Learn To Take The Loss

Wed Feb 13, 2013 11:52pm

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One of the hardest things to do in trading is take a loss. This is what makes the game so hard as you will be reminded often that you are wrong. Then when the hope strategy doesn’t work it creates a mental blow that leaves you offering excuses as to why it didn’t. But after learning to take several losses you will find that losses are some of the best teaching aides out there and in fact can be rewarding. Aside from studying and learning why it was a losing trade, it will create a mental relief as you are out of the trade and can reinforce your discipline or strategy as that loss becomes a bigger loss. As many traders say, all big losses start as small losses.

Today I took my loss in an Amazon (AMZN) trade. AMZN is a stock I like to trade with options as they are liquid, offer weekly options, and the stock moves. I don’t want to go into much detail on the strategy here but want to keep this post more about taking losses. On 2/12 I took on a bearish position in AMZN via March 260/255 Call Diagonal for a 2.45 debit (max risk to upside of $740.00). Trade order entry shown below:

I took this trade while watching the 30min chart and I was looking to take advantage of anticipated downside but still bullish AMZN hence being on the call side of AMZN and long the March Call with weekly rolling capabilities. Anyway here is the 30min chart I was looking at with notes:

So with this action I liked the idea that we would retest those 2/7 lows around 255 and this looked like a good place to get long AMZN according to the daily, overall the Call Diagonal was a strategy looking to take advantage of a pullback in order to get long.

So what happened? AMZN came out with several news bits this morning of minting currency, playing its cloud in cars, and expanding a content licensing agreement with CBS; regardless it was all bullish news that had AMZN gapping up Wed morning almost 3 dollars. My thoughts were of course “why not as I just put on a bearish strategy” looking for a gap down or selling to 255. Right away I thought “all this news appears bullish for AMZN so lets see how it handles the opening gap?”

As stated in a previous post I was big on the 260 level for AMZN. Another reason for this bearish position was its inability to hold that 260 level on Tuesday 2/12, so this was in focus for me. Seeing that we would gap above this level left me feeling uncomfortable with my position and looking at how it handled that news. Concentrating on a scaled down time frame, opening volume was bullish and the 260 level wasn’t even breached. This told me I just need to accept the loss and I was wrong. Below is a 30min and 5min chart:

It appears that this news from AMZN coupled with its continued selling since earnings was the catalyst it needed for further upside and it ripped through the day creating a nice daily chart. Below you can see my order entry/exit orders:

I ended up taking a -$85.00 loss on this trade (per 1-lot, -34.6%). But watching AMZN price through the day made a losing trade into an actual win from a mental capital standpoint. Here is an EOD Risk Profile of the current trade, currently showing a loss of -$304.98 (-124% debit, -41% risk). As you can see by the low/high red dashed lines not even a 2 sigma move to the downside (low probability of happening) would put me at my target of 255:

I cut the loss realizing I was wrong in my thesis and ending up cutting it before it turned into 3.5x the current loss. To me this is near a win as when I first started trading I would have turned this into a hope strategy (which it could still come back down). I have learned through several blown accounts this doesn’t work and learning to cut the loss when you realize you are wrong from your initial analysis is the right strategy.

Now when I look back at this I ask myself “would I take this trade again?” and the answer is yes I would. This just turned out to go against me with maybe some news catalysts & no anticipation of AMZN or some overall market weakness. I preserved capital to move on to another trade or get back in AMZN. If there is one thing I have learned through time it is the ability to realize I am wrong and learn why. There are just some things you can’t control, accept your risk going into a trade.

