Archive for the ‘TCC’ Category
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Trailing Stop Loss
In a way, almost every stop loss that is carried with an open position is a trailing stop loss. The price level that closes an open position is generally moved as either price or time advances. I will use a long position in our example. You and I buy a stock at $100 and we decide to place a sell stop below the market to protect our account, in case we are wrong about our investment decision.
Some traders and brokers use a flat percentage calculation for this stop price level. This is a mistake. A flat percentage stop assumes that every stock trades at the same level of volatility. They do not. The average price movement on a daily basis in stocks is about 1-3%. However, there are many stocks which may move on a daily basis more than 5 percent of their daily prices. This is especially true for active low priced stocks.
If I use a flat trailing stop loss of 10 percent, for most stocks, the stop loss would be about 3 1/2 days movement away from current prices. [If a stock moves 3% of its price a day and does this 3 days in a row, prices have moved 9 percent of its price.] This sell stop may be fine for a stock that moves 3% of its price per day, but what about a stock that moves 9 % of its price a day? Yes there are many stocks that move that much of their price in a single day. Such a stock could be stopped out in a single day’s move against your position. You could easily be stopped out, just to watch the stock move back higher after you are out of the trade.
Trailing stop losses are a money management tool not a forecasting tool. Trailing stop losses are called that because they trail behind current prices and move as time or price advances. They are used to “lock in profits”. This means they are used as a tool to protect an account financially. Trailing stop losses are generally kept so close to current price levels that they are easily “hit” during price corrections within a trend. While a profit may be insured by the use of a trailing stop, the use of a trailing stop loss can take a trader out of a major trend rather easily.
This is the problem with the trailing stop. The average market correction easily hits many types of trailing stops and the end result is that the trader misses a potential dynamic bull market by the use of such a money management tool. Traders may point to the bull market in IBM or AAPL, but a strict use of a trailing stop could have taken them out of those trends early in the game.
The use of stop orders to close positions is very complex. Quantitative research focuses on their affects over time and the end result risk-to-reward profile from the trade strategy. Here is what you do to see if your trailing stop loss is working for you. Plot your trail stop on a chart and see if the trailing stop is easily hit during normal market corrections within a bull market. Look at many examples of bullish trends. If you see that your trail stop is easily hit during the typical market corrrection, then you know that you will be taken out of most bull markets very easily. This means you may miss a major move.
www.traderscountryclub.com was created to help you with trading and investing. This site will launch soon and you can learn more about stops of all kinds, as well as other monoey management strategies. The use of trailing stops are a major topic within the education section. Happy trading.
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“I am not just a potted plant.”
These are the words attorney Black used while he was representing John Dean during the Nixon hearings. I have to steal them to make a point. In December, I advised the listeners to the WSS that airline stocks were about to get hot, because of the sell off that occurred in the energy markets. Unlike other hosts, I also advised the audience to take profits in 1/2 the position after the nice price rise in the sector had occurred. I followed up this advice by warning that this same sector would come under pressure as the cold spell created the most recent price rise in the energy complex.
I did more than that. I advised that upon the next price advance in the equity market, the oil stocks would move up with the equity market, unlike former periods. I explained that the energy complex was facing a change in fundamentals and this time the energy sector would advance with the market. I added that the refinery stocks would be the fastest to respond to this change.
Well take a look at the charts. I am not just a potted plant. I have 30 years of trading experience which is something rare for a radio commentator. I have winning streaks and I have losing streaks like all advisors. This time everything fell into place. Good trading and investing for everyone in 2010. Listen to the WSS. You just might like what you hear.
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Are You Getting Ready for Next Year?
The bull market for 2009 has been unusually strong and a trend which has been rather consistent. From a trading or investing point of view, it has been one of the easier price trends in which to participate. Now by no means do I imply that trading is easy. It is never easy. However, the bull trend which began in March has had only minor corrections during the price rise. Bull trends with constant reversals create many opportunities to make a mistake in investing. The bull market of 2009 was one of the most consistent price rises you will witness.
