multi-national bank,  who also trades for himself and was immediately struck by his wisdom and insight, something that many traders don’t ever achieve. With his permission, I’ve reprinted the article below from his site named Streetcoup below:

The cat and mouse game of newbie traders

by Matthew Hagemann

We are here to trade trends on a consistent basis by simply following them. An ubiquitous urge, particularly among beginners, is to predict how markets are going to evolve in a given course of time. In fact, having predictions subconsciously leads to trading them instead of actual market conditions. They become so inextricably enmeshed with a trader’s bias.

If I were to review your trades of a given day, I would probably find numerous trades coupled with little proceeds you got from them. Such activity points out that you have been trading an expectation which failed to materialize. Second thoughts forced you to close a position before the market turned against you big time.

While the market wiggles and you take one loss after another, the experienced trend follower has been staying in his position during the whole time. No action was taken at all, but yet the trend follower ends up with a more advantageous position than the one who is being assertive. Why is that so? That experienced trader listened to the market and is thus convinced of his strategy, his bias, his position, his stop, even himself. Be more convinced of yourself. To avoid fearful closing of trades, you have to know why you are opening a trade in the first place, based on objective observation of price action. What is your rationale for going long or short? Every single trade of yours should be planned out with great care.

The majority of traders who begin with futures trading, choose to scalp out of fear and are so focused on the tiny wiggles that everything looks like an opportunity. We witness this behavior in various trading forums and online chats. What’s happening is subjective trading out of gut feel and fooling oneself with regards to progress made. This getting in-and-out every minute never seemed to me a paradigm for success in the long run. Let me attempt to redirect you to the right path if you feel that you still belong to this majority of self-deceiving traders.

Trading with the trend

 The market is a master in tricking the average person. Since one cannot predict markets – or turnarounds for that matter – another plausible explanation for hyperactivity (besides prediction) is that a trader tries to catch up with the market. He missed out on the easy move down and is now at a disadvantage. Consequently, the only solution that he can think of is to buy into every spike. He is hoping to participate in the move of the century which is supposedly coming any time.

This show turns into real comedy after the market has actually turned around. Now the trader is feeling left out all over again. He subconsciously reverses his habit, and keeps shorting on the way higher. He is playing cat and mouse with the market all day long, only to lick his wounds in the end.

What is a Trend?

We need to acknowledge that markets do not move like elevators, but like waves within a current. Uptrends will always be interrupted by frequent sell-offs, whereas downtrends will witness just as many rallies. What we focus on, is the overall current in the shape of trends because this tells us the path of least resistance.

According to the Dow Theory, an uptrend is defined by a sequence of higher highs and higher lows. A downtrend is a sequence of lower lows and lower highs. Trends become most visible in the 1H time frame. Look at the ES, for example, and you will surely get a clear picture of trends that you can take advantage of.

If a market is still showing a series of lower lows and lower highs, one simply does not go long in this environment. Buying is a much more challenging proposition because a long position will most likely fail sooner or later. This is due to the strong underlying market forces that are able to break support areas sooner or later.

At some point you may be lucky enough to have caught the bottom, but is it worth it? Let’s be realistic. Even if you did catch the perfect bottom, you have most likely exited prematurely out of fear of another sell-off anyway. So much energy is expended on catching turnarounds, resulting in so little proceeds while you could have it much easier.

Trends take time to shift from bearish to bullish. You will notice a shift soon enough once sellers stop selling where they are supposed to and buyers are cracking a significant resistance area.

Alternatively, regard price action from a psychological standpoint: Imagine yourself in the position of the buyer, then in the position of a seller. What would you be thinking in each case? Would you be contented with what’s happening in the market? What would you like to see to stick with your bias? It is a chess game. This thought process is very powerful because it gives you a more objective view on the market and makes you reflect on the price action.

