If you can sell a Bad Entry trade, DO IT! Don’t think about how much you could have made!

This post is about a general trading error, nothing to do with the Russell 2000, but keeping in line with the theme of my rule here, I’ll use TWM (a 2x Russell 2000 inverse)  to demonstrate what I’m talking about.

Scenario:

You get yourself into a horrible entry trade, which then promptly moves against you. Most likely you were chasing, hoping to ride the momentum. But the stock (or ETF) reverses, and you don’t bail out. Instead you watch it reverse, going lower, and lower, all the time thinking “I should have waited until now to buy it!”. Then the next day, a lucky break! That stock pops back up to where you bought it! However, instead of feeling lucky, you are obsessing about how much you “could have made”, had you just had a better entry, the previous day. So, rather than seeing the true p&l on that trade, you are seeing how much more it has to move, for you to make what you feel you “should” have made from a better entry, yesterday.

Then the stock pulls back, to where you are flat. You don’t bail – no, you still have a lot more coin you feel you need to make… Then it drops down… You hold it, watching it go reder and reder… Then finally you sell, taking a loss, not believing how stupid you were.
More often than not, you then watch it turn back up, and you stop looking at the screen, lest some piece of electronics goes out the window…

Here is this scenario, using TMA over the past 2 sessions:

Does this sound familiar? I bet it does.. It does to me. It’s happened to me many times over, most of the time after trying to chase a position.

This is a rule that I’ve developed for myself, to help me get out of such situations with a min of financial and emotional damage:
If Mr. Market gives you an opportunity to get out of a trade which you now recognize was a bad one, at break even, or even better, a small profit. TAKE IT!!!!!!!!!!! Do NOT (!!!!!) let thoughts of lost profit opportunities, or past day’s (or even hours’) action cloud your thinking – sell it. Period. Just do it, don’t think about it.

THEN, having removed the position from your balance and your mind, look at that stock again, objectively, taking into considering only the relevant price action. And ask yourself – outside of any other considerations (regret, frustration, etc), would I be buying this stock here and now. If the answer is yes, by all means, buy it back. If the answer is no, then don’t buy it.

Now, I know. I can see a lot of you thinking “but I don’t need to sell the stock, I can do that analysis in my head while it’ still on my books.” Guess what? If you could, you’d never yourself in this situation. Do no underestimate the impact that the very presence of a position has on your mental attitude about that stock, and what you see in the price action. This is a concept talked about in “Trading In The Zone”, an awesome book – if you have a position, it is normal for your mind to filter out “painful” information, which means your mind will give much greater weight to the ticks which “agree” with your position, and will cause you to (try and) disregard information which suggests you are “wrong” in holding that position.

If you unload that position, you no longer have to worry about that filter getting in your way – it will be much easier to OBJECTIVALY evaluate the price action, and decide if you should buy the position back…

Well, this isn’t the ultimate truth of the universe, but it is something which I’d argue over a beer…

Have a great weekend, everyone, and let’s have some great trading next week!! I picked up 200 shares of GS into the close, let’s see how that’ll treat me next week… Everything else is cash in my account.

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Hi all,

The PPT hybrid oversold signal does provide for a great opportunity to trade a 1-2 day bounce, and we just saw that, and profited from it. Typically letting the oversold swings run longer is a great way to make even MORE money, however, if the market happens to be overly spooked, after a tepid bounce, we can see another leg down, to another oversold. This is exactly what happened in Aug of last year (current situation in the small PiP):

I got into TNA at the first oversold, didn’t take profit on the bounce, saw that profit disappear into a sea of red, and I didn’t have the balls to add more at the bottom. In the end I made money on the original O/S purchase  since the market recovered nicely, but the lesson here is: taking some profit on the first bounce, and getting out at flat for the rest would have been a winning strategy, allowing me to add without fear on the second O/S.

It is far too early to tell what the current action is telling us. The Bulls, as @chessNwine keeps telling us in his excellent market recaps, are doing an impressive job of keeping the market afloat. The bears, however, are doing an equally impressive job of keeping resistance down trend lines impassable, on most of the major indices. That, unfortunately, has the side effect of, by default, giving us a continued series of lower highs.

Please respect that. I am doing dip buying, but on intra-day basis (like with another TNA buy today) – not planning on putting on any swings (long or short) until we see more conviction from either the bulls or the bears.

My vague, personal feeling (from a newbie, so it’s worth what you paid to read this blog post) is that we’ll go lower before we go higher.

Update: I saw my $TNA buy go +$1, then start to retreat, so I sold out with a profit of just under $100.  Just keeping the day trading impulse happy, while the rest is patiently waiting for an indication of which way we might go, market direction wise.