Trade Adjustment – AAPL

Tue Feb 12, 2013 6:53am

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AAPL saw another decent gain yesterday making it 5 days in a row of higher highs, higher lows and positive closes. The best action on a trending basis that we have seen since its selling off the high of 705.07 set back in September. From a trading standpoint I believe the push above 460 on Feb 7th was big. We came below that level during the day and closed above it and the 10EMA on volume 17% above its 50SMA of volume. Today saw us run into the long-term trendline from the September highs. Some of Mondays gains may be attributed to the news of the iWatch or the anticipation of Tim Cook’s presentation at the Goldman Sachs technology conference at 10:15 EST. Below is a current chart of AAPL with notes:

I have stated with reason in a previous post that I am currently long AAPL via options, specifically a March Broken Wing Call Butterfly of the 460-480-490 strikes for a 4.25 debit. With today’s unknown words of Tim Cook and the recent move we have seen (8.5% in last 5 days), I am expecting some stalling or slight retracement. But like we have seen in the past, selling can ensue. I do believe we have seen a low at least until next earnings but I also respect the fact that we are below that trendline and declining long-term moving averages. While I anticipate we will break above these negative technicals, today I adjusted my trade to allow for some selling while still being happy with current gains (+72.4% before adjustment).

The trade adjustment was adding the Feb/Feb4 460 Put Calendar for a 1.60 debit. I liked this trade in that it was cheap and it took full advantage of that 460 level mentioned above. Below is a 30min chart which does not look bearish at all to me. I still have those yellow trendlines on there from the daily but look at the highlighted blue boxes. These intraday breakouts are supported with volume.

Below is my order entry and the new risk profile set for AAPL:

While this adjustment changes the characteristics of some of my Vega (going from negative to positive) I am happy with the more neutral delta (8.65 to 0.71) and increased theta (3.27 to 17.14). Also this is more of a play on direction than greeks, which are important when playing delta neutral or income strategies.

Charts Posted – Fri 2/8

Mon Feb 11, 2013 8:26am

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Below is a list of charts with notes I posted to the stream (chronological order) during market hours on Friday 2/8 (except for INTU & JCI posted pre-market). You can also see these on my profile at Chartpin.

1) INTU – at an important level, looks vulnerable, lagging RS & lg selling volume, earnings Feb 21 AMC

2) JCI – weakening industry/mkt performer, hit on earnings, closes below lows of >Avg volume up days on >Avg volume

3) GES – big gap above 28, inverse H&S pattern, >14% short float

4) MCD – like the reaction/volume as it came back & tested 94 y’day, moving >y’days high today

5) PPO – nice high volume bounce off 200sma, earnings 2/20 AMC, 30.8% short float w/30.6 days to cover

6) MCRS – like the volume pattern and prior 2 days action w/today confirming

7) DLX – nice volume pattern off earnings w/follow thru, low volume pullback to 10ema

8) VCI – hitting 52 wk highs & 27% short float w/28 days to cover

9) PKD – nice b/o of range here

10) UNFI – liking todays move w/intraday volume supporting b/o’s; recently broke long-term TL

Updated – Look At This New Chart Sharing Site

Sun Feb 10, 2013 12:43am

294 views

Back on December 30th I wanted to highlight a chart sharing service with the name of Chartpin. I went on to state how I could not find much information about this new site but I liked what it was doing. Below you can view the original post. Well it has been confirmed by @The_Real_Fly in his blog post that it is the workings of none other than @RaginCajun. Yes I feel stupid as this was the trader I mentioned in my original blog post. When I wrote that post I had no idea who was behind it as you can read that I did research and came up with nothing. I also wrote about why I like the new chart sharing site of Chartpin and why it is especially useful for us traders that may be on the road and rely on mobile for trading and reading about what is going on in the markets.

Anyways I wanted to share the origins of Chartpin and my original post as at the time of writing I knew of the site but not of the origins and where to give credit. Also I wanted to write this as I share my blog post to iBankCoin Blogger Network and just wanted readers to know I did not know that iBC blogger @RaginCajun was the creator of Chartpin and I wasn’t try to pump any traffic but was just trying to find information. Either way I like Chartpin for reasons stated in my original post and I plan on continuing to use it.

Below you can find my original post:

When I was first introduced to trading in mid-2007 I fell in love with technical analysis. While this may not be the method of many successful investors, I was immediately attracted to it as it made sense to me. It showed where the price was at the time and that is all that mattered. Then when indicators could be applied and adjusted through my own preferences that just added to my love for technicals. While I like to include fundamentals as a supporting factor to technicals, it never made sense to me that if a stock had great fundamentals yet it kept trading down then why would it be a buy. Needless to say I like to incorporate many factors in a trade longer than a swing.

