In the game of trading, the hunter (aka trader) is always looking out for runner.  To do that, I like to observe the following:

1) Look for catalyst that may kick-start a runner
2) Find out the story behind the catalyst and see if a fire exists to fuel the runner
3) Find out which direction the runner is going.
4) Track the runner in the same direction it is going.
5) Let’s the runner leads you.  Do NOT try to jump the gun on the runner.
6) Always be mindful that the runner can change direction abruptly and collide with you head-on.  This can be dangerous to your health.
7) Due to number 6 above, one needs to know when to let go of the runner.

Last week, I spotted the catalyst (Pt #1) that kick-started my interest in SKF.  JPM $2 billion losses was a great catalyst.  The story (Pt #2) has a strong scent that reeked of blood and fear.  A strong combination to move a runner.  On top of that, the looming European woes, especially from Greece, added another dimension to support the thesis in establishing SKF as a runner.

Obviously, since SKF is an ETF (ProShares 2x UltraShort Financials); the direction I expect it to run is up (Pt #3).  Thus, a campaign to go long SKF was in order (Pt #4).

So far, we have covered point 1 to 4.

Point number 5 needs a bit more narrative.  Knowing the story and the potential behind a runner is not enough.  I need to see proof.  I need to see price action supporting the thesis that SKF is a runner.  If you see a deer running fast by you; you see a runner.  There is no doubt the deer is running.  Not only that, you know exactly which direction the deer is running to. Now, if you see a deer meandering here and there; do you see a runner?  Of course not.  And if you try to jump the gun on the deer by guessing the direction it will run (if it even run at all); you can be caught by surprise if the deer run (or walk) the opposite direction than the one you picked.

From the beginning of last week, I needed to see SKF makes consistent higher high and higher low to confirm that it was running.  Noticed that I was quick to get out or reduce position because I wasn’t sure if SKF would run or continue to run.  From my daily comment; on May 15th (day 2 after I bought) I got stopped out because the morning price action looked like it was going back down and actually went below the half-way point of May 14th where I had my stop.  Nevertheless, after I was stopped out; SKF made a higher high by taking out May 14th high.  This was the proof I needed to see.  Without hesitation, I bought back what I sold for the hunt.

The rest of my daily comment for the week displayed my actions and the thought behind them.  Several times I reduced position ’cause I was always keenly aware that SKF could make a sudden dash back to the downside (point #6).  And each time after I sold, I also bought back at higher price, ’cause price action continued to make higher high- more proof that SKF was still running.

By May 18th (Friday), after 6 days of higher high and higher low, I knew I needed to let the runner go since it could get tired and was due for a correction (Pt #7).  And let go I did; I sold my entire position (from averaging up during the week on the way up).  My greed would tell me to hold on for next week since more financial Armageddon over the weekend could stir up a bigger fire to boost SKF even higher.  But on the other hands, a general solution (e.g. from G8 meeting this weekend) could also be created to calm the mass and the bank-run; thus fuel a potential gap down correction on SKF.  If I’ve to choose b/w the two before the weekend, I always choose safety and sure profit.  Sure, I may miss the bigger rocket launch on SKF come Monday; but there will always be another day for me to find another runner with sure cash in my pocket.  On the other hand, if I chose to hold SKF over the weekend and SKF corrects violently, I will give back all my gain and end up with nothing to show for my effort last week.  That would be a complete waste of my time.

You might have noticed that I followed the same game plan when I hunted DDD and SSYS.  The sudden proliferation of news on the 3D printers technology sparked great interest in these two stocks.  Not only that, after I bought in, more news from DDD’s acquisition and SSYS merging news with Objet also created fresh catalysts and fueled the fire even stronger.  If you read my past posts regarding DDD & SSYS, I continued to add to my position (at higher prices) when I read news from DDD and SSYS.   The full coverage on the science of 3D printer technology from The Economists could not come in a better time!  More fire!

By the time price started to cool off around May 2nd in the $30ish for DDD and $50ish for SSYS, I winded down my position to lock in profit.

Btw, as a hunter, I prefer to focus on a very few runners at a time.  I don’t like to hold too many different stocks at the same time ’cause they distract my attention easily.  I would do well on a few stocks but neglected others; as a result, the ones I neglected usually came back to bite me.

Good Hunting!

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I can start by telling you mine.  I am always looking for RUNNER!  Yes!  A stock that can run.

