Trader's Thread 01 (May 08 - Dec 08)

[kennynah]

the old saying

"those who can, do
those who cant, teach"

[millionairemind]

the old saying

"those who can, do
those who cant, teach"

"those who can, do
those who cant, teach.
Those who can't teach, consult"

[winston]

The Problem with Market Commentaries -- by Bill Kraft

A recent note from a subscriber alerted me to discuss what I am trying to do with the Newsletter articles and why I am doing it. The subscriber chastised me for failing to comment on the financial meltdown in last weekend's article and suggested that I did not write about those developments as every other Newsletter writer to whom he subscribed did. He took it as a sign that I wasn't paying attention to the market. While I understand his issue, it comes from a misunderstanding of what I am trying to do with the Newsletter articles and my beliefs about market commentaries in general.

I do watch the markets quite closely because I make my living trading. It is a rare day when I am not monitoring movements and looking for entries. However, I do not intend to make the Newsletter articles a regular weekly commentary on the markets. I reserve my market comments for paid subscribers in my weekly Summaries to them and generally try to make the weekly Newsletter articles relevant to trading principles, methods, or strategies. In the Newsletter articles, I try to talk about things I believe are important to traders in general and that might advance their trading knowledge and, perhaps, show some approaches that have worked for me over the years.

The subscriber pointed out that all the other market Newsletters he read did discuss the current financial plight in the U.S. As I suggested in my response, I am not writing a market commentary and have no intention of following the herd. What can one say other than things looked bad and bearish plays continued to be in order. No one, absolutely no one knows what the future will be so attempts by commentators to predict the future are nothing but pure speculation.

We can come up with all sorts of rational, logical guesses about what the markets are going to do, but they are just that -- guesses. Just consider the jolt the news that Lehman Brothers was in trouble and the news of its subsequent bankruptcy caused. Until that news precipitated the further news that our whole financial system was on the verge of collapse, the markets may have seemed OK, if not great.

I did have a subscriber a few weeks ago who commented that he expected another big failure after Bear Stearns, but he made no prediction of which financial institution it would be. In any event, no matter what the talking heads on TV may say and no matter what market commentators may predict, we must keep in mind that it is nothing more than speculation. If any of us knew tomorrow's news, we would be instantly wealthy beyond belief -- we could buy the winning PowerBall ticket.

One thing I will say with respect to the financial crisis is that I am absolutely sick of politicians. As usual, even in these dire financial times, they have directed their attention to posturing and finger pointing. Everyone but the guy speaking at the moment is accused of being at fault. How about being intellectually honest for once and taking some of the blame themselves. How about working together to serve the people rather than working to blame the other guy? I know it isn't just the politicians who created the mess, but, for sure, they helped.

When are we the people going to rise up and demand that the politicians represent us rather than themselves. I know I have mentioned politics and that mere mention usually brings out a lot of political comment, but I would appreciate it if readers would restrain themselves from writing political diatribes or defenses of their particular party or candidate since we really do want to limit the commentary to specific trading issues.

Well, that is my "market commentary" this week. Going back to the issues of prediction, all of us have no choice but to trade in the present. The past, of course, is gone, and try as we might, we cannot know the future until it becomes the present. When we make a trade, it is now.

Without insider information, we have about a 50/50 chance of success on any particular trade no matter what we think or believe or bet will happen. In my view, that is why it is critically important to successful trading to have entry and exit strategies in place before we ever enter a trade. In that way, whatever may happen, we have set up a position in which we cut our losses and let our profits run.

That method and money management will take us farther as traders than the thought that we can predict the future. Remember, we can have 50% winning trades (or even less) and still be successful if we manage our money properly and have a disciplined strategy to cut losses and let profits run.

[kennynah]

great article; trading based on prediction is amateurish n lacks understanding of this business. It's truly a fine line between predicting n probability based opinionating. That difference coupled with proper risk mgt will determine winning n losing in the long run

[winston]

5 Simple Rules for Making Money in this Market By Larry Connors | TradingMarkets.com

Yesterday's market sell-off was one of the worst in decades. And it left more than 90% of the tens of thousands of money managers, fund managers, and investment advisors down for the year. Most of these professionals are on average down over 20% this year and many (including some of the biggest) are down more than 30%.

Could this carnage have been avoided? Possibly. And in a minute I'll show you how. In reality though, if someone is entrusted with investing other people's money, they can't take all the credit on the way up, and then blame it on politicians, Wall Street, the mortgage industry, and the dog ate my homework on the way down. Excuses are exactly what they are... just excuses. I'll paraphrase Warren Buffett when saying "in business you either make money or you don't".