The bearish trend in 2008 was also clearly identified, if you knew what you were looking at in your charts. My question is whether you feel comfortable in looking at a price trend in a stock or commodity chart and developing a trade plan from what you see? If the answer is no, then you need to make that part of your new year’s resolution for 2010. Learn as much as you can about how to read a price chart. If you do, you will be rewarded for many years to come.
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Irrational Exuberance in the gold bull market rally?
Everybody just loved gold. Radio and Television ads continuously pleaded that everyone, even your children, should own gold. And the public rushed in as gold moved above $1,100 and $1,200. Now we will see if they have the staying power to hang on during the first major correction of the bullish trend.
The US dollar is the supposed culprit in this sell off, but I am not so sure. Every market reaches an over reaction point. All trends eventually have a correction, because the last of the eager sellers finally quit selling or the last of the eager buyers finally quit buying. Every bull trend easily reverses as soon as the next buyer steps aside and says “I don’t think so. I’ll wait.” That is what we have now in the gold market.
How far can this decline go? Considering the amount of “new” buyers and investors in the gold frenzy, who knows. Some will come out and sell early, because they have no stomach for the correction and others will try and hold on. It is best to wait until you see a clear sign that prices have stopped their decline. We have not seen a bull market that was built upon such a foundation of hype for some time. It will be interesting to see how this plays out.
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The Big Lie in Trading Education
There are lots of trading educators out there. Some spend days and days teaching the new student all about support and resistance or some other simple concept. I hold three books in my hand that teaches the same amount of material for a fraction of the cost of the course.
Other courses or paths to education imply that trading is easy. Just buy software or attend a webinar and within a few days you are looking at a BMW brochure looking for your next car purchased with your dollars earned on a daily basis. Well you and I know that is nonsense, but there are still so many that line up and sign up.
The transition from “working for a living” that earns a certain income for hard work to trading for a living that offers uncertain income that fluctuates widely on a daily basis is incredibly difficult. But I would reduce my sales, if I were to tell the potential student this was the case. Instead, many course vendors imply that trading is not difficult. Just give them a week and they will have you ringing up profits like a cash register. Well, if that is the case, ask them how many of their students are actually trading for a living after one year from graduating the class.
You would be shocked if you knew the answer. Most organizations do not make such a survey. Why? Because if they had hard evidence of how many, it would open them up for potential legal claims in the future. Hard to make a sales pitch on how easy it is to become a trader, if you know by survey that less than 10 percent of your students actually learn to do it.
Let me make this simple. You cannot learn to trade for a living by taking a one week course! Oh there are a few who will catch on to a methodology and turn the corner and change from being a big time loser to having a small degree of success. But I am talking about the vast majority of the students who are new to trading. “But there are testimonials about students finding success.” Let me tell you about the testimonial game.
Ok. I teach 100 students and they go out and begin to trade. Some of the students will have a great winning streak. Even if the students merely sat in an empty room and watched Lady Gaga videos, some of the students who trade will have a streak of winning trades. It is nothing but a fact of probabilities. Now some of these students will be so excited about their winning streak they will write a letter or send an e-mail to the course vendors. “I made $10,000 in my first week of trading! Thanks for the great education.”
Now the course vendor will be able to post that letter on their website. It is factual, but it may represent only 5 percent of their students. As I teach more and more students, I get a few more letters, but they represent only a small fraction of the total experience by all the students. As you can imagine, they don’t print the letters that say “What a crock. A total waste of my time!”
Now I have taught students in the past and it may look like I am trashing my own industry. In fact, I am merely coming out of the closet and telling the truth about our industry. You are not told about how few people who take trading courses, attend webinars, or buy a boatload of books actually succeed in trading to the level of replacing their income from their “real job”. It is an extremely low number. Just know that and realize that, if I am selling you a course, I will most likely tell you about the few successes and not the experience of the majority.
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Market Update for the US Dollar, gold, and the stock market
I have mentioned various trends for the past several days on the Wall Street Shuffle and I wanted to spend some time updating these points of view.
Stock Market
In regards to the stock market, Dan and I mention warnings that appear from time to time that may change the longer term landscape in the investing environment next year. The current trend is unquestionably bullish and this trend must be respected. Investors may want to take some profits off the table, if they have any, but there is certainly no sign yet that the bullish trend has ended. Long positions are still paying off better than short positions. Once we see a change in that trend, we will let our listeners know the bullish trend may be ending. That is not what we see today.
US Dollar:
I recently mentioned that the dollar index (DXZ09) was holding above the 76.00 level very well and that traders or investors should be on the alert for the possibility that the index could rise simply because buy stops could be triggered by large quantitative funds getting out of short dollar positions. This buying frenzy is taking place today.
The main reason for my forecast was because the Japanese Yen had risen for three consecutive days and that this kept a small lid on the dollar index rally. Any reversal of the Yen’s rally could help the dollar index blast higher and trigger those nearby buy stops. This event began today as the Yen is down more than 150 points.
GOLD:
Dan loves gold from a longer term perspective and likes to hold physical gold. I prefer the futures market to trade the gold and silver markets. WHY? It is simple. Leverage. For less than $5,000 margin, I can control $112,000 amount of gold. If I am right about my market call, I obviously benefit from the use of the margin. If I am wrong, then I get hurt just as quickly. However, with training you can learn to control that risk and profit over time.
I have recently warned our audience about the price of gold. I saw the potential for a change in the dollar and I also was watching the energy market decline. Now for full disclosure. Did I go short gold futures? No I admit that I did not. However, as an advisor (I am a registered commodity trading advisor (CTA) I recommended clients to sell their gold coins, which were at a considerable premium to the spot gold price. Are they happy? A $100 decline in gold has them with a broad smile – at least at the moment. Clients are fickle beasts.
Trends are based upon perspective – not necessarily fundamentals
There are many times price trends make no “sense”. New traders must understand this. The trend of any market is based upon the current fundamentals of supply and demand and the perception of future supply and demand. The perception of the future is often more important than the current conditions. Keep this in mind as you analyze price trends in the future. If good news cannot drive prices higher, then the perception of the marketplace may be that all the good news is already priced into the market. The reverse is also true.
Sometimes a market can price in such bad news that a low is made simply because the news or perception cannot get any worse. This is what we saw in March of 2009. The market priced in the US economy going over the cliff. A change in that perspective created the bottom. It was not a change in the fundamentals per se that was the critical factor. It was the change in perspective.
The comments I make on the program are generally from a trader point of view. I have been a professional trader for 30 years, so that is my perspective obviously. However, I promise to do my best to teach our audience how they can begin to analyze the marekts themselves and become better investors and traders in 2010.
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A Hint of a Correction
Today we actually had a decent down day in the major stock indexes. However, the decline was still minor. If you take a look at the low of the day in the stock indexes and measure these lows from the highs which were made just a few days ago, this decline is between 1 and 2 ATR (average true range). A correction of this size from the highs is the size of a normal correction. In fact, many corrections are much deeper than what we have seen for the past few days. Most corrections are between 2 and 3 ATR.
What is ATR and why use it to measure corrections? If I want to decide if an $8 move in Google is significant, I can’t use a fixed dollar value. Sometimes GOOG moves $5 on an average daily basis and sometimes GOOG may move $10 on an average daily basis. Plus if I am measuring price declines in a bull market, I want the ability to measure Google with the same measurement tool that I use to measure the stock of Apple or the crude oil futures contract. What tool can I use to measure these three very different markets?
That tool can be ATR or average true range. If you want more information on ATR go to www.traderscountryclub.com and go to the Chart of the Day Tab. I placed a free lesson on ATR.
Think of ATR kind of like the average daily range, but price gaps are taken into consideration with the use of ATR. A decline of 1 ATR from market highs is a decline of 1 average daily range. A decline of 2 ATR is a decline of 2 average daily ranges. In this way, when I say the average correction in a bull market is about 2-3 ATR from the highs, this means that in every traded instrument, it is not uncommon for markets to “correct” at least 2 of their average daily trading ranges.