When I was starting to share charts and look at charts from others I was attracted to @chartly. This would later become a part of StockTwits, the trending curated site for market information. I do respect what they’re doing as Twitter can be classified as the new yahaoo message boards for pump and dump stocks (depending on who you follow).

Now as a trader that prefers to have the TweetDeck always up, quick reference is important. One thing that bothers me about the chartly function through StockTwits is that you had to click on the link for a picture of the stock. It did not show a picture preview through TweetDeck as shown in the example shown below:

With that, I started to use the TweetDeck picture attachment function through Twitpic. I liked when other traders used this or other photo sharing services as it provided a quick chart reference in TweetDeck as shown below:

With this I can get an idea of the chart I am looking and see somewhat of a picture. If interested I can then click on the picture to see an enlarged frame.

The one thing I found missing using TwitPic was the sense of connection with other market/chart enthusiasts. I was not able to connect charts with those that did not follow me, much like what the chartly function allowed. But like I said I did not like the fact that there was not that quick-reference function as just shown. Through some reading of the @RaginCajun blog , his challenge of the #stockoftheyear2013, and following his Twitter account, I discovered the chartpin site.

Upon further examination I discovered this site to be a go-to site for things I was looking for. It is a site where you can post your chart and see the views, likes, & comments of other traders. Also it has the functionality of the quick preview that I was looking for which you can see that through the previous image from RC. If you click on the image it will enlarge or you can click on the link to see others comments as well.

Needless to say I am liking this application for chart sharing. While I do have some likes I also have some suggestions. Upon looking into chartpin, I find the information too obscure as there is no “about” or anything else on the site. I do see an angel list upon doing a Google search but it is still hard to find information about it. Either way I still like what they are doing, understand that it is just starting up, but would like to create awareness and maybe some suggestions in features I and others may like. I encourage you to check out this site and if you have any other information that I may not know please let me know as I like to what they are providing.

**Please note I do not receive gratuities or compensation from the chartpin site or affiliates but am a mere recent user of their product

Charts Posted During Market Hours – 2/7

Fri Feb 8, 2013 8:59am

507 views

Below is a list of daily charts that I posted during market hours yesterday. Not sure how these ended up during the end of the day but I liked there setup at the time and considered them worth a watch. They are posted in chronological order from when I posted them to the stream along with the message I attached to them. Also I believe these can all be found on my profile at chartpin.

XEL – small bull flag, hammer off 200sma y’day

ESI – beaten down industry, nice b/o, like RS pattern & 50sma cross, 38% short float 10 days to cover

DLB – CwH pattern, sold off on earnings pop, low volume in recent pullback, like stop just below 20ema

GHL – strong RS, earnings out of the way, above 60 tgt 70, 12.9 short float w/12.9 days to cover

NEM – confirming TL break, crossed 50sma & RSavg y’day

LPLA – out w/earnings, nice volume in this run up w/consolidation, chart pattern looks like a serpent

GGG – looking for the b/o to 52wk highs with RS confirming move

INFA – nice beat on earnings w/pos reaction, came into 10ema, target 39

WFM – hammer off rising 100ema/200sma & holding rising 20ema, earnings 2/13 AMC, like that it held 93

Position Updates – AAPL, AMZN, V

Fri Feb 8, 2013 8:28am

526 views

Yesterday the bears definitely had the upper hand in the morning only to see the selling subside and the often seen grind up continued through the afternoon. Much of the excitement was in the afternoon surrounded by none other than news concerning Apple (AAPL). Overall a fun day that is still seeing individual stocks set-up and break out.

