It is Tuesday, February 3rd, and another down day for the markets, but a great day for me.
Well, it was another downer on Wall Street today. I would bet that people are getting pretty nervous out there. As I said yesterday, all anyone can do is hope there is a bounce coming to relieve the market of its anxiety. Usually though, when that happens, at least initially, the rally will be met with more selling until it can flatten out and put a bottom in. No signs of that happening yet. To try and be a buyer in this market, without any signs of a slowdown, is like trying to catch a double edged knife while it is falling – not usually a good idea.
I know there are many calling for a bottom here and I hope we get one, but anyone thinking about buying here needs to wait. You could be a hero and catch it right, but you would be taking a big chance. What I am talking about is longer term money, not trading capital. During the day, there is all kinds of buying and selling going on in the the large cap stocks. In fact, tomorrow I will post a few stocks and show how they can be traded in this environment.
As I write this, the aftermarket is taking the the Dow and S&P 500 down, 60 points on the Dow and -6 points for the S&P. For every 10 points on the Dow, you get about 1 point on the S&P. The Dow is around 6700 and the S&P is at 696. When you see the Dow off -200 the S&P is usually off by about 20 points.
I would like to be as positive as I can be about the markets and the economy, but right now everything is down, down, and down. All time frames are lower and are not showing any signs of life. If we keep going down, companies are going to have a real hard time contributing to their employees’ pension funds. It is currently taking so much of their profit right off the top and at some point they will probably stop contributing to it out of shear survival. As they take their earnings and put it aside, it will lower by a wide margin the money that could be going to the bottom line. As their earnings projections are lowered, so goes the stock valuations.
That is one thing the market is factoring in right now. It always looks out 6-9 months and see what are the conditions are going to be like then and it will price the stocks accordingly. So far the economic numbers are going to be bad over the next few quarters, that is what the market is saying. We will feel the brunt of that in higher unemployment and so on.
Trading is still a viable opportunity for those who can handle the risk and have capital. You are not going to get a return in the bank and if you have the willingness to take on some risk for a large consistent return then this could be a possibility for some.
I will be the first person to say that day trading is not for everyone. There have been so many who thought they could do it and failed. Most people do not make it. There are several reasons for that which include no trading plan, no discipline, no patience, no focus, no dedication to learning, over-confidence, and the list goes on and on. Everyone is different and I believe most people with a desire can learn if they have the right person teach them. You have to know what to do, that is for sure. You need to have insight into how the markets work, knowing that theor job is to make you fail. It will put you into a position only to take you out and second guess yourself, to put you back in and out again you go.
It has a field day with those who can’t stand to be wrong. You can’t afford to have an ego while trading, because the market will do its job to humble you quickly. All that being said, it is almost imperative to have a mentor, someone who is doing it and can tell you how. There are a lot of people who do not know how to trade and that may even be an understatement. There are so few people who understand the underpinnings of the markets and how they can be harnessed to produce consistent market gains virtually every day.
If it were not possible, I would not be writing this blog and wasting my time. But it is possible. You can see everyday that I have consistently posted winning days for over a month straight, while limiting my risk to a very small margin. There are very few people who can do that, straight up. You need to start at the beginning – price action. People are always looking for the “Holy Grail” indicator or system that will take the trades for them. Well, if you continue that pursuit, you will be looking for a long time. Indicators can help, but usually they are lagging behind price. So would it not make more sense to then look to the price and learn how to read that? You will be one step in front of everyone else. That is what I do. I will tell you that I do look at a couple of custom indicators that I have modified to give me confirmation with my timing, but I always rely on price action first.
The markets always have a flow or rhythm to them, just like so many other things, (real estate being one of them). Making a purchase on a home is an emotional experience and it is like that for almost all people. So collectively when all of these transactions are taking place, the market is being moved by what people think and feel about life, their job, their status, and so on. All of these things get portrayed out in the market place to establish trends and those trends move people to action.
The same is true for buying and selling stocks. It is a group of people establishing the current market value for a company. As conditions change, so does the price. All news is always factored in the current price of a security. That is why I rarely ever look at news, because the current price reflects the news. Which is more reliable, the news or the current price action of the security? It would be the current price action.
People are funny and predictable if you know how they operate. Going back to news, a good example would be an earnings report is coming out and it is expected to be good, what happens as the news comes out, great earnings. The next thing you see is the stock dropping 2-3 points on the news and you say, “what the heck”. You see the price had reflected the anticipation of good earnings and bid the stock price up days and weeks before, so when the actual event happened, there was no longer a good reason to keep the stock, as traders and investors cashed out. It is almost always like that, you can hardly make any sense of the news and how it relates on a daily basis. It all goes back to everything is reflected in the current price today.
As the markets look into the future they are going to try and price in a recovery ahead of time and or continue to adjust themselves downward as they see the future earnings potential of the companies they represent. If you know how to read price action, you can take control of your 401 K, IRA’s and mutual funds as opposed to listening to those who have a vested interest in keeping you fully invested. There is something to be said about dollar cost averaging into a retirement account, but if someone knew that after 8 years it is now time to step aside for a while, and after 2 years of being in cash, you go back in to add to your position. Being able to side step the markets while the volatility is taking prices down and out, is a talent that most people do not have, but it can be learned.
In today’s day trading, I had a flat start for the first 30 minutes, then got going. It seems like when I have a little draw down, I seem to get more determined to get back, and stay, on top. Just a little observation that came to me. I was not planning on trading as much as I did today, but it all turned out great. I was very focused on putting trade after trade on. Trying to forget the last winning trade and just focusing on getting the next one right. I did plan on staggering my exits today and it worked perfectly. When you have a trending market, I can capture more profit from the move. When you set a small target at first and get it, you then lower your risk and can move up your stop, to put you into at least a break even position. As your next target goes off, a few ticks higher, your can comfortably ride the last one for what ever the market can give you, while always moving up your stops .
After the slow start today, I put together about 52 winning segments of profit with only 4 losses. I only took about 30 or so trades, maybe a few more or less, but my equity chart posts each segment of profit as a separate trade. That was a real nice streak I had – not my best, but very good.
The percentage today was about 80% W/L ratio, which is what I always strive for and most often get. The total profit after commission was $ 5300 dollars. The interesting thing about this is that I did that while mostly trading small, 2,3,4 contracts. I did take a few that were a little bigger, but most of them were small size.
Towards the end of the day, I did load up on an area that I felt was going to go. I did yet another different type of trade, that I call the pyramid trade. You first establish a position and as it goes your way, you move your stops up. After a new signal or break out in price, I add more and yet another signal up, I add more. I had 13 contracts built up just before today’s close and then started selling them into strength little by little, until they were all gone. Wow.
That is it for now!!!!!!!!!
http://www.screencast.com/t/mf1cQP9ud7 Equity Chart- small audio
http://www.screencast.com/t/Q6dnbEWChS1 Some of todays trades
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