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Hey all,

If some of you are getting bored of me writing about the Russell 2000, well, sorry – that’s my favorite trading instrument (well, index, TNA is the favorite INSTRUMENT 🙂 ). This is how I’ve made most of my money since I started trading, so there.. 🙂

The PPT oversold trade executed 2 days ago was a work of Swiss precision and beauty – buying on a dip after the day OverSold was flagged was, typically, the sweet spot (not always, but most of the time).

I sold out most of my TNA this morning, just before the jobs numbers, and then I sold the rest plus all my ERX on the pop after the numbers came out – gaining me about 6-7% in 2 days. This is about half of I used to aim for, with O/S plays, last summer, but I’m so unsure about this market here, I’m taking gains where I can get them.

I thought to myself: would I be more regretful if (a) I sold and it went higher, or (b) held, and I lost my gains? The answer is (b). There’s never anything wrong with taking profit, and I needed that profit to undo some stupidity from last week. So even though my trade was up almost 7%, overall, the whole TNA/ERX position, including some left over stuff from before, only gained me about 1.5% portfolio gain. Will be more patient next time, wait for oversold, and buy more, not having an underwater position already, which I was, in essence, averaging down.

Now, looking at what’s happening today:  the Russell futures came close to the overhead resistance which has been building over this month:

840 was my rough target, we hit almost that, so that was also a reason why I sold out this morning.

Following the high open, we dropped quite a bit, to the point where we seem to be, more or less, in the middle of the channel (I’m not an experienced chartist/technician, just drawing lines where I see them).  While the multi-day trend seems to be clearly down, in the short term (hours, 1-2 days), I feel this is a crap shoot, where we’ll go next, so I’m not too eager to go either short or long. Going short Russell this morning, with a stop somewhere above that resistance line would have been a high prob trade. Buying Russell when we get closer to the bottom of the range will be a high probability trade.

Doing anything with the Russell here is, well, a coin flip, and with The PPT hybrid RAPIDLY climbing, and approaching OverBought levels, well, I’ll stay away.  Same logic applies: will I be more regretful if I (a) don’t buy and it goes higher, or (b) I do buy, and it drops? (b) – so I won’t do it.

Last thought – for people thinking “why not just buy and put a stop loss”? TNA is so volatile that any normal/reasonable short term stop loss is very likely to get hit, just from its normal movements, and a big stop loss, when, that’s when my (a) vs (b) comes in. At this point, I want to avoid a bigger loss more than I want to try and squeeze more money out of it.

I see the futures are popping up, just now, both SPY and Russell – who knows, maybe we’ll be making new highs here. But I’ll wait for a definite confirmation of a reversal from the month-long down trend, before committing more money here. Doing 1-2 PPT/oversold trades per month is boring, but can be very lucrative. Can I find my patience again? Let’s hope so… 🙂

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It has been quite a few months since the last time there was any kind of organized group effort to play The PPT over-sold trade. I’m sure we have a lot of new members who’ve joined since that time who might not understand what we are referring to, or what the best approach is. I would like to take this opportunity to give everyone a brief summary of what we discussed to death last summer.

The PPT hybrid has proven to be very effective at flagging local/short term bottoms, via its oversold range value(s).  Two people (myself and @Po Pimp) did quite a bit of work, last summer, analyzing that phenomenon over the previous 1.5 years or so, back testing various approaches – a lot of that discussion can be found in the various PPT forum threads, I invite you to search there if you’re interested in exact details. He and I had slightly different approaches to trading hybrid oversold markets:

@Po Pimp would go long a bull instrument when The PPT hybrid flagged oversold, and would sell it when The PPT hybrid flagged a value which was either overbought or close to it (the details of what values constituted good entry and exit points  were subject to long discussions, and varied from situation to situation, as you might expect).

I had a slightly different approach: in “my” system, I would go long at oversold, and then wait for a  specific return, giving the market specific number of days, selling out at the end, if the goal wasn’t reached. I wrote a number of online back testing tools, available to PPT users, to test both of these approaches using different values for the main parameters. I found that, in the market as it existed until last fall, using my system, the sweet spot seemed to be asking for a 15% increase in TNA, giving it 10 sessions to run.

During the 1.5 years up to the fall, doing only that trade, would have given you some silly return, like 800% (this was, of course, assuming you’d go all-in at the oversold, into TNA, and I doubt anyone would have the balls to do that, so while mathematically correct, this rate of return would practically be unreachable).

There were drawdown, and there were situations where you had to sell on day 10, at a loss, but (going from memory), there were something like 8 winning trades to 2-3 losing trades. That’s right, doing only about a dozen trades in 1.5 years gave you a ridiculous profit. It only required patience, and access to The PPT engine.