I personally am still light in the portfolio. I posted previously about my Amazon (AMZN) and did get filled and exited that position Wednesday as I put a note out on the stream. I exited as I did not like how AMZN cut through 265 on volume so I was looking to take advantage of any up swing by placing an order at the mid-price to which I got filled. Below is my post to the stream and orders:

As I was already out of the position, yesterday saw a move down to 255 and did put this position underwater about -$250.oo give or take but price action brought it back up to slightly positive . Either way I was out so moving on. I did try to put on another similar position for a 15c credit capturing the 245-255 range but never got filled as my entry marked near a bottom in the price action.

I remain in the AAPL position as shown in this post. I haven’t played AAPL in a while and if interested into why I got in it is stated in the linked post. It is a March 460-480-490 Call Broken Wing Butterfly for a debit of 4.25. Yesterdays news definitely helped this position.

Then I put on a short position. Yes I feel like one of these move to the downside is going to stick shaking some further weak bulls. Yesterday I put on a short position via options in Visa (V). It came out with earnings Feb 6th AMC and beat on EPS and revenues. The action in Visa yesterday had me believing a pause or slight pullback is due after a very consistent run as of June 2012. I am looking for a pullback to the 50sma (blue line) which coincides with a gap support area around 154-155. Visa has pretty much been in a basing pattern since the new year gap and I am looking for a pullback to at least the bottom of this base. Also the Relative Strength Average (purple line in blue highlighted box) is beginning to roll over, something we have not since but only once during this recent run.

With this information I entered into a Mar/Feb 155/150 Put Diagonal spread for a 2.50 debit. This position will provide a return of approximately 30% if 155 is hit and will provide near a max return if the gap is filled, all being around next week Friday expiration. I wasn’t too concerned about the greeks when putting this on as I am looking more for direction. But I also wanted to take the greeks in consideration and wanted to take advantage of any increase in IV so the Diagonal gave me what I wanted:

Delta – than a Calendar spread while creaqting profit from downside move
Theta – no big time decay (becomes theta positive w/downside move) as seen with a single call position
Vega – wanted positive vega so that an increase in volatility will benefit the position

Below is a risk profile of the current trade:

Thoughts on Divergences

Thu Feb 7, 2013 9:22am

448 views

When going through the timeline last night I came across a post from @AnneMarieTrades that I found interesting:

“Folks, momentum is SLOWING – it dsnt mean we r rolling over. Observe divergence- but don’t trade divergence. Trade price, & price alone $$”

I always like to look for divergences in price with indicators such as the popular MACD, Momentum, or RSI. When I first started trading I read in books that these can be warning signs. So what did I do? Naturally I traded against the trend and in the direction of the divergence that the indicator was pointing to (often at tops calling for downside). Needless to say I lost more money than I made. Sure there were some hits and the psychological feeling was great but I lost more often than I won.

Then I watched a presentation by Linda Bradford Rashke and she stated that when most people trade divergence they fail to look at the higher time frame. This is exactly what I failed to do and needless to say I was usually trading against what was a powerful uptrend. So if you are trading a daily chart and there is a divergence, look at the weekly and what is that telling you? Same goes if you are trading a 5min, look at the 30min; and if you are trading a 30min, look at the 240min or daily. I am quite certain you will be surprised at how often you are trading against the bigger picture. Sure you may catch a top or bottom here or there but those profits will probably go back into the market to the other side. Now divergences are more of an observation than a trade for me.

Posted below is a daily chart with the Momentum Oscillator, MACD, and MACD histogram (difference below the two lines). While many traders like the MACD histogram (bottom pane), I personally do not use it and instead focus on the MACD (middle pane) by putting the Value as a histogram (purple) and the Avg as the line (yellow). If the histogram (purple) is above zero, then it is a bullish signal. Also I will look for divergences on that histogram alone more so than the MACD histogram (bottom pane). Below is a picture of the daily chart of the SPX, note that MACD (purple histogram) has not shown a divergence like the MACD Historgam (bottom pane) has:

Here is the Weekly chart showing the same time frame, highlighted in blue. I left the lines on price to show as a reference to where they were on the daily:

While the daily is showing a divergence, the weekly is showing a powerful uptrend. While many can trade the divergence or scale down to a lower timeframe for day/swing trades then that is great as there can be some homeruns with a good entry and scaling plan. My goal here was to highlight that higher time frame, no matter what time frame you trade on.