‘Yeah, yeah, so do we all” you said.

“Well, how do YOU look for the runner?”  I counter.

Alright, I’m not going to get into a small argument that may lead to a physical fight and then have my ball squeezes till I turned blue on my face and bid this life farewell in the most unpleasant way…  Instead, I’m just going to tell you how I do it.  If you don’t agree; it’s a free country and you are ALWAYS right!  Yes, I’ve given up the sacredness of being right.  When you think about it, what is the whole point of “being right” anyway?  What do you get out of being right?  A feeling of superiority?  A feeling that you are in control of your destiny ’cause you are right about a thought that appeared in your mind.  If you say yes to these questions, then you are also subscribing to the belief that when you are wrong, you are no longer in control of your life and you must appear foolish… Wow, that must be a LOAD for your EGO.  “No F__King WAY!” the ego will scream.

Guess what, we are NEVER really in control of our life; we are merely an insignificant part in the whole scheme of thing that is significant.  Yes, a double-sided irony!  Of course, what I just said is all baloney ’cause you are right in your judgement!  I don’t know what is the hell I’m talking about…  Ok, enough of my being wrong, let’s get back to the purpose of my post…

What I look for is a stock with a great story!  If it has a fantastic story, the stock will have the propensity to RUN.  Forget high P/E; forget the poor balance sheet; just focus on the validity of the story.  If it has enough substance, it will RUN.

“So, how do you find the runners?” You inquired with a readily hammer to pound.

These days, they are ALL over the place!  Seem like the most recent trend is Social Media…  and you can always find them in technology.  Names like AOL, Netscape, Microsoft, the dot.com of the hey day were great runners.  Oh wait, there is always a story stock in BIOTECH!  And that is why Biotech is always a part of my trading arena.

“You are not telling me thing I don’t already know!”  Your hammer is probably inched closer to my head…

Wait!  What most people forget is that despite the story stock having the propensity to run, it can also simply be a story stock with a propensity to FAIL.  Yes, remember Netscape? How ’bout Commerce One?  Commerce One went from IPO price of $30 to $900 without making a single dime in their business model.  I felt bad for those who kept on shorting the stock while it ran all the way up to the stratosphere; imagined their faces turned blue… and for those who were holding the bag when it went to zero.

Do you see the allure and the danger here?

That is why you MUST master the art of chart-reading!  To me, chart-reading trumped fundamental hand-down.  I ALWAYS listen to the chart ’cause it is a DIRECT message from the market.  The chart give you clue on demand and supply of the stock you are looking at.  If demand is high ’cause the story reaped of validity, it will RUN.

But there is a CATCH!  All runner will also crash and burn before it will run again (if ever).  That is why you MUST learn to take profit with profit target.  Yes, you can miss out the rest of the run; but at the same time, you are also spared from the crash that literally eliminated all the paper gain you used to hold dear to your chest.

REMEMBER, PAPER GAIN is just that- paper.  A worthless number in your broker account until it becomes a part of CASH balance.

Bottom line, when you find your runner, don’t just buy and fall in love with it.  You must trade it according to the chart.  Average up with the trend (not the other way as in averaging down).  If you go with the flow and direction of the price movement, runner can be extremely profitable.  And you need these profitable moments to offset all losses (keep them small!) from those fake runners that pooped out.

In other words, in the world of trading, you must acknowledge that you can be WRONG again and again.  Playing runner is high risk; so go ahead, hit me with the hammer.  I’m already wrong by suggesting that it is a profitable way to trade.

Good Hunting!

 

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Chart reading can be simplified into two steps process by following Newton’s First Law of Motion:

“Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it.”

The first step is seeing if price is remaining in the state of motion.  In other words, is price trending?

The second step is seeing if there is an external force being applied that stopped the price from continuing its original path.

Basically, if you answer “yes” on the 1st step, there is no 2nd step.

Nevertheless, if you answer “no” to the 1st step; then the matter becomes a bit more challenging.  The burning question will then become: “is this external force powerful enough to stop the original motion from going forward?”

From my perspective, why do we have to struggle thru this 2nd step?  Why not just take your profit first and see how strong the external force is before you get back on the horse to keep going?

If the original motion is strong enough to overcome the external force, then jump back in for the ride.  Yes, you may give up some profit by buying back at a higher price; but once we know the motion is strong, why do we care as long as the trend continues to push forward?

