After weeks of the slow but inexorable grind up and my account ringing deeper in the red, things looked bleak Tuesday when the market was making new highs against all my analysis expectations. If Wednesday saw more highs, I'd have to start exiting and look to reenter higher. Serves me right for going short too soon.

But today the Bears finally decided enough was enough and pushed back against the Bulls - giving my account much needed relief!

 

Hello Bears! 

 

 

 

 

New Senator Elizabeth Warren questioned all the banking regulators last week.

If you are as disgusted as I am about no criminal charges being brought against Wall Street banks for their integral part in the financial meltdown we are suffering from, you'll find this clip quite refreshing:

 

 

 

You go Senator!!!

 

 

My original plans this weekend was to read 2nd version of the book, "Mastering the Trade" by John Carter-

 

 

I had checked it out of the library and due to the discussed unforeseen events that needed addressing, was quickly running out of time. I wasn't able to have it renewed for more time since someone else had put a hold request on it, so this was my next big task as I had to return it next week so if I don't look at it now, it will be at least 3 weeks before it becomes available again. I got some time yesterday evening to power though it.

The good news was since I already read the 1st version, I didn't have to read each page/section with deep focus so I could go through pages at a fairly fast pace. Even so, the book is about 450 pages, so I didn't finish until the wee hours of the night. Nothing like "fast reading" a technical book - I attribute it for the weird dreams I had last night.

My quick review of it would be good, but I think new traders would likely benefit more from the 1st version as the 2nd version would likely be a bit overwhelming. What I like about his books are that he gives you numerous examples of trading techniques he says he uses- which is a kind of proxy for looking over another traders shoulder to see what they are doing.

Note, doing this works best when you already have methods of your own to compare with, as opposed to trying to learn to trade by his info only. When I read his 1st version, his techniques gave me better insight on applied trading such as how to set up entry/exit points on my own methods, but I didn't find his methods of trading to be compatible with mine. I also think that anyone trying to duplicate his techniques word for word will likely also have problems being consistent in generating gains. But I wouldn't fault the book for this entirely- it's the nature of trading- once you reveal a certain technique to the general public, unless it's complicated or subject to much interpretation, it becomes less effective because techniques work best when only few people know them as the market is based on human behavior and not a fixed-in-stone mechanism.

The reason I recommend the 1st version for newer traders is the amount of guidelines and examples thrown at you. A new person will try to soak everything in and easily be inundated with everything presented and probably wind up missing the main points to take away. The 2nd version also starts veering into commercial methods like more proprietary indicators and references to his website that offers "premium services" for a fee. The 1st version has much less of secondary "selling".  Seasoned traders can benefit from the 2nd version since it's easier for them to separate the wheat from the chaff.

 

 

Not much to report this week as I'm still on a holding pattern. This week saw the smallest range movement this year in the futures market I trade. As the range gets smaller, one's trading techniques have to get more precise to get any sizable profit in price swings.

Last year got me used to larger swings with more volatility so this is good training for me to refine my trading focus to be able to handle these smaller fluctuations. It's giving me the opportunity to fine tune all my methods.

Of course the biggest lesson these last few weeks have taught me is to, say it with me, "stay with the main trend and only switch to the "counter-trend" when it establishes itself as the new main trend and not a moment before."

It's interesting that up until now the market has pretty much all but ignored the coming sequester cuts to social services and military spending, a negative hit to the economy.That's what the market does best - ignores a problem until it decides there's a problem, at which point it overreacts.

Now we have only two weeks left so the countdown clock begins again with what looks like yet another game of brinksmanship with Dems vs Republicans. This will likely dominate much of the airspace this coming week if little progress is made with finding common ground.

 

 

 

 

My house gave me a "romantic" Valentines day gift by alerting me to home repair issues that has monopolized much of my time since then. I called some contractors to get estimates and they quoted sky high prices for what I thought I could do myself, and so I did and am working on now.

First my computer, now my house. Life is keeping me busy in areas I had no desire to, haha.

I'm taking a break now to see if I can put thought to paper in a timely manner to crank out a few blogs.

 

 

I woke up Saturday feeling pretty good and like ritual, went to check my email.