The rules I'm going to share with you to help trade this market are all statistically backed. You only have to look at the investment results this year of the people who come onto television sprouting their views to know that most of their methodologies have no statistical evidence of working in a down market. Think back to 2000-2002. The same carnage that happened then is now being played out a second time in this decade. Markets go up, their funds go up. Markets get volatile and go down - these people are not equipped to handle it. The numbers and the results from 2000-2002 and again this year are the proof of this.

So how do you make money in a market like this? The exact same way you make money in a rising market. You start with 5 simple rules and you do your best to abide by those rules.

We've been publishing these rules for years and it's helped many of the long time customers who have been with us. And we do our best to live with them too. The rules not perfect (not even close) and they do not guarantee we or anyone else will make money in the future. But I oversee a private investment partnership which has been profitable since inception. And as of September 30, we're again profitable this year. Why? Because of the following set of guidelines or rules which are the backbone of our trading.

I'll share them with you and they'll hopefully provide some guidance for your own trading.

Rule 1: Only buy stocks above their 200-day moving average.

This rule, more than any other, is the reason why people who use it have done well this year. If you go back to 1995 and look at every stock's 5-day performance above their 200-day moving average versus below, you will see edges on the stocks that were above the 200-day (this is on a sample size of over 8 million trades). What the statistics don't truly reflect though, is the wreckage many stocks below the 200-day moving average cause. Go look at the charts of Bear Sterns, Countrywide, Lehman, Wachovia, the mortgage companies, the home builders and many more and see what happened after they broke under the 200-day moving average. Nearly every money manager in the world could have protected their investors from this one simple rule. And you can too by simply avoiding stocks below the 200-day.

Rule 2: Buy stocks above their 200-day on pullbacks.

There's an entire generation of traders who like to buy breakouts and some are successful at it. But if you look at the average short-term returns on stocks making 10 day lows above their 200-day moving averages versus 10 day highs, you'll see significant differences. Stocks making 10 day lows have far outperformed stocks making 10 day highs. And again, this has been seen in testing millions of trades for over a decade's period of time.

Rule 3: Use the 2-period RSI to find your pullbacks.

We've been teaching the 2 period RSI for more than 5 years. In my opinion it's the best oscillator available to you. And the statistics back this up.

Stocks trading with a 2 period RSI under 2 substantially outperform stocks trading with a 2 period RSI above 98 over the short-term. Instead of "eyeballing" the pullback, let the 2 period RSI identify the pullback for you. It's a great indicator.

Rule 4: Buy stocks on further intra-day pullbacks.

We ideally want to be buying stocks in uptrends which have pulled back. And then we want to buy them after they've pulled back even further intra-day. This one rule alone increases the simulated returns on test results and we especially like it to help filter out the better stocks to buy each day. Look for intra-day pullbacks in the 2%-5% range (or higher) as these are the stocks that have historically been the better selections for short term traders.

Rule 5: Exit on a close above the 5-period moving average.

Everyone likes to tell you when to get in. But we all need to know when to get out.

We have many different exit strategies (all quantified) but to keep this simple, use a close above the 5-day moving average. Once the stock closes above its 5 period moving average its time to get out. This exit is price dynamic, meaning its always adjusting to current price, and it does a nice job of finding the sweet spot of a stocks rally. Once a stock closes above its 5-day moving look to exit (hopefully profitably) and move onto your next trades.

I'll add a Rule 6 here because of what's happening in the market this year. And that rule is unless your trading and/or investments are down more than 20% this year, trust that you are likely smarter than many of the "experts" who are giving advice on television. Most are having a very difficult time this year and I'm sure many will eventually bounce back. But in the meantime, until proven otherwise, they are obviously not equipped with the tools necessary to make money in this type of volatile market environment (possibly CNBC could require these people to disclose whether they're up or down for the year?). And if you're profitable so far this year, give yourself a pat on the back because you're in the top 1%-10% of all investors and money managers in the world. And you've done it in one of the toughest market environments you'll ever see.

[kennynah]

What does the author mean, when he wrote these 2 terms?

2 period RSI and 5 period MA ?

[iam802]

period = days or months (or whatever as the base unit)

2 period = 2 day RSI (default for most system is 14)

You can also read their article here
http://www.tradingmarkets.com/.site/sto ... od-RSI.cfm

[kennynah]

thanks 802....

so what is a 5 period MA ?

[iam802]

Most likely a 5 day moving average.

I suspect these setup are for swing trading... very short term moves.

[kennynah]

thanks again 802...

hmmm...swing trader....possible i guess...

except i wont use MA200 to signal my entry if i was a swing trader....wait forever for this to happen just once and then hang out the "gone fishing" signboard for the rest of the year....hahahaha...