Since the bull run which started in Sept we’ve really not seen any “real” oversold conditions, so this approach has fallen aside, forgotten, in favor of chasing an increasingly bullish market. Well, it seems like PPT O/S trades might need to be re-visited.

We closed PPT oversold on Mon, according to the current definitions of what constitutes an oversold PPT hybrid value range. I bought into TNA and ERX today, playing for the O/S bounce. No particular target in mind – I am not going to try for the 15% which has proven successful in the past, but I will try for a more modest 10%. Let’s see what happens… And best of luck to anyone else who might like to do their own version of The PPT O/S trade!

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(I had to re-type this from memory, since the first entry was lost when the browser crashed before the post was saved or published. Arrgg.. Lesson learned – Save Draft every few sentences).

“[investors] should try to be fearful when others are greedy and greedy when others are fearful.” – Warren Buffet

When the market is showing signs of breaking down, it is most natural for traders to run for the hills. Sell their positions, and/or go short. It is normal, and I share those feelings along with everyone else.

Acting on those feelings can lead you to miss out on some wonderful trading opportunities, on the long side. This is, to me, the core and basis of the type of hybrid driven trading we did very successfully last summer: buy at O/S, sell at O/B (or, at least, after a nice bounce), repeat as necessary (I choose to stay out of the ‘short at O/B, cover at O/S’ part of the cycle, which leads me to miss out on making money on the down side, but I sleep better at night for it). It works because (for most part), as Fly says, Nothing Moves In A Straight Line! The market, no matter how bearish, no matter how down-trending, WILL, from time to time, bounce back up. As traders (as opposed to investors), we can and should make money on those bounces.

The Russell 2000, since the highs of the morning after Bin Laden’s death was made public, has pulled back some 5.4%.  With another down day tomorrow (something I’m very much hoping for), the index will most likely get pushed down below its 100DMA and outside of the daily BB, bringing the pullback up to about/over 6%.  On no real news, just a general feeling of uneasiness , combined with May seasonality, and some vague fears about the Eurozone. Hardly anything  new or newsworthy.  Compare this to the pullback RUTX suffered from the back to back Libya and Japan situations: 7.4%.

Add to that the fact that we seem to be, today, in an equivalent of a PPT hybrid O/S situation, and with another down day tomorrow, most definitely will be oversold by EOD tomorrow, and we have the makings of a great bounce play opportunity.

I know, I know – everyone is getting bearish, everyone  loading up on inverses, who the hell am I to call for people to go long, and go long with the likes of TNA to boot!!!!

Let’s assume a realistic worst case scenario: that we are, currently, at the start of a last-summer-like multi-month long correction. Fine – let’s see what happened to the Russell last May:

Hmm… What do you know?? Pushing down through the 100DMA and outside of the lower BB were amazing buying opportunities, for Russell instrument!

Yes, that’s right – at the start of a multi-month long correction, buying into the Russell 2000 when it first crashed through its 100DMA and poked outside of its lower BB were excellent buying opportunities.

Buying the Russell at the 50DMA was a great trade in the past few months, but that’s over, for now. The 100DMA trade is on deck:

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Greetings all!

Overall, an interesting day in the market.  The carnage in the tech sector was extensive, but other major indices did not feel (to me) like they were in a vicious sell-off mode. Yes, a solid down day, but none of the mindless panic selling we saw before, in the past 2-3 months.

I will leave the analysis of pivot points, VWAP, Fib levels, etc to others, I’m going to just look at what moving averages on the main 3 indices we have to look forward to, just below us.  It seems like those are logical support levels, in the absence of anything specific which will cause panic to take root in the market (in which case, all bets would probably be off). Will they work as such here and now? We’ll know soon enough (in the next 2-3 days, I’d imagine). I just want to alert you to them, so you’re on a lookout for specific index behavior, when such an average is being approached.  Even if those averages fail to stop our decline, chances are they might provide a good probability entry for a day/scalp trade.

One support point on a single index is unlikely to stop the sinking of the whole market, but when multiple, different averages on different  indices lines up below us, like they are now, there’s always the chance that each individual index will find its own support level, in more or less the same time, allowing us to hold, and maybe, after some chop, reverse the slide.

The S&P500 :

The Nasdaq Composite:

The Russell 2000:

Personally, I will be on the lookout for how the Russell behaves around the 100DMA and the bottom of the BB, with an eye to trade some TNA, for at least a very short term bounce. The 100DMA proved to be solid support during the Japan situation (the only time since Sept that the 50DMA didn’t hold the Russell up), so I would be extremely surprised if we didn’t get some bounce there, no matter how fleeing.

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