Utilizing Market Comments from Other Traders

Wed Feb 6, 2013 9:25am

299 views

Yesterday was a good day for those that did not get shaken out of the market from Monday’s action. It was probably a bad day for those that got eagerly short in portfolio. Yesterday can be a good example of letting the overall momentum shift before jumping the gun. There were some good comments on the stream yesterday from @HCPG:

If you’re looking for a top, wait until you have no more stocks setting up. That’ll likely coincide with any top.

and from @stevenplace:

$SPY potential broadening top. If anything, is indicative of increase in actual market vol stks.co/q1nI

Below is the SPY chart that is referenced in the link:

I must say that I agree with both of these outlooks. It is too soon to go overly short as there are still stocks setting up and breaking out as mentioned by @HCPG. But as @stevenplace mentioned, there will probably be an increase in market volatility. Personally when I see indices making moves like this at a top I try to think from a behavioral standpoint and right now it is telling me to trade light. Also, I am not one to eagerly short either but would rather have more cash if the market sold off instead of always being involved.

With that, I am still in the Amazon (AMZN) position that I have posted about here. I didn’t need to adjust this as yesterday’s action was favorable. Also yesterday I got back into an Apple (AAPL) long position. This was mostly due to current price action and a posts to the stream from @OptionsHawk :

AAPL – Liked what I saw this morning, involved at $444 via calls, held 10 year trend support for 2 weeks, looking for 510

AAPL’s IV30 down 40% since earnings and near 6 month low, see that as bullish, less uncertainty

The last comment really got me interested. With the drop in IV since earnings and 6 months low, the uncertainty was alleviated. I remember in the past there were several traders calling for 425 and that could be justified by the chart. But sometimes we don’t always get what we want and I am liking the current action in AAPL. Yesterday was a good day for AAPL in that it rallied with the markets, something it has really failed to do in this whole market rally. I decided to put on an Call Broken Wing Butterfly. I went out to March expiration with 460-480-490 strikes for a debit of 4.25.

I choose this strategy because I liked the risk involved and it is a bet that AAPL will at least hit 480 by March expiration. This also takes advantage of one of those 40-50 point rips that we could see in AAPL and then at that point I believe the low in AAPL will be established.

Below is the risk profile for the AAPL trade based on a 1-lot. This is a play more on the direction and not so much the greeks as in an income position. The red dashed lines represent a %5 move with the dashed line in the middle being the current price at 0915 hours 02/06/2013:

Amazon Trade Update

Tue Feb 5, 2013 9:12am

267 views

Back on January 31 I described here a trade in Amazon I took on. I was looking at the weekly chart and saw 260 as a support area as it was a breakout point and I thought institutions would see this as a place to add shares as it wouldn’t be extended here and it aligned with the 10-week SMA. Below is a chart of what I was looking at:

Below is the trade that I put on as I really liked the idea that we would stay between the 260-270 level on any selling with subsequent bounce. It is the AMZN Feb2 255/265/270 Call Butterfly and I was filled at 4.88 ($488.oo being max loss).

Below is the risk profile. It takes full advantage of the 260-270 range and if we saw a run up, would result in a slight profit. But the overall goal of the trade was to take advantage of that range.

So where are we now? The continued selling in AMZN was surprising and I did not expect there to be as much as selling in it as we have seen, especially with the market moving up the prior week. With the overall market seeing selling yesterday AMZN followed suit but held at support at noon and based for the rest of the day. With this action I am right at that 260 level sooner than I had hoped and have an adjustment plan in mind. If we see further selling below the 260 mark I plan on closing the Bear Call Spread of the Butterfly (265/270 strikes) and will be left with a bull call spread. With current prices, this will leave my my breakeven at 260.80 and increase my max loss to $579.00 with max gain of $421.00 if we close above 265.00. The risk profile looks like this (based on 1-lot position):

Below is a daily chart of AMZN with a dotted line at the 260 level and shown to be holding the gap and the 50-day SMA: