Saturday, January 23, 2016

The Opening Bell Trade: Long the Dip or Short the Pop? Dissecting My $MRO loss on Friday 1/22/16

The Opening Bell Trade: Long the Dip or Short the Pop?  

Dissecting my $MRO loss on Friday 1/22/16

This article is to dissect the tough decision at the open on whether you should be looking to looking to buy the first dip on a stock that's gapped up or short the first pop.  It is important to understand that we generally develop a certain type of bias, be it a correct one or an incorrect one, before the trade even occurs either from our own analysis, what the general public  or market sentiment is, from whatever CNBC says, etc... but this will focus on one thing and that is the action at the open and nothing else.

I want to use my MRO loss at the open on Friday 1/22/16 as an example of this.  I made the [wrong] decision to go long at the open and upon reviewing the trade I can easily see why I should have went short.

I developed a long bias because the sentiment on oil seemed to reverse from bearish to bullish at last for Friday with everyone and their mother touting oil and oil related stocks and indeed oil was bouncing [and holding it's gap up] for the most part that day.  So this lead me to believe that oil companies such as MRO would follow suit and at worse just gap up and go nowhere.  Instead MRO faded 2 bucks or - 20% off its highs for the day at one point, something I totally didn't expect, which goes to show you that no matter what, the only thing you should trust is the actual price action of the stock because that's the only thing that's not really subjective unlike the opinions of CNBC or someone's twitter feed.

Let's keep it simple, MRO was a short because the first 3 minute candle closed red and had a large topping wick.  This is a clear tell-tale sign that the sellers piled on and sold into the first move and the first attempted "bounce" was also stuffed and led to a lower high.  Did those sellers give a damn about what CNBC said or even the fact that oil was holding it's gap?  Nope.

Here's a chart of MRO from Friday 1/22/16 illustrating this:

As you can see the only thing you can truly trust is what's in front you, not what you read, not what you heard, and not even your own personal opinions.  What you see is what you see and that's what it is, and we have to see things objectively as a trader to correctly analyze and made the right decisions.
Now my loss here was amplified due to liquidity issues and not getting filled at my stop out which meant I had inappropriate sizing but in truth I wanted to take a step back to understand that I never should have been on the wrong side of the trade to begin with so therefore I wouldn't be in the situation where I'd have to dump a large long position in a stock that's dropping like a rock with no bids for me to sell into.

Here's another example of a short the pop at the open [and not a buy the dip situation] ZFGN Thursday 1/21/16:

Here you can see the same setup, stock attempts a move up at the bell and gets sold into and then made lower highs.  I also longed this but got filled on the stop out fully and was able to get short and I made good money on this trade.  But again I should have never went long to begin with and I would have been up nicely on the short with a better entry and at a higher price.

As always I want to provide a counter-example so you guys can see the difference.  Here's an example of a buy the dip situation at the open [and NOT a short the pop]: ZFGN, the day before Wednesday 1/20/16:

Now is this ALWAYS the case?  Of course not, there's bound to be exceptions to these examples.  But this is the stock market, nothing is absolute, however we should always take the higher percentage trade to maximize our chances of profiting. Even if a strategy yields a 99.9% success rate, there's still a chance you run into that 0.01% where it doesn't work out, just be mentally prepared for it and don't throw a fit and go on tilt if you implement a seemingly "impossible to lose" strategy and lose money once in awhile.

Again this article is to serve as a reminder to myself to learn from my mistakes.  My strategy at the open has proven to be extremely profitable in all my years of trading (on average I win on 90%+ of my trades at the open) but even then the best strategies will still need tweaking from time to time as the market conditions are always dynamic.  Hope this also helps others who feel like they could benefit from this.  I may make a video on this in the future to reiterate how important this is.



Wednesday, January 13, 2016

More Things that Cause Losses

More Things that Cause Losses

As you know I took a break from posting on twitter the past couple of days just to reset my mindset after a silly loss involving a fat finger.  It was a bad loss but it wasn't horrific however I went from an emotional high to an emotional low in a matter of minutes because of a technicality and I wasn't ready for that so I just wanted to focus on my trading and recalibrate some of the parameters of my strategy.

So I just wanted to do another write up on more things that cause losses again as a reminder to myself to not make these mistakes moving forward to eliminate more ways to lose and giving me more chances to win.

Trading with size after 11AM (including revenge trading):

It's very apparently that the volume after 11AM is clearly substantially lower the volume at the open like 99.99% of the time (barring some random catalyst like a major news event).  When volume gets low, range also tends to get tighter, both of these things combined causes the retail trader to lose edge and market makers with algorithms tend to take over and hence we why see more "controlled", "grinding", or "choppy" action during these hours.  

Note to self: It's very tempting to trade stocks like UVXY which typically has decent liquidity the entire day but choppy, whipsawing trading during lull makes the action very disadvantageous for us. 