I press the button to fire up my computer, and nothing happens. Everything was fine the night before when I shut it down. My initial thought was a electric outage, but I look at the equipment and the monitor lights and their power LED's are all lit.

After a couple more non responsive button presses. I can only conclude that power supply has failed. Oh happy day.

For those new to my saga, I have had what I consider a ABNORMAL amount of power supply failures over the last few years - here's the history: Link to the past.

During that time, I suspected the nice "bling-bling" LED power supply was suspect, but didn't have concrete proof. I gave it the benefit of the doubt since I put it in my main computer which has much more equipment and draws more power so I though the power supply amount wasn't big enough to handle the load.

Then I built my new trading computer and used a similar "bling-bling" power supply from the same company I had purchased a few years back. The trading computer is streamline build with minimal equipment that has just a fraction of the energy requirements as my main system, so I thought I would be good. This Saturday proved me wrong.

Failed power supplies are a big hassle since it requires you to unplug the system, take apart the case, and detach all the power connectors before you can swap out the power supply. Of course before that you have to go buy a new power supply. This isn't something I can put off since I need the computer for trading so it takes immediate priority over the days tasks.

Unfortunately, my main computer is also offline due to a bad hard drive that I'm troubleshooting, but fortunately I still had my laptop to access the net and shop around the area for a new power supply.

After a nice long drive and dealing with obnoxious store crowds that appear to be aimlessly wandering around I find the power supply section. Then I get accosted by a store clerk who attempts to "help" and sell me a product I'm not interested in while I politely decline. I should have said, "Don't worry, I'm an engineer- I know what I'm doing."

Anyways, I get a suitable replacement, make it back home and I'm already kinda tired, but I know this is when the "real fun" begins....

Caution: Not for the squeamish....

 

Surgery Begins:

Besides the power supply being burnt out, the front turbine fan had some spin issues and a mini fan in the back developed a noisy whining sound so it was a good time to make those minor replacements as well.

 

 

Computers can be quite the dust magnets. Once the case is opened, you can see all the dust/dirt that collects on the fan blades, even if you're using fan filters. So you have to spend a good portion of time cleaning that up.

 

Here's the offending power supply:

 

 

Nicely chrome polished outside, "cool" looking inside with blue glow, but apparently a "non-cool" short life span.

The first unit in my main system failed in 19 months. This unit lasted a bit longer at 23 months.

Lesson learned: "Bling-bling" is nice - but go with brand name quality/reliability unless you miss engineering and like computer building so much that you want to revisit those skills around every 1.75 years or so.

 

Side view:

 

Oh so sexy, but oh so sinful!

That makes for an exciting mate, but not so much fun when it comes to power supplies.

 

The surgery was a success and the system is back up and running, ready to trade another day.  

I only wish the prospects of completing all my original weekend plans were just as optimistic....

 

 

 

In the world of trading, there are two main schools of thought- programmed/automated and discretionary methods of trading.

 

Discretionary trading is when one is making decisions on what to do real time based on market activity. Automated trading removes the human decision making element out of the process and does pre-programmed responses based on market activity.

 

For computer automated trading - ideally the biggest pro would be that you'd be able to turn it on and just sit back and let the cash roll in while it does its thing. No thinking required- just a simple flip of the switch to make money. No faulty human interaction to mess things up...

It's the Holy Grail that every trader has thought about at some point and would love to have- who wouldn't?

On the opposite end, you have discretionary trading, where people decide whether to buy or sell based on what they see going on in the market. This is what the majority of non professional retail traders do.

The region of space both types can share is systematic trading - where you trade according to a defined set of trading rules and methods. The automatic traders will have these rules programmed in while the discretionary trader manually operates his system. My trading style falls into the category of discretionary system trader.

 

Which method is better? People working on automated systems swear by them and condemn discretionary traders as giving their money away to the market. Discretionary traders scoff at automated traders as trying to perform an impossible task resulting in a big waste of time and money.

In the professional world of Wall Street, automated trading machines exist but they only look to make pennies per trade- the key for them is performing thousands of transactions per second so they can make big profits on mass volume. You need big bucks to have such a machine and a big outlay of capital to be able to afford to trade on such a large scale. In other words, this is not available to non professional private traders like myself that trade on a far smaller scale.

