SFK Trade, Partial Exits and Poker

I received a number of similar questions about the SKF and Poker posts:

How did you determine your partial profit target for the SKF trade; and when do you decide to use a full exit versus partial exits?

I like to use partial exits when major resistance is more than 10 percent from my entry. This happens quite often with certain setups, like oversold bounce and breakouts-pullbacks.

For the SKF trade, major resistance is near the 50 day moving average at about $123. That's my target. However, that's about 20 percent away from my entry. If my targer never got hit, I would not want to give up a 10-15 percent gain. To remedy this problem I use a partial exit at around 10 percent, move up my stop to lock in that profit, and hold on until my next target is hit.

It seems that you were upset with yourself about the "big hand" in the poker post, but you said you had a 95 percent probability of winning. Why is this a bad move?

I confused some of you about what I was upset about with regards to my play that night. It wasn't the intitial $3600 bet I lost. I'll take a 95 percent probability every time. What I was upset with myself about was the $900 I lost after that hand. I made poor decisions because I was an emotional wreck, or on "tilt", because of losing based on a good decision ealier. So I wasn't criticizing my play on the big loss, it was the smaller losses after that hand that I need to work on.

Questions and Answers

What books do you recommend?

I have read over 100 books on trading and frankly, most have been a waste of time. A few that I have liked include The Market Wizards books by Jack Schwager, Entries and Exits by Alexander Elder, Thomas Bulkowski's chart pattern books, Alan Farley's trading setup book (if you can get through the horrendous writing style) and Technical Analysis for Dummies by Barbara Rockefeller.

I would spend more time going through historical charts than reading books. Flip through at least 100 charts every day. Look at past winners. Understand price movement, momentum, sector analysis, volume and patterns.

You don't talk as much as you used to about psychology. Do you focus less on it?

Not at all. These days I focus more on psychology than I do the markets and setups. At this point, trading analysis comes easily to me. It takes me about 10 minutes a day to analyze the indexes and key sector charts to come up with a theme for the next day. The hard part for me, considering I have a ultra-competitive, addictive personality and am prone to taking gambles, has always been the pyschological aspect.

Creating a simple, balanced lifestyle and adopting a Zen-like approach to trading has helped. I also focus more on research than obsessing over current positions. I force myself to let my initial trade analysis do the job, and only exit at my preset stop or target.

Earlier in the year you metioned you wanted to start trading options. Have you put on any trades?

Not yet. I have done some reading and am starting to get a feel for the vehicle. I hope to put on my first options trade sometime this year. I know a few of the trades I have made would have made much more money had I went with an option strategy.

Are you still as bearish on gold as you were before?

I am standing aside the gold trade right now. Remember my analysis was short term (and profitable), when I made my trade. Now we are getting mixed signals. Price action still looks bearish, but I am seeing some indicator divergences in GLD. For instance, RSI broke out recently. Gold stocks like BVN and GOLD are acting more bearish than GLD. These might be better trades, although they are currently very oversold.



What sectors are the best right now?

It's tough to say what's "best", since strong sectors like energy might not currently be good long trades. I'll just list areas that I am watching closely, both for long and short setups:

Energy, Coal, Financials, Steel, Natural Gas, momentum tech stocks, recent earnings breakouts and breakdowns, Railroads.

Question and Answer

I don't have much to say today, so I'm going to use this post to answer questions from e-mail and comments.

What do you think of GTLS as a short?

I certainly would not buy right now, but not sure I would short either. While the it printed a big down bar and the bounce has been weak, the breakdown did not break major support levels. The stock is still in an uptrend.

While the probability of the trade doesn't give a great edge, since the risk is well defined and small, I would not be opposed to using this as a pioneer short trade. A stop could be placed about two points away, above the recent high. I would only make this trade with a small position size.



How far would you wait for a pullback in FSLR?

I mentioned FSLR as a bullish setup requiring a pullback. I actually took a small "pilot" position at 303 today, but wouldn't make a big play until we see a pullback into the $290-300 range.



Does it concern you that MON's OBV is breaking out to new highs?

This was in response to my MON short. OBV has not made a new high since January. I would not have made the trade if OBV was at a new high.



A question related to my TRLG trade basically asked how I define my target with a breakout into new highs.

That is tricky. When buying on the pullback, my intial target is usually the recent high. I'll take some off and then move my stop up. If I get stopped out, I've made a profit. However, I am still in play if the stock moves higher. At some point the stock will become very overbought, at which point I might take off the entire position and wait for another pullback.



What do you think of oil right now?

I believe oil (USO ETF) has become a speculative play that will pullback soon enough. The commodity is very overbought. Historically, this is the point that we see a pullback. However, I am not confident enough to short. I will be a buyer on a pullback to the 50 day MA *and* successful test of that range.



That's it for today. I may do another Q&A post tomorrow. Feel free to comment or e-mail if you have a question.

My Favorite Trading Setups and More (Q & A Part 3)

Since the market is closed today, I took some time to answer some more reader questions:

Thomas asks: What chart service do you use?

Market Speculator answers: I use Telechart. Every evening, I run my scans (breakout, pullback, etc) and flip through charts from my watchlists. Over the weekend, I analyze the best and worst performing sectors, then drill down to the individual stocks within those sectors.

Thomas asks: What are your typical plays--setups that you trade?

Market Speculator answers: I have a variety of setups that I use according to market conditions and time frames. There are too many to name here. For long term positions (an account I don't detail on this blog), I like to trade long term trend pullbacks and buffet-esque value plays. The few days a year I daytrade, I like to use pullbacks and breakouts combined with sentiment and breadth indicators.

The bulk of my trading comes from the swing trading setups. I trade many different setups. I dont' subscribe to the theory that you should have one methodolgy and follow it religiously. I believe you have to adapt to the market environment. Some of my favorite setups are: earnings breakout, breakout-pullback, trend-pullback, momentum breakdowns, distribution setups, bull and bear flags, bearish topping patterns and simple rangebound setups.

Thomas asks: What indicators do you follow closely?

Market Speculator answers: I don't focus a lot on indicators. I mainly look at price, volume patterns, and support and resistnace levels. However, I do like to look at OBV to help with volume pattern identification and strength. I also use stochastics.

Off topic questions:

Brian asks: You used to post heavily about the television shows you are watching. What are your current favorites?

Market Speculator: Yes, I don't post off topic as much as I used to.

I recently got hooked on the HBO series The Wire. Best cop show I have ever seen. What I love about it is its not black and white, good versus evil. At certain points in the series, I've felt more of a connection with the gangsters than cops and politicians. One of my all-time favs.

Lost is also one of my all-time faves. Love the blend of sci-fi, philosophy, human psychology, mystery and drama. The show keeps getting better.

I watch How I Met Your Mother simply for one character, Barney played perfectly by Neil Patrick Harris. The character is "legend-ary".

Okay, I have to admit, I watch American Idol. I don't know why.

The only other reality show I watch is The Ultimate Fighter. Some great fighters have come from that competition.

Other favorites that are either not out right now or I watch via DVD: Friday Night Lights, Curb Your Enthusiasm, Heroes, Smallville (out but I watch the DVD and Prison Break.

A Bullish Divergence in AAPL?

Frequent e-mailer and one of my most loyal readers, Hal B., asked about a bullish divergence setup in AAPL. I don't have annotation capabilities from my current locale, so bear with me as I explain the chart.

I do see a slight divergence that might be used for an extremely short term play. We measure the divergence by taking a look at the two february lows, both of which printed long tail candles. If you measure both RSI and Stochastic readings at those levels, you will see a "higher low" readings. This creates a bullish divergence.

While the divergence could be used for a short term play, the overall trend in both price and volume is still down. OBV stinks. Volume is not diverging with RSI and Stochastics. Today's nice up move was not on "bottoming" type volume.

Thus, until AAPL mounts a major resistance level and has an uptick in upside volume, I'll stay out of the divergence trade.

Fibs Don't Work For Me (Q & A Part II)

Continuing the Q & A series of posts:

Suresh asks: Do you use Fibonacci retracement levels for your break-out pull back and earning set up trade ? (I remember seeing DCO was at at 38% FR level when you pulled the trigger)

Market Speculator answers: While I do trade retracements (pullbacks), I do not use Fibonacci numbers. Rather, I look to enter on orderly pullbacks to support.

Before I use a system, I demo trade and analyze my results. Over the span of three months I made over 100 trades using Fibonacci retracements. I also demo traded the same stocks using my normal pullback method. While both groups made gains, the Fib group trailed my pullback system by over seventy percent.

This does not mean Fibs don't work. However, I have no use for them in my own trading.

Suresh: Apart from price and volume action, what oscillators/indicators that 'ALWAYS' you validate before getting into a trade?

Market Speculator: See the previous Q & A. Short answer is I don't need any indicators for validation, though I do pay attention to stochastic and obv.

Suresh: On the day before you take a trade, do you check 5-min or 60-min
charts for arriving at the right entry price?

Market Speculator: It depends on the trading setup and time frame. When I trade very short term strategies (hours to 2 days), I'll look at intraday charts. However, for most of the trades I make here, I am only looking at the daily.

The Best Indicator is . . .

Way back in November I asked readers to submit questions for a Q & A session. The response was much more than I anticipated, and even after setting time each week to answer questions, I still have not finished answering half of them. So, rather than answer them all in one post, I am going to start posting my answers one at a time.

Jim asks:
What do you believe is the best overall technical indicator to use in trading a stock?

Market Speculator:
Wow, one indicator huh? That's a tough one, although I do like the Zen-like approach of using as few indicators as possible. As the saying goes, keep it simple stupid (kiss). I am a firm believer in simplicity, in all walks of life.

When I first started trading, I was a slave to indicators and probably have dabbled in just about every one imaginable. I have tested some extremely complex systems with mixed results. My breakthough came when I stopped focusing on indicators and zoned in on price and volume patterns, along with support and resistance levels.

These days I only look at stochastic and obv (on balance volume). To tell you the truth, I don't even need them, but they can be helpful in quickly identifying oversold and overbought stocks, along with spotting divergences.

I do pay attention to the following key moving averages: 10, 20, 50 and 200. This is in line with my strategy of watching key support levels, both in price action and moving averages.

I know I still haven't given you an answer yet, Jim. Gun to my head, I would pick OBV, since it is one of the better expressions of volume.

Q & A Session

Taking a que from Charles Kirk, I am going to entertain questions on any topic that is stock, trading psychology, time management, sports or entertainment related. Basically, stuff I've blogged about or that is on your mind. You can send your questions to SinghJD1@aol.com.

The best question will receive a free, trading related gift :)

4 Elements Required to Trade Successfully

I received a question for Tom that many of us have stuggled at some point in our trading careers:

I think I have about 90% of the same stocks on my watchlist (and like you I
spend a TON of time on them), however, my challenge is always the entry/exit!

What tips can you give on the best way to approach this? With high beta stocks I am always nervous of a nasty reversal...we've seen a few lately.

There are 4 elements you must master:

• Idenifying support and resistance. If you are trading in the middle of the range, you will be more suseptible to what seem to be reversals, but are actually just noise in between a trading range. Do not enter if your stock has moved more than 5 percent above support or the breakout point.



• Identifying volume patterns. If you buy a dip on high volume, there's a higher probability of getting caught in the midst of a reversal. Same goes for low volume breakouts.



• Set appropriate stops, based on support, resistance and percentage of your trading portfolio. Even if you take the appropriate cautions, you can still get reversed. It shouldn't hurt when you do.



• Do not trade scared. Trust your analysis and risk parameters.

It has taken me time to master these four elements to trading, and at times I still fall into my old habits. The key is to constantly assess both the technical and mental aspects of your game.

A Reader Criticizes My Non-Technical Impulsive Trading

A reader seemed disappointed with Friday's "not-so-technical" trades. In that post, I said I was annoyed and pissed off by a market making non-sensical knee jerk moves. To take advantage of an emerging pattern (market is up one day and down the next), I went long the indexes on extreme weakness. I noted that I was taking emotion out of my trade decision, ditching my normal setups in favor of the short term pattern. The trade is short-term in nature with very tight stops. A reader responded:

Annoyed? Pissed off? Then you go ahead and you say you won't let the emotions get in way.

Judging by these non-technical trades, I would say you are trading on "tilt" here.

These are the worst trades I have seen you put up yet, totally against your strategy and many other sound trading principles.

While you may get lucky and these may turn out profitable for you, there is nothing more dangerous to a trader's account/career than starting to do impulsive, on-the-whim trades.

Let me address the two main points from this commentary:

1) I am letting my emotions get in the way of my trading by making impulsive trades

I don't know how to get rid of my emotions. I am a passionate person. It would be unhealthy to deny what I'm feeling. While I acknowledged my feelings, I did not let them cloud my trading decision. I based my trade on a current pattern, not emotions. I waited for the sentiment readings I watch to turn in my favor before entering. I placed a tight stop and used half the position size I normally use. This makes for a low risk trade.

2) I have ditched my strategy in favor of "on the whim" trades

I showed above that this trade, while unconventional compared to most of my trades, was not impulsive.

I don't have *a* strategy. I have many strategies in my arsenal, and employ them as market conditions dictate. I do not have one rigid form. Rather, I strive to be like water. As Bruce Lee would say, water is formless. It adapts to it's surroundings.

Be like water.

Note: The blog is experiencing an uptrend in commentary, both positive and negative. I enjoy constructive criticism and differing opinions, so don't be shy if you are in disagreement with my analysis.

