The bottom feeders won’t be satisfied until grave capitulation hits wall street. There was nothing redeeming about trade today. The 10:30am buy only took place in FANG. Participants cringe at the thought of owning any other company. Breadth was a scant 26.03% on a flat SnP.
What forces drove the maddening (no John) trade this morning in the futures, I have not an idea, but it was the first time in well over 6-months I became woozy. It was the biggest/fastest chop I have ever seen. However, I doubt many felt the sting of these actions. We need a different sort of pain.
Or today was the last flash of madness and we are set to begin the famous OPEX rally of 2015–the kind that works through Friday then rolls over the following week. The action has certainly taken me to the brink of reason, as I went out and bought TNA for the first time this year. TNA–the 3x bull Russell ETF. lol
Soon centaurs will come kicking and neighing down the streets of wall, hooving reindeer in the scrotum and taking all the presents back. This is how the Christmas of 2015 will be remembered.
You guys ask me all the time what I think about oil and I usually lack any clarity on the commodity. I do not like oil as an instrument because it is a fundamental product. That means its action is predominantly driven by macro events. It also means anyone hip to those macro events will have an edge over me.
However, there is a technical setup going on here that I have become intimately familiar with–the old falling wedge. This pattern is a vicious bastard, one that many times severed my head until I threw out the book that stated it was a bullish pattern and looked at it as an auction.
What happens in a descending wedge?
a. price goes lower
b. volatility compresses
c. higher highs, higher lows
d. lower highs, lower lows
I will answer that one in a while, after you’ve had the chance.
Here’s what I expect oil to do over the next week or so. First, a big fast and nasty flush lower out of the descending wedge. It will likely test below $43 and maybe even $42. It is very likely to be a gut wrench. Then, over the course of several weeks a return to the wedge and blast higher up through it.
I am not providing a chart. You all have charts, yes? Pull it up. We have tested above this major consolidation and found responsive sellers. They are walking price lower. What’s next? We test the other side of this well-established consolidation.
The special kicker is it comes on the heels of a descending wedge. Hide your pets. This move will crave pets and brains.
..and it acts like a range, it’s definitely not a trend.
Breadth is decently low, below 40% inside Exodus. Financials leading us lower has me questioning the validity of the sellers because banks don’t matter until tomorrow.
In the meantime put your eyes on the PHLX Semiconductor index, right on the top end of what appears to be a range, see below:
Transports are nearing the top end of their intermediate-term range as well, after sellers failed to defend bracket low, post breakdown.
Trading is a numb3rs business. I look at different ideas and systems and methods every year. I am trying to find improvements and ideas just like everyone else because there is no broad stroke to success in trading.
I have found there are essentially two ways to consistently profit in trading. You either trade a high win rate or a low win rate. When you trade a low win rate, you also need to win the lotto once or twice a month with a super large profit to offset not only the many losing trades but also the scratches and commissions as well.
The issue is you need to exit a trade only when you know it is a loser. Usually, you can’t know a trade is a loser until you have lost money. If your stop loss per trade (or average loss per losing trade) is $600 and your average profit per trade is $1,000.00, with a 40% win rate the math of your trading is as follows:
On 100 trades, $40,000 won – $36,000 lost – ($14 * 100) commission = $2,600. By the way, commission soaks up about 53.8% of your profits. This is on the high side and needs to be brought down below 30% if possible.
On a futures trading strategy, I aim for higher win rate trading because multiple opportunities arise during the day, and it takes incredible fortitude to continue trading an idea with a low win rate. Psychologically it becomes challenging to stick with a method or system that trades this way intraday and you may not be around when the winner that makes the system profitable occurs.
If your stop loss on a futures trade is $140 and your average profit per contract is $80.00, with a 70% win rate the math of your business is as follows:
On 100 contracts, $5,600 won – $4,200 lost – ($4 * 100) commission = $1000.00. Again, the commissions eat a high amount of your profits, 40% in this instance. You may think $1000 is not much to make from trading 100 futures contracts. That’s just $10 of profit per contract traded. However, if you improve your entries or exits by just three ticks on every trade your profit per contract is suddenly $20.50 and instead of making $1000 you are making $2050 and doubling your profit. What if you can improve by three ticks?
The above numbers are how I approach any method of trade. Everyone has a different preference or availability when it comes to putting risk into the stock market. If you find one that works, say swing trading, then you need to take at least 50 trades (preferably live to get the juices flowing) and run the numbers.
Now let’s run through a live example of a swing trade I have on in KNDI. With swing trades, I like to max out my position size at 20% of my book, but most often I put 10% of my risk into common stock. My idea is for losing trades to lop 1% off my book. Thus, I size my position so if the stop loss is hit, I will lose 1% of my entire risk capital. I target to make 15% profit on my swing trades. For swing trades, my stop loss is $700 and my average profit per trade is $1050, with a 70% win rate the math of swing trading is as follows:
$73,500 won – $21,000 loss – (100 * $14.00) commission = $51,100.
Below I present a chart of the KNDI trade. I draw these up to help me determine how much money should be in a trade when I enter. The second and third targets are lower probability. I scale profits on stock trades and work my risk higher along the way:
As the markets become more volatile, I adjust the proximity of stops to prevent getting knocked out of a trade due to noise. Overall, I have a 75% winrate to my first scale, 65% win rate to the second scale, and 55% win rate to my third scale. I tend to milk the winners by getting down to a runner size and becoming very liberal with my stop loss. This worked out very well the last two years, letting my winners do the work while I focus on futures and such.
Now the environment may be changing, and that is exactly what I have been coding my eyes out to discover. If we continue to see violent chop, I will be increasing position size and targeting fewer ideas with tighter stops. I simply cannot manage 15 positions while trading futures properly. However, I want to see if bulls build on this bounce like they have for the past two years. If we get a mild dip, a higher low, and then return to our pleasant decent, I will keep a large book. Developing…