After all, capturing “a piece” of the action is all we asked for, not necessarily the whole 9 yards.  It is those who tried so hard to capture the whole 9 yards that they ended up giving back a large part of the gain or worse, turn gain into loss.

Trading doesn’t have to be complicated.  It can be as simple as 1-2-3.  It is our own human tendency to analyze everything to death as well as our emotional leaning that bring complication to our trading life.

The issue of time-frame.

Yes, while shorter time-frame saw external force in action first, longer time-frame may not necessarily shares the same picture.  However, longer time-frame have a larger risk factor and a much bigger reward that comes with it.  The key question to ask yourself is: “Are you willing to take that larger risk to follow the longer time-frame?”

Some may jump ship from shorter time-frame to longer time-frame ’cause they didn’t want to face the truth of the time-frame that their wallet is suitable for; thus by jumping to longer time-frame, they may unnecessarily shorten their trading life if the trades did not work out as expected.

In summary, find the time-frame that fit your wallet and your style of trading (from minute chart to weekly chart) and stick with it.

Life is simple and so is trading, it is when we try to interfere with our mind that life becomes like a roller-coaster ride.  Perhaps, this is why thrill parks are so popular.  We love to add thrill to our life; but do you really want to pay an expensive fee for the thrill ride in the trading market?

Good Hunting!

 

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Why is it that traders/investors averaging down?   Seriously, what is the main rationale for buying more when you are losing on your trade?

Here is a simple answer: Greed

Here is a long answer: our being uncomfortable with seeing loss and want to make it right by buying more so that we can be “right” again sooner when the price turns back our way.

“Holy mackerel!  It is getting cheaper!  I’m buying more here!”

“It is so cheap here that I’m going to increase my portfolio allocation to this stock to buy more…”

“No F**kng way! how can it be??? The fundamental is so strong!  I’m buying more here…”

“Oh crap! Not again! I’m not going to take loss here ’cause it ALWAYS go back up after I do.  I’m buying more here!”

Sound familiar?

Regardless of the “thought” behind buying more when you are losing in the position; you are actually increasing your risk by buying more.  Simply put, by buying more when you are losing, you are “multiplying your loss” even more when prices continue to go against your position.  Whereas before your averaging down, the rate of loss is steady and all of a sudden, your rate of loss is 2x or more than before (depending on the magnitude of your averaging down) on every tick that go against you.

Size cuts both way.

Sure, many were able to “get away” with averaging down ’cause the prices did come back in your direction even though some had to wait a long time for it.  Unfortunately, this only encourages the bad habit of buying more when you are losing.

“It works!  I’m back in the black sooner!  Wow, I’m making even more money now!!!”

And thus, buying more when losing becomes a tactic to use the next time you face the same situation.  Averaging down will always work as long as the direction of the trade you are taking is trending the same way.  And so the habit of averaging down continues to strengthen while the ability to cut losses becomes even harder to do.

Lo and behold!

A correction against the trend you are trading is taking shape…

“Nah, we are in a bull market! This correction will be over soon, I’m buying more!”

But… price keeps going down.

“Wait a minute… this is not right.  My loss is deeper now…  I can’t take loss here, what if the price goes back up when I’m out.  Let me buy some more here so I can make it right sooner when prices head back up.”

Yet, price keeps heading down… and the loss accelerated as a faster clip because of the multiple averaging down

“Holy Shit!”  Now, fear becomes a dominant emotion.  Paralysis begins to set in.

Price goes thru a dead cat bounce..

“Thanks goodness.  Come on baby!  Get back up!”  Instead of finding a point to get out to reduce the loss from this “godsend” bounce; all the energy goes into “cheering” for the price to go back up to make you whole.

“I think I buy more here since it looks like a bottom”

Price continues the downtrend but with a bit more zest..

“F**k!!!” By now, the portfolio lost 1/3+ of the value.

Need me to go on?

Think about it, if you cut your loss on a planned 5% stop loss in your stock, you probably loss only a tiny fraction of your portfolio when price changed direction.  And what more, you are now sitting in more cash when the market continues its correction phase which may or may not lead to a trend change.

The good thing about taking your 5% loss (or whatever % you feel comfortable with) is that you are now giving the opportunity to buy back the stock as a much cheaper price after witnessing the deflating of the price on the sideline.