Listen to the Market

Beginners focus too much on the random moves intraday, than the actual trend in the broader perspective. Trade those, and you will witness far greater success. It is evident that a trader gets confused every single trading day anew. Randomness has no logic, so do not seek logic in randomness. Start looking at the forest for the trees. My favorite time frame is the 1H. I do not look at anything shorter term. Random profits also create the delusion of real progress in your trading. You get random rewards playing craps, too. But that does not mean that you know what the dice are going to do at the next roll.

To escape randomness, you must feel comfortable with holding your position over night, even several nights. It is a common misconception communicated among beginners that you need to close your trade within the same day. Trends last more than a single day. They last multiple days to weeks, sometimes months. Why? Because public sentiment does not shift from one moment to the next but takes a long time.

To trade such multi-day trends, you will need to figure out which support and resistance area is of real importance, and observe the price closely at those areas. They will stand out visibly as a trend unfolds and your eye will be trained to spot them by the time. A break of such zone is a potential entry for a new trade. By trading longer term time frame trades, you will not trade randomness, but trends that sustain themselves over multiple days. A welcome side-effect is that your broker commissions sink drastically.

Only take action if you observe clear evidence for a reversal. Otherwise you are better off doing nothing and letting the stop-loss order work for you. A stopout should happen where the original reason for your entry is no longer given due to objective observation of price action – not your gut feel.

I hope you enjoyed and take to heart Matthew’s post. It’s excellent advice for any trader. You can follow Matthew at http://www.streetcoup.com. He has many other excellent articles.

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Two Sectors Worth Watching

by on Mar.14, 2011, under Market Commentary

One of my favorite activities when I’m doing analysis is to track various sectors, and the stocks within, as I start to see movement in their relative strength. Although I have many tools to set up watch lists, Finviz Elite has become one of my favorites due to intraday pricing and quick pop up charts. I can set up an unlimited number of portfolios that I can quickly scan during the day.

Two groups that have seen exceptional movement in the past several weeks have been the solar stocks and natural gas stocks. Although energy stocks have been one of the strongest sectors in the market this year, even allowing for the sharp sell-off the past week, solar stocks which tend to generally follow to some degree, have been getting annihilated. Natural gas stocks have performed very well considering natural gas itself has been relatively flat the past month.

Solar stocks have recently been hurt somewhat by certain legislation and changes in reimbursement policies in certain European countries. Because of that, certain companies have lowered guidance in the near term. However, it’s hard to believe that legislation in a couple of countries has accounted for the drastic sell-off we’ve seen across the board. As you can see from the chart below a portfolio of most the well known stocks is down nearly 19% in less than 30 days.

For a larger image – http://screencast.com/t/wbmEvfduohBt.

My thoughts on this sector are several: What’s causing this extreme dichotomy in this sector versus energy stocks in general; Some of these stocks are nearing or are at intermediate support levels; With potential nuclear problems being manifested in Japan at the moment, will this help revive interest in this sector. Therefore is it time to be doing some selective buying in this sector for a potential bounce or are solar stocks just the leading sector in a potential correction in the entire energy sector.

One sector that has been improving in the energy sector is natural gas stocks. Just a few of many that I’ve been following are below:

Click here for larger image – http://screencast.com/t/qK6PSOO1JNlh 

As you can see this portfolio was created on the same date as that of the solar sector above, but with drastically different results. Even thought the SPX is down approximately 3% this sector has risen nearly 6% in the past several weeks.

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Fed Policies Set to Decimate Poor and Retirees

by on Dec.06, 2010, under Editorials

The Federal Reserve’s monetary policies have no doubt been a positive factor for the stock market. We’re barely a month into QE2 and already there is talk of unlimited QEs to come, if necessary to inflate the economy. But little has been said about about the ugly consequences for the poor, not just here, but worldwide and those retirees on a fixed income due to steep increases in commodity prices.

The past six months has seen one of the sharpest rises in commodity prices in history while at the same time interest rates have been pushed lower and lower so that even retirees with some savings, which most tend to invest conservatively in shorter term instruments, have seen their incomes drop considerably. Can any advisor tell their elderly clients that they must pull their money out of short term bonds and CDs, the traditional refuge, and put it into the Russell 2000? But even this assumes they have some discretionary money to invest. How about those who are locked into fixed payments via Social Security and perhaps a fixed pension payment?