What does this mean for the average investor? The ATR for the SPY is about 1.65 on 11/19/2009. This means that it would not be uncommon for the SP 500 index to decline by almost $5 from the highs in the current bull market. A decline of this size would be normal. AAPL’s ATR is about 2.10. It would not be uncommon for Apple to decline by a litttle more than $6 from its highs and yet still retain the bull market bias. Google stock GOOG ATR is near $8. This means that Google can correct by more than $25 from its highs and yet still be a valid bull market.
Now let’s use this knowledge as we analyze prices. What was the size of the correction in Google in early November? 2.9 ATR. AAPL correction for the same period was a little larger 4.0. Larger than normal, but still deserving of a bullish bias, in spite of the larger size of the correction. The size of the correction in the SPYDR SPY 3.6 ATR.
Keep the ATR calculations in mind as you take a look at future corrections in the stock indexes, stocks and commodity trends. If the reversal from an old high is less than 4 ATR, you have to assume the decline is a correction and not a change in trend. If the correction is larger than 4 ATR, it is time to make a whole new analysis of the trend. There may a change taking place.
We have not had deep corrections in the stock markets for some time, but now you know how to measure them. Not in percent; not in price, but in ATR.
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Just Give Oil the Slightest Reason
Crude oil sits near $80 for the January delivery future’s contract. Gold is running higher, silver is running higher, and many of the other commodities are moving higher as well. Crude oil only needs the slightest push to get the energy sector to set new high prices for the year.
Consumers better stock up winter supplies and fill up the car on the way home. Energy costs are about to go up. All it takes is a little more improvement in the economic numbers and a continued loss in value of the US dollar. So far the stars are all aligning up for higher prices – and it may not wait until 2012.
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Half Way Up the Tree
The high of the Dow Jones industrial on the week of October 12, 2007 was 14,198. The low was made during the week of March 6, 2009. The approximate low price was 6,470. This was a fall of 7,728 points from the high. The high of last week in the Dow was about 10,342 or 3,872 points from the low made in March of this year. In other words, as impressive as the rally in the Dow Jones has been for the past 6 months, we have only gained about 1/2 the amount we lost from the highs of 2007.
They say markets climb a wall of worry. This has certainly been the case for the stock market. Unemployment is at 10.2 percent and most economist believe this number will continue to go higher. The US dollar is losing ground against almost all the major currencies and our estimated deficit and debt is continuing to explode. Wall of worry? It is more like a sunami of worry.
Yet americans are heading to the malls. It is the holiday season and the banks have a whole new attitude. Charge it. Don’t worry. Why we have even lowered our overdraft penalties. We are the friendlier bank you have always dreamed of. Well it was either that or face new legislation creations by chairmen Barney Frank and Chris Dodd. But never you mind americans go charge it.
Americans may indeed heed the call. Sales may continue to be brisk and the stock markets may indeed continue the bull market pathway to higher prices. The only shame is that americans are buying their holiday goodies from salespeople who have Phd’s, masters degrees, or other letters of significance. The person across the sales counter lost their job long ago and although they are now counted by the governement as employed, it is at a wage that is about 1/2 or worse of what they use to make. Come to think of it. That is about where the Dow is now. It is also about 1/2 of where prices use to be. Go figure.
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Higher Energy Costs – The next insult to all Americans
It took a little while before $1,000 gold prices began to become a bargain rather than a potential market top. The same is beginning to occur for $75.00 crude oil and 2.00 gasoline in the commodity markets. Today the US dollar index set a new low. Every correction in the US dollar has been viewed as a selling opportunity in the investment community and this is beginning to have a continued affect on the commodity markets.
Crude oil and other enery products appear ready to set new highs for the year, because the U.S. dollar continues to weaken on a weekly basis. The $75.00 price barrier has become a price of support recently, not a temporary price level set in a stage of short covering. Higher prices appear to be around the corner.
Gold traders have gotten use to $1,100 gold and above. Consumers this winter better get use to higher energy prices as well.
Americans better bundle up, while they wait in line for their unemployment check!
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