Here's an example of a choppy, whipsawing UVXY chart from 1/12/16:

The bulk of my money is made in the first hour (where the edge is optimal for the retail trader because of substantially higher volume and liquidity) and the temptation of finding a "make-up" trade if I mess up the big money, easy trades in the morning is very tempting.  I'm sure this has happened to everyone.  Imagine your niche setup shows up at the open and you're excited and expecting  a nice profit.  Ding ding! The opening bell rings, but for whatever reason you screw up the trade.  You  hesitated and missed the entry or you chased with a bad entry.  You end up making nothing or even worse taking a loss.  Because you were expecting a nice profit off the trade and didn't get what you wanted your emotions get stirred and you start looking for a trade with inappropriate sizing to make this up.  This is revenge trading and 9 out of 10 times, you will turn your no-gain or small loss into a big loss or even a blow up.  

Easier said than done, but the thing that is preventing us from making a clear decision here is our ego.  We're too stubborn to be wrong, so our emotions cloud our judgment and we pay the price.  The correct move here is to understand that the edge is less or perhaps even nonexistent after a certain point and that we must adjust our profit expectations on the day.  With the lower volume and liquidity, we must accept that the result is fair and that even if you're down a few bucks from messing up your niche play at the open, that is the best course of action.

Trying to get long with size on a small cap big mover while it's consolidating (even if it's near the highs) around 10:30-11AM EST:

Back when the market wasn't so poor this used to be a great chart setup but the recent trends show that, aside from a few exceptions, these small cap runners tend to top out and fade to oblivion around 10:30AM-11AM (if a stock consolidates near the highs before 10AM it has a much higher percentage of a second leg because volume and interest is still typically high).  A tempting trade would be to try to get in while it's consolidating closer to the highs thinking that it will accumulate more shorts and break out but these market conditions has really put a damper on a lot of those setups and the majority of them diminish in volume greatly and just fade back slowly on air the rest of the day.  

The correct move has and always been to wait for the breakout and buy dips based on the previous resistance which now should be acting as support rather than let "fear of missing out" (FOMO) goad you into buying during the lull hoping to capture the home run move.  Alternatively, you can still try to buy washouts BUT watch size because of the higher probability of getting dumped on here.

Here's an example on ATV from today, 1/13/16:

Essentially 10:30AM-11:00AM is the "make it or break it" moment for these small cap, low float runners. Since this is when volume and interest fades, it needs a reason to keep going.  Typically, what would fuel a move would be enough shorts getting caught in the morning spike which will lead to a move higher.  If a stock continues to make higher lows and higher highs around 11AM, then it has a much better shot at squeezing these shorts, which brings back volume and liquidity and draws the attention of longs back as well.  Of course, these were more common when market sentiment was better but for now they seem to be relatively rare and for that reason we need to be more cautious when looking for these setups.

Here's an example of when a recent small cap stock, LEI, was able to do just that and ended up running beyond 11AM:

Fat Fingers

Not much to learn from here other than, don't try to multitask while trading (I was trying to talk on the phone while nonchalantly scalping UVXY) and always pay attention to your orders and positions at all times.   Really silly but costly mistake which ruined my day and mindset for a bit.

Hope my thoughts help you guys as well in eliminating more losing trades and habits.  

Until next time!


Sunday, January 3, 2016

2015: A Year of Learning

2015: A Year of Learning

This was a great year.  Not because of profits but because of all the things I learned as a trader.  I've always said that life is a perpetual learning experience and this year proved exactly that.  This was the first year where I had to make the complete transition from trading OTC penny stocks to big boards (NYSE & NASDAQ stocks) as the liquidity in the OTCs evaporated this year.   Since big boards are an entirely different beast, I needed to fully understand the way they trade as the OTC strategies that I spent the previous years to develop, no longer really applied here. Despite being a trader with over 4 years of experience, I had to press the proverbial reset button here due to these changes in market conditions.

The key to successful trading has always been establishing consistency and I feel like I've gotten way more consistent as the year went on.  Overall, I finished green on 87% of the days on the year.  My goal for 2016 is to get that to 95% or higher as I feel that having 30 red days is way too much.  However, I was on my personal best 36 green day win streak from early November to late December and only had 8 red days in the last 108 for 92% green days in that time, so I feel like I'm heading in the right direction there for 2016. 

Here are 3 key points that I figured out after spending the entire year creating a trading journal and logging that greatly contributed to me becoming a more consistent and improved trader over the course of the year.  

Discovering the high percentage niche plays and sizing appropriately into them comfortably.
As I've discussed multiple times on my YouTube videos and on twitter, my main plays are the morning washouts at the bell for a long scalp and any panic pops at the bell for a short scalp, what I like to call the "big money plays".  Most of my money have been made on these and I don't expect this to change.  They are quick and fast money with minimal risks if done right with the correct entry.  I am able to comfortably go in with some decent size on this make the quick bucks and bail.

Size in moderately on the "decent but not high percentage plays".
My next plays were mid-day washouts for a long scalp and mid-day panic pops for a short scalp but with smaller size.  Liquidity is generally lower mid-day vs. at the open therefore to manage my risk accordingly and to protect my gains in the morning I reduce my size on these so that way I don't suffer a horrific loss due to inappropriate risk management but I also don't miss out on making money on these either because I'm still profitable on the majority of these trades as well. 