The net result is rising commodity prices, while affecting everyone, has a particularly adverse effect on those on fixed incomes. According to the latest Bureau of Labor Statistics the average consumer unit, spends 12.4% of their income for food shown very well here at Visualeconomics.  Now two important things to consider here – these results are based on prices over a year old and notice that the number is based on an average family income of nearly $63,000. Must be the banker salaries skewing the income numbers because I know plenty of families that exist on much less. The result is that even before the recent skyrocketing of commodity prices some families were already spending in excess of 25% pf their income on food.

Now let’s talk about about rising energy prices, which affect everything from home heating oil, elctricity cost, and perhaps most importantly gasoline prices.  Wholesale gasoline prices are up more than 25% since mid August. Not only does this have a more direct impact upon poorer and fixed income consumers, but also indirectly as these fuel costs are translated into higher costs for nearly everything farmed, produced and transported.

There is also the indirect costs to our economy of increased health care expenses since as food costs go up, those who can least afford it switch to less healthy foods, encouraged to do so by our government. In a recent Newsweek article it addresses the social divide we now have in this country based on food.

We haven’t even began to talk about the ramifications on the poorer economies of the world where often food can eat up 50% or more of their budget. The UN’s Food and Agriculture Organization is predicting the food import bill could surpass one trillion dollars for the poorer countries. Here is a FAO food price index chart showing the dramatic increase in food prices. If you remember, it wasn’t long ago that there were riots in many parts of the world over food. Guess what, the prices are higher now. Is it long before we start seeing them again and pictures on the nightly news of people starving?

Here in our country, the big debate is about extending tax cuts. What about the the most regressive tax of all, higher food and energy prices for the people who can least afford them. Who is lobbying for them?

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Higher Move in Interest Rates Not Necessarily Bad for Market

by on Mar.29, 2010, under Market Commentary

The stock market, as we all know, has made one of its quickest and largest recoveries ever in history, over the past year. This move has been aided in great part, by an abundance of cheap money. Since the Fed and the Treasury have turned on the spigots, standing in front of this uptrend in hopes of a reversal back to newer and lower lows, has been an exercise in futility.

As we close in on the important 62% Fib level on the S&P, as well as several key resistance areas on the DJI, we are starting to see signs that the market has become over bought in the near term from a technical perspective. After a brief respite from it’s climb in January, the market has resumed it’s recovery with a vengeance, now having gone nearly 30 days without even a 1% pullback, much less a more serious correction. And it has done this with declining volume throughout the entire move up for the past year. So caution has become the new watchword as traders and investors wait for the so-far, never coming pullback.

The end result is you have three groups of participants in the game now: those who bought into the move in the early phase and are extremely happy, those who have missed a large part of the move up are but are now eagerly awaiting a pullback so that they can get into the game and thirdly, those who think the whole move up is simply a correction in a major new downtrend and can’t wait to pounce once selling begins, hopefully soon, since some are probably already underwater on short positions. Of these three groups, 2 of the 3 are eagerly looking for topping signs or if not finding many lately, reasons why it should be topping soon.

One of the more prevalent reasons I’ve heard lately, besides certain overbought indicators, has been the recent climb in interest rates to a small degree and the expected greater increase as governments all over the world, but especially ours, have a lot of refinancing to do, as well as plenty of new, in our case. So the pervasive argument is that as rates move higher, this will make stocks less attractive. There is no doubt  that we could be close to breaking a 20-30 year general down trend in interest rates, but I think a look at the charts below may surprise you.

US Treasury 20 Year

Click Here for a larger image

As you can see in the chart above I’ve highlighted the areas where the 20 year rates were moving up. You can also see the SPX in the top of the chart and it’s performance while rates were moving up. I can see no correlation in the past 20 years that rising rates had a negative effect on the market. Now obviously at some point, if we reached rates like in the late 70s and early 80s with rates above 10%, then it may become a different story.