And if you truly believe in the fundamental value of the stock and choose to hold on to your position WITHOUT averaging down, you are in a much better position to handle the drawdown against you.  Instead of witnessing a quick dead to your portfolio, you are flowing with the tide of the market like most of the investors out there.

Next time when you are facing a losing position, instead of letting your need to be right “sooner” by buying more, ask yourself if you really want to “increase” the risk of destruction first.

Averaging down may not get you right away, but eventually it will destroy you when you least expect it.  Simply because by the time we realized the market trend has changed, it is already too late to save your portfolio from your averaging down.

Good Hunting!

 

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Excerpt below has some creative idea of using MA to identify trading range that may give you an edge.

Please click here for the article by Thomas Demark.

Good Hunting!

Excerpt from “Moving Averages By: Thomas Demark“

“To avoid a multitude of signals while locked in a trading range market, I created a moving average system that only became active when price recorded either a 13-day-high low or a 13-day-low high.  Let me explain this concept further.  If price advances and it records a low greater than all previous 12 lows, then a 3-day moving average of lows is installed and followed for a period of 4 trading days to identify a place to sell.  Conversely, if price declines and it records a high less than all previous 12 highs, then a 3-day moving average of highs is installed and followed for a period of 4 trading days to identify a place to buy.  The moving average is active for a period of only 4 days after the higher low or the lower high is recorded.  As you can see, the application of the moving averages is dependent on the fulfillment of various prerequisites.  Other variations of this approach can also be applied.  In every instance, however, the key ingredient of any approach is its ability to remain dormant while price moves sideways.  Once price breaks out of the trading range, the technique should be sufficiently sensitive to detect any movement that would precede a trend reversal.

For many years, I observed a central tendency for price activity to move within a band defined by a moving average that was identified by multiplying each day’s price low by 110 percent and each day’s price high by 90 percent.  This band can be smoothed by multiplying an average of the previous 3 days’ lows and highs and by increasing the band factors to 115 percent and 85 percent.  When price exceeded this moving average band, overbought and oversold readings were generated.  The percentages presented can be adapted to specific markets.

One technique I developed many years ago I call the TD Moving Average technique.  It is designed to initiate buy and sell signals on the first day both of two moving average – a long term and a short term – turn up or down simultaneously for the first time.  Generally, the short-term confirms – that is the day action is to be taken.  In other words, the first instance they both move up or down versus the previous day’s TD Moving Average readings is the trigger day.  Typically, the two moving average periods I use are 13 and 55 days, but the latter period has been adjusted to use as many as 65 days.

I believe another approach has merit, but because of both software and data constraints, I have been unable to test it.  This method involves identifying and averaging the median (middle) price recorded each day for a particular period of the day.  I plan to experiment with variations of this technique now that I possess the software required; I am awaiting the necessary data.

My moving average techniques are unconventional.  They have been designed to counteract the nemesis of all moving average approaches – trading range and sideways markets.  I believe that these methods circumvent the obstacles confronting the average trader, and can be implemented to give the savvy trader a market edge.”

 

 

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In part 2, I discussed how Richard Dennis, the legendary commodity trader, proved to all of us that trader can be trained to become successful; he/she doesn’t need to be born with the talent.  We have much to thank Richard Dennis for this very insightful experiment he conducted.  The experiment also taught us that the key to trading success is the temporary restrain of the chest-thumping gorilla inside us (in which I postulated in part 1).  Richard Dennis imposed discipline (external imposition) by threatening the survivability of the trading trainees.  This external imposition of discipline forced the trading trainees to put aside their chest-thumping gorilla and gave themselves the opportunity to witness and experience the strengths and weaknesses of the long-trend trading strategies taught by Richard Dennis.  After knowing that the trading systems worked,  some of the trading trainees learned to trust the systems and went on to become famous money managers on their own.

So, how do we follow the same path without the benefit of a benevolent trader like Richard Dennis to coach us?  One of the key element of external imposition of discipline is that the trading trainees were willing to set aside their chest-thumping gorilla in favor of an external guidance.  The trainees knew that Richard Dennis was a bona fide trading legend and therefore trusted him totally.

In the same token, we are going to find something we can trust totally so that we can control our gorilla better.  And what better way than to trust our very own hunting instinct that we are all born with?  We will let our hunter mind guide our action instead of relying solely on our chest-thumping gorilla.  Think about it, our ancestors did not survive this long without our inborn hunting instinct.  Yes, we have two very important characteristic traits that sustained our survival- the chest-thumping gorilla for protection against predator and the hunting instinct for foods.

Due to our advancement in modern science that pretty much eliminated the need for hunting; we somehow “forgot” about our talent for hunting!  And as a child, we weren’t taught the skills and discipline that are compatible with our hunting instinct inside us. Nevertheless, deep inside us, we are always yearning to hunt.

Try this one for size, our stock market is our own creation as a way to establish a “virtual”  hunting ground to fulfill our desire to hunt!  There, there, if you accept this premise, you are ready for the next step to utilize our inborn hunting instinct to control the chest-thumping gorilla inside us.

What does hunter do to capture their prey?  First thing a child learns from the hunter father is to understand the prey they are hunting.  The child is taught the nuance and habit of the prey- from their eating habit to where they prefer to sleep.

Light bulb light up yet!  Yes, understand the stock you are trading!  Know how your stock price action moved in different market environment.  Understand the fundamental behind it.

Next, the child is taught the hunting skills.  There are many hunting skills to learn since different prey required different skill set and weapon for the kill.

Learn all the technical analysis (chart reading and/or tape reading) and becomes an expert at it.  Learn to know which technical settings are more appropriate for long-term trading as opposed to short-term trading.  Learn the basic financial/accounting skill so you can decipher  the fundamental information provided by the 10K reports.

Next, the child is taught that patience is required for the hunt.  A steadfast and calm demeanor are required so as not to alert the prey.

One must be patience to wait for the proper signal before taking a trade.  The stock must trigger the parameter in your trading system before you take a trade.

Next, the child is taught to summon the chest-thumping gorilla inside to go for the kill when the moment is right.

When your trading signal is triggered, you must summon your inborn strength to take the trade.

Next, the child is taught that if the kill was not successful, he/she must retreat immediately to save him/herself first so they can hunt another day.

If your trade was not successful, take your loss immediately so you can move on to the next setup for trading opportunity.

Finally, the child is taught to be humble and be thankful for the kill since an arrogant hunter will eventually become “careless” and mauled by the prey.  This is more to remind themselves that their chest-thumping gorilla inside them must be contained after the kill.

By focusing on the hunt and all its intricacies, we are putting our chest-thumping gorilla to the sideline and only called out for trade execution- from entry to exit to cut losses or to take profits.

In summary, direct all your energy not at the stock market but as a hunter scouting the stock market.  The focus of energy is different- at the market, you can get carry away by the mob mentality and forget to take your profit or cut your loss; as a hunter, you are focusing on the hunt itself and that put you in a position to “observe” the mob mentality instead of being part of it.  Thus, you are more likely to take profit or cut loss before the trend changed direction in a big way.

We,as human, have two very powerful characteristic traits that we passed on from generation to generation- the chest-thumping gorilla trait and the hunting instinct.  Brush off the dust and bring your hunting instinct back up so as to balance against your gorilla trait.  Both are needed for the success of the hunt.

Now, you know why I always sign off with…

Good Hunting!

Link to Part 1 & 2:

Understanding Discipline- a new perspective (part 1)

Understanding Discipline- Turtle trader approach (part 2)

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In part 1, I postulated that exercising discipline on our own is like exerting control over a chest-thumping gorilla inside us.  If you think about it visually, it is almost impossible if you don’t have a strong desire and motivation to make it happen.  Exercising discipline in the trading arena is no different than exercising discipline in the martial art or boxing arena. A lot of time is needed to devote to this endeavor.  Practice, practice, & practice are needed to ingrain the actions (cutting losses and taking profits as trigger points, etc) you wanted into your trading mind.  If you are not embarking on a journey to tame your chest-thumping gorilla inside you, the probability of you being part of the 97% traders who eventually lost their hard-won gain is very high.

Nevertheless, there may be a “way” to master discipline on your own.  I said “maybe” because it is still up to each individual to take this approach seriously.  Before I get into this; let me offer a real-life example of how discipline is being instilled in a group of turtle traders hand-picked by Richard Dennis, the legendary commodity trader who, based on what I read, turned $2,000 into hundred of millions.  I’m sure some of you already know the story of how Richard Dennis and his partner came to a decision (while debating the issue in a Singapore’s turtle farm) to do an experiment to prove Richard Dennis’ theory that traders can be trained to succeed instead of being born with the talent.

Based on the books by Michael Covel and Curtis Faith, some of these turtle traders went on to become some of the greatest hedge-fund and money managers out there.  How did Richard Dennis accomplished this feat?  How did he instill discipline in these traders in such a short-period of time?

It was devilishly simple, Richard Dennis came up with an elegant solution to remove the chest-thumping gorilla in each of the traders he was training by stating that if anyone deviated from the trading methodology he was teaching, he/she would be fired.  He also reminded the traders that they were trading his own money, not theirs.

First, Richard Dennis’ approach, while simple and elegant, is not an approach anyone would try.  If Richard Dennis hadn’t done the experiment, I don’t think we will ever hear any success stories about the former turtle traders.  Come on now, who would risk million of dollars on a group of trading newbies with no experience?  Richard Dennis did it because he could.  It was like making a million dollar bet he could easily afford to lose.

Without a doubt, the new turtle traders learned shortly that Richard Dennis’ long-term strategies worked brilliantly in a trend market.  Despite some difficult periods before the trend took hold, the turtle traders were able to witness and experience first hand that draw-down and cutting losses were very much a part of the trading business.  They also experienced the trials and tribulations of seeing a long-term trend play thru to the end.  This was no easy task since they were witnessing profits disappearing, reappearing, increasing and decreasing thru out the trending phase.  As you can see, if you have the opportunity to witness and experience the strength and weakness of a winning trading system as a participant, the action of executing the trades day in and day out would eventually become part of your daily trading discipline.  The turtle traders began to “believe and trust” the trading system they were taught. In other words, these turtle traders were extremely lucky to be able to “practice, practice, & practice” proper trading discipline using real (but someone else) money; and on top of that, coached by the best trader there was at the time.

Bottom line, if you can master yourself (meaning your own chest-thumping gorilla), you can become one of the 3% successful trader.  Richard Dennis proved it.  But here the caveat, it is all depended on your commitment to tackle the gorilla inside you.  Without an effective coach and free money to practice, mastering discipline can be as difficult as preparing yourself to climb Mt. Everest.  Not every turtle traders in the group became successful, but those who did also possessed the desire and motivation to succeed.  Do you have that desire and motivation?

In human, the chest-thumping gorilla inside us is what make us stand tall among all species, it is actually our greatest asset, from business to artist, unfortunately, it is lethal in the trading arena if not cultivated correctly.

To be continued.

Good Hunting!

 

 

 

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Discipline as we know it may conjure an image of a boot camp in a military training facility.  To some, it may be an image of their parent’s stern look.  These are just example of discipline being imposed from the outside.  On our own, discipline becomes a difficult subject most preferred to avoid.  Why?  ’cause discipline is one of the most difficult endeavor to master on our own.

Allow me to venture a thesis of why it is so.

While we, as human beings, are at the top of the evolutionary chain in this earth, our primal essence is not dissimilar to the chest thumping gorilla.  Why the chest thumping gorilla, you may ask?

First of all, despite our small size compared to the wild animals out there, human being is the most fear predator in the animal kingdom.  Unlike the lion or tiger which has four powerful legs and the mass to go with it; human beings, having only two legs, go by the way of the gorilla.  To survive and to dominate, human or gorilla, must show the “presence of force” that cannot be ignored.  The chest thumping gorilla expresses strength and a fearless demeanor.  The vibe generated from this chest thumping exercise is very palpable.  It can induce fear in other predators.  Of course, the chest thumping gorilla is also inflated with a supreme confidence that it can take on any predator that cross its path.  This confidence is definitely felt by other predators.

Guess what, human, being in a higher evolutionary chain than the gorilla, refines this chest thumping maneuver into a much higher level even the gorilla will have to abandon its chest thumping exercise when encountering the human “chest thumping” tactical maneuver.

It began with loud noise, then crude weapon and graduated into fire power.  In other words, human inherited the “presence of force” tactical maneuver gene from our chest thumping gorilla.

In a manner of speaking, we ALL have a chest thumping gorilla inside us.

What does all this has to do with discipline?

Take this: imposing discipline on our own is like trying to control the chest thumping gorilla inside you.  How can you control your own essence?  Exercising discipline on our own is like restricting your own essence to be yourself.  It is just not that easy at all!

To be continued.

Good hunting!

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When you are sitting in good profit, all you see is green on your quote machine.  Wow!  What’s a beautiful sight!

Unfortunately, the green color also plants a seed for complacency; and thus, you open the door to give back much of your profit if not all before you wake up from the hypnotic effect of the flashing green light.

An antidote is needed to protect us from the narcotic effect of the green flashing light!  And what better way to jock us back to reality than a red flashing light?!

When a gift is handed to you by generosity of the market in the form of January effect, you have to say “Thank you” and walk away with the gift.  But you don’t want to walk away when the gift is not done giving yet, right?  So, here is the trick I used that can protect myself from being mesmerized by the green flashing light.

When I am sitting on a decent profit and the market reached a point in the chart that look like a strong resistance.  Even though my intuition feels there are still room to run.  I take my profit as soon as the price started to stall at the resistance line.  If price retraced from the resistance line, then I look for an area of support in the short-term chart and start buying back my position.  While this is an optimal strategy to buy back my position as a lower price than what I sold; this is not as important as making sure I buy back my position.  Often time, I ended up paying a bit more to buy back my position or I bought back at same price plus commission fee.

Do you know where I’m going with this?  At this point going forward, the  green flashing light is no longer guarantee if the market correction continue.  Instead of feeling more forgiving to my portfolio shrinkage due to the flashing green light.  “Hey, I’m still deep in the money, no worry” kind of thought is no longer an option for me to entertain.  I hate seeing red flashing light and I have a habit of liquidating my position if the red light flashed passed a certain percentage.  I’ve no tolerance for red flashing light!

There, there, unless you are gunning to buy and hold for at least a year to take that long term capital gain for tax reason, the only downside of this strategy is that I may end up paying a bit more than I got out in order to stay in my original position. That is why I only execute this strategy around resistance point (or support point when I’m shorting).  Think about it, if the stock rally hard and break thru resistance after I got out, I’ve no qualm jumping back in at higher price because of the powerful momentum behind it; as in my DNDN trade. All I want is to participate in getting a piece of the pie; where I jump in relatively to my past trades is not as important as making sure I hopped in the train before the risk becomes unacceptable.

The additional benefit of this strategy I used is that sometimes I may not buy back the same number of shares I sold due to the lofty height of the price in the chart.  This reduction of shares also protect my realized profit if I’ve to bail out of the 2nd  buy with a small losses.

Of course, this only work if one is allergic to red flashing light like I do.

While this strategy sound simple, it is not easy.  You have to overcome the mesmerizing green light and the fear of missing a rally right after you got out.  The way I look at it, keeping a piece of your win (not necessary at the high (or low when short) is what trading is all about.

Needless to say, today I closed enough position to raise 65% cash because I saw way too many red flashing lights!

Good Hunting!

p.s   oh, almost forgot. “Thank you market for the generous gift of January effect!”

 

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One general mistake for most people is that they tend to grasp the falling knife like they will grasp a round stick- surrounding your fingers on the knife.. Ouch!

The proper way is to line up the flat side (not the edge) of the falling knife so it is parallel to your palm; then you slap both of your palms together on to the blade.  Obviously, you may get some minor cut which depended on how well your palms are parallel to the flat side of the blade,  As in any human response to feeling a sting (pain from the knife cut), you should immediately let go of the knife by opening up your palms to avoid a deeper cut.

Market translation:

Instead of just buying blindly because the price of your favorite stocks are down to a level “you think” is attractive (grasping the knife with your fingers), you should look at the chart to see where the likely supports are in multiple time frames (such as monthly, weekly, daily, and hourly for swing trade).  By paying attention to the popular techniques for recognizing support & resistance such as 50ma & 200ma, Bollinger bands, Keltner bands, or previous pivotal lows etc.; you are instinctively lining up your palms to the blade of the knife so to speak.

Knowing when to clap your palms together will require some timing devices; momentum indicators such as Stochastic, RSI, MACD, etc.may come in handy.

Of course, as in all risk taking endeavor, techniques from the study of technical analysis are only to help you increase your “confidence”; it doesn’t guarantee success.  So it is absolutely important that you let go of the knife the moment you feel the sting; in other words, DUMP that loser of the stock if it kept doing down after your purchase WITHOUT hesitation!

Nevertheless, this is not for everyone.  And PLEASE, do not try it at home!  This is only for those who already cultured discipline from years of practice.  If you don’t believe me, just look at all those fingers or hands lying on the floor at the marketplace.  It is quite a bloody sight!

Good Hunting!

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