Discover low percentage plays, plays that cause losses and blowups and AVOID THEM.
This was the hardest part, but a HUGE reason why I became more consistent was because I recognize the trades that kept causing me losses.  I made a note of these and eventually I was able to spot them and just ignore them and therefore not getting myself in the headaches that ensued if I were to enter a low percentage trade that would result in losses and potentially blow ups. As I figured these out, I essentially eliminated one way that I can lose.  Less ways to lose  = more chances to win.  Simple as that.  Here is a comprehensive list of types of trades that caused me to have a bad loss or blow up at some point this past year.

  • Shorting front side of a move: I'm not going to elaborate too much on this, this is pretty obvious and has been talked about by many traders.  Front side shorting is for scalps only, that's it.  
  • Sizing big on midday news plays: It's very tempting to go big on these because of the volatility and the potential for a big move, but the bottom line here is the risk is simply too great.  There are too many factors that are out of your control such as the timing of news releases, halts, market maker manipulation, etc...  Several of my biggest losses fell into this category such as shorting ADXS on that "bad news" in September, the stock ended up squeezing everyone back to new highs unexpectedly.  Now, when a stock randomly spikes or tanks on news midday I just ignore it or play very small.  It's just not worth the headache.
  • Trading into a sideways chart anticipating the big breakout or breakdown: This is also a very tempting trade to take.  Many traders will justify getting in this trade because of a "chart formation" but there's a reason why I always advocate letting the move happen and then reacting to how it trades after that (i.e. let the stock breakout and buy dips, instead of gambling before it breakouts or chasing the move).  A good example of this was BNSO in early November.  Stock seemed destined for a big breakout with a chart that showed a consolidation near the highs and then it tanked.  I took a bad loss on this trade as well and moving forward I will eliminate all temptations from trying to front run any move.  I don't care if it works 9 out of 10 times, all it takes is it not working 1 time and you're going to pay a hefty price.
  • Chasing the Breakout or Breakdown:  I don't care what people say about this but this strategy does not work in the long run.  Again doesn't matter if it works a few times, the times it doesn't work you're going to get screwed and screwed in a big way..  How many times have you attempted to chase a breakout just to have it turn into a fakeout and you got slammed on?  Exactly...
  • Revenge Trading: Forcing size to make back a loss is suicidal for any trader especially when they do it and it works the first few times, which causes the trader to develop a false sense of security that this style of trading is correct.  In the long run this will come back to bite you in a big way.  The way I deal with this once I sense that I'm taking some bad losses and I'm losing control, I just simply leave the computer and get my mind off of trading that way I don't continue to lose more control and subsequently more money.
  • Treating high-institutionally stocks like they are the same as low float small cap stocks: This is something that I figured out on my own this year.  Unfortunately I had to take some bad losses to realize this but I made a few videos stressing that high-institutionally owned stocks are way more manipulated due to the big players involved in it.  I took some bad losses attempting my washout long at the open on high institutionally stocks such as FIT and SGYP in June before realizing that I have to trade them differently.  They can dump further without a bounce or go up forever without a dip and I have to account for that.  The way I trade them now is I simply scale in a lot smaller to account for the fact that they could dump more than I anticipate for a long or spike more than I anticipate for a short.

Objectives for 2016
  • I had one too many "bad losses" and mini-blowups in 2015.  These must be completely eliminated in 2016.  Big losses are signs that stops were not respected, too much size was used in the wrong situations, etc... I will focus very hard on avoiding all low percentage trades (identified above) to prevent this from happening.
  • I will work to reduce the number of red days from 30 days to 12 days or less (1 red day per month only or less).  This ties in with the avoiding bad losses.  I will focus on recognizing high percentage plays and nailing those and ignoring low percentage plays which will eliminate losses and therefore potentially red days.  This will also increase the number of winning days.  I always felt that red days aren't just days where you're losing money, they're also days where you missed out on the opportunity to make money, so swinging a red day to a green day has a pretty big effect on your trading performance.
  • I will INCREMENTALLY increase my size on the high percentage plays.  A mistake I used to do was go in with a gun slinging attitude and get really excited when I saw a big play that potentially could make the big bucks, but this develops a very poor mindset and causes you to assume too much risk, which will result in a major loss if you are stuck in a trade that doesn't work out.  I feel that too many traders are too short sighted and they only look at making money in the short term.  Experience has taught me to realize that we need to develop winning habits in the long term so we can stay in the trading game with longevity.  So rather than going from say 10,000 shares to 50,000 shares (like the old reckless version of me would have done), I will manage my risk accordingly and increase my size incrementally from say 10,000 shares to 12,500 or 15,000 shares, which is still a 25% or 50% increase in potential profits each trade, pretty substantially if you ask me.

All of these goals should result in a bigger and more profitable year overall in 2016 but I will take it one step at a time and not jump the gun.

The purpose of this write up was more-so a reminder for myself so that I know what mistakes were made in 2015 so that I won't repeat them in 2016, but if this helps anyone else out there then that's pretty awesome as well.

Happy trading in 2016 guys!