Indicators are not the be-all and end-all!

Lately I've received many e-mails and comments asking me why I made a trade when so-and-so indicator was divergent or not giving a buy or sell signal. This comment left by Rey is a good example:

"It looks like I don't see eye to eye with you sometimes regarding going long on stocks that are about to break out with divergance such as MACD, OBV or any others... all the books I have read teaches don't get in on break out if there is majar divergence...what am I missing here?

and also what is your favorit book(I was just layed off work so I got some more time to fill) and what softtware do you use to find and analyze stocks if I may ask..."

As I've stated before, I use indicators as a secondary tool. Sometimes I don't even look at them. I am a slave to price and volume patterns, along with support and resistance.

Earlier in my trading career (if you can call it that), I placed more emphasis on indicators than I do now. If there is an indicator out there that I have not studied or used, I would be surprised. As I've evolved as a trader, I've taken a more intuitive and simplistic approach. As a consequence of viewing, literally, over a million charts, I trust what my eyes tell me. I'm not going to back out of a trade I like because one or two indicators give me a negative signal. Especially when I could probably find an indicator or two that give the exact opposite signal!

That's not to say indicators have no value. I do like to use OBV, Stochastics and RSI (the only three I use regularly). However, I am not a slave to them, and will defer to my own judgment if it tells me to do the opposite of what these computations tell me to do.

That's exactly why I traded GRMN, on the $105 breakout, although there was a divergence. The stock hit $108 today. Divergence be damned!

The four five books that I recommend most are on the top right margin of the blog. It's tough to pick one, but if I had to, it would be one of Thomas Bulkowksi's chart pattern books. The Farley book is good, if you have some background and don't mind reading through dense material that at times doesn't make sense.

I use Telechart for my evening chart reviews and scans.

Reader Question: RVBD

Walter, who always seems to find great stocks, asked my opinion of RVBD.

There is little to dislike about the stock. It's made a nice run after breaking out of it's base at $32-34, is under heavy accumulation (as evidenced by increase in volume during run), has an uptrending RSI reading and has yet to violate any major resistance points. While this is all great for somebody who is "in", I'm not so sure I'd enter right now.

Today's breakout volume is not great comes after a parabolic run. I usually like to enter breakouts that occur closer to base congestion. If I did decided to enter, I would wait for a pullback to$40 and place a stop under the latest pivot point, which would be $36.

Answering Questions About Part-Time Trading

First of all, I would like to let you know that I enjoy your "Market Speculator" blog and find it very educational. After reading many of your posts, I noticed that you prefer not to micromanage your trades and sometimes only check the market a few times a session because of your day job. How do you enter and exit your trades? Do you use buy stops to enter positions or do you enter a position by buying when you get an opportunity to check the market?

I check the market a few times per day, in the morning, lunch and at the close. If I have time while at work, I might sneak in a few more looks. Each time I check in, I take a look at all of the stocks on my watchlist to see if they are at my buypoints. If the stock and market looks good, I enter.

This method works really well for breakout-pullback plays, but not quite as well if I am trying to time pure breakout entries. Therefore, I use buy stops for breakout plays. For example, if a stock is basing near a strong resistance level, I'll put a buy stop above that level. The drawback with the buy stop is I can't monitor the volume.

The key to trading part-time is to do loads of research at night, build a strong watchlist, and stick to that watchlist during the day.

Also, when you exit, do you enter a profit target order or just exit when you get around to checking the market and if the price is good you close the position?

I have a profit target based on technical factors for every trade I enter. I try to stick to the target, but may exit early if the stock isn't acting as it should.

Trailing stop?

Depending on the setup and how the sector is acting, I'll either use a trailing stop, take partial profits as each target is met, or exit in full. Trailing stops work best for trend trades lasting longer than one week.

Any tips you can suggest for swing trading the market and holding a day time job?

Have a disciplined post and pre-market routine. Carefully study market and sector action every day. Pay attention to market sentiment (high/lows, percent above 50 day moving average, etc). Study at least 300 charts per day. This is easy if you have Telechart. Create a daily watchlist based on your preferred setups. Preperation is the key to success as a part-time trader.

Here are some of my past posts on part-time trading, preperation and routines:

Part-Time Trading

Early Rising Part 1

Early Rising Part 2

Daily Schedule

Watchlist

Watchlist and Entry Points

I welcome any questions my readers might have. Whether it's about my trading methods, sports, entertainment, something I've talked about, or anything else that you may have on your mind, feel free to leave a comment or email me at SinghJD1@aol.com

View the rest of my site, including today's trades.