Below we have similar results looking at yields on the 10yr notes.

US Treasury 10 year

Click Here for larger image

The net result that  is that those thinking a move up in rates will be  the trigger for a pullback they’ve been looking for may be disappointed. We may certainly get a correction soon, but I don’t believe it will be because of interest rates. Now there are always those that may argue that traditionally when rates move up it’s because the economy is growing.  Therefore it’s normal that the market moves up then also but that this time it’s for a different reason that rates are moving up, more supply than demand. I think we’ll know soon enough.

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Bidu Trade 1-13-2010

by on Jan.14, 2010, under Trade of the Day

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Gold Trade 1-13-2010

by on Jan.14, 2010, under Trade of the Day

Remember to click button to see full screen

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EURUSD Trade 1132010

by on Jan.13, 2010, under Trade of the Day

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Energy Prices Continue to Pressure Consumers

by on Jan.07, 2010, under Editorials, Market Commentary

The recent winter blast across much of the country will only continue the recent trend in energy prices that are putting pressure on an already squeezed American consumer. After dropping dramatically in the latter half of 2008, energy prices, led by oil have, have rebounded significantly aided by a weak dollar.

The increases have been significant, and perhaps more so now than in 2008, in regards to the impact on discretionary consumer spending. Let’s look at recent moves in the past year. Oil, which bottomed at $35 in December of 2008, has now, without much fanfare from the administration or the talking heads on TV, climbed to over $80 per barrel. Crude oil imports averaged about 8.5 million barrels per day in the latter half of 2009.

The result has been that gas prices have made a huge move upward to nearly $2.20 per gallon wholesale in the past year from a low of $.82 a year ago. This is closing in on a 200% increase in just over a year. According to the EIA, we use about 380 million gallons/day in gasoline. Just in direct costs to the consumer, that’s a huge cost increase in the past year when many are already stressed financially. That’s $456,000,000 per day increase out of the US consumers pockets. That’s a lot of discretionary income up in smoke daily. This doesn’t include indirect costs for food products, transportation costs of products, electricity, etc.

Natural gas prices, which were the lone bright star in energy costs through the end of summer have spiked from a low of $2.65 in September to close at nearly $6 yesterday. Though at least our supply situation is much better in nat gas, as more users switch, primarily many of the utilities and recent winter weather, have caused a serious spike in prices in just the past 30 days. So when you factor in that many of the newer homes built in the past decade use natural gas for heating, that’s another hit to the consumer as well as those who use other forms.

Increasing energy prices are one of the most regressive taxes on consumers, affecting those who can least afford them the most significantly, yet not a peep out of anyone in the current administration, who have purposely pursued a weak dollar policy in order to cover our growing indebtedness. We’ve seen a definite move upwards in longer term interest rates the past 30 days which have a direct effect on mortgage rates.

So my question is, who and what is going to lead this economy out of recession, as unemployment remains high, foreclosure levels are at record highs and will probably continue, see here, and now a further squeeze as energy prices are once again seriously affecting consumers pocketbooks. Yet no one is even talking about the effect that these energy prices are actually having on the consumers. The Fed, led by Ben, says they’re keeping an eye out for inflation. I suggest they go to the grocery store and stop on the way home for a fill-up at their local gas station.

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Gold Trade 12-16-09

by on Dec.17, 2009, under Trade of the Day

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BIDU 8-15-09

by on Dec.16, 2009, under Trade of the Day

We’re trying a new format here to help expedite making more posts to our Trade of the Day area to give you more examples of current trades to help you in looking for different signals that we watch. We hope that this will help you in your trading.

We’re using Jing Pro to record short videos of actual called trades so that we can quickly post these on a much more frequent basis. Enjoy and please feel free to leave comments or suggestions that we may do to help you in your trading.

http://www.youtube.com/watch?v=RYuPZh0Eabk

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Links That May be of Interest: streetcoup.com - excellent articles about trading psychology and strategy thewildinvestor.com- has daily stock ...