On the smaller scale,  an automated system would have to place fewer trades that would last longer. To date, while I have "heard" of automated systems that are successful for the retail trader, I have yet to see a bonafide proven system that one would say is successful if your goal is to keep risk low and live off the income.

 

The Kryptonite of discretionary traders are their emotions. The market is geared to induce an emotional response that will lead you to doing the opposite of the right things to do. One of the first things a competent trader has to master is the control of their emotions and ego- it's the cause for most discretionary trading losses.

Purely discretionary traders treat the market like an extension of a Vegas casino and make "bets" based on gut feelings. As you move towards more organization and control, you have "system" traders who have a defined method/strategy of making trades, but it's not automated and instead done manually.

 

This is the biggest "pro" of automated trading - removing the human chaotic human emotional factor from the equation.

 

However, as a discretionary system trader, my answer may be biased, but I think "organized/system" discretionary trading is superior to automated trading for the following reasons:

 

1) The market is comprised of living/thinking traders, which makes the market a living entity of sorts composed of the summation of human actions. Trying to code that type of random behavior analysis into a working program is incredibly challenging and perhaps beyond the scope of the technology that currently exists for it to perform consistently well for retail traders.

2) It's said that the market never repeats but often rhymes- making it difficult to program in those subtle variances.

3) The learned response: being able to learn/adapt from past mistakes favors discretionary over automated trading.

 

From the above, I think #3 is the biggest reason against automated system trading. When market conditions cause a trader to lose money, they know they need to make changes to their methods. A discretionary system trader likely has a better feel for the market than an automated trader who just plugs in market variables. As a result, the discretionary trader will have a better chance at pinpointing the exact problems while the automated trader only knows the current running programs need changing, but no specifics on which variables or rules to change.

Running automating trades comes at the price of not having a hands-on feel of the market, so detailed knowledge of market behavior and nuance is not as developed as those with their hands continually on the driving wheel such as discretionary traders are.

I can point to my own trading growth from being able to do analysis on my trading logic and figure out what improvements to make to adjust for the market.

 

Case in Point - Trading Update for 2/4 - 2/8

 

Which brings me to my latest trading update. It was another week of tough sledding as the market continued to fluctuate in a tight range. I'm still waiting my position out as it hasn't moved enough to invalidate it, but it also hasn't moved to make it profitable yet either.

The problem is the market makes a fairly strong move and it looks like it will break out of the range, but instead of breaking out and continuing a Bullish or Bearish advance, it pulls back into the range - frustrating the plans of those anticipating a trending move.

In addition, the annoying afterthought is the realization that those "initial" strong moves followed by pull backs could have been traded for significant profit- which means I let another potentially profitable week get by me....grrr!

It was clear that my current trading methods had a weakness with what the market was doing - tight ranging/drifting moves, and that I needed to make some adaptations/updates.

This is where my system discretionary trading has an advantage over automated system trading. My manual system trading gives me a hands-on feel of the market so it's relatively easy for me to make changes that will enhance my system without adding any potentially negative side effects. If I had to modify a fully automated system, I'd have to figure out what exactly needs to be changed and then test to see if the changes made will cause additional problems in other areas- a much more complicated task involving many different programming variables to consider. That task is made even harder since the user is likely not as tuned in to market flow and activity due to relying on the automated system.

I made my changes to my system that should now let me trade narrow ranges in addition to trending moves so next week should finally see more trading activity.

My only action this week was to add a couple of Bearish ES call option spreads - still anticipating a pull back. We've had 15 of the last 18 days up - a pretty lopsided move that should balance out eventually.

 

 

 

I was so focused on my current trade that it wasn't until Friday that I realized that I ran out of "month" and so had a performance summary to generate.

Usually during the final week I start figuring out how I'm doing and what I'm going to say to reflect it, but since it caught me by surprise I wasn't sure what it would read, except that it would be negative due to my current trade in progress:

January Performance

 

Started off well, jumped into a counter trend trade too soon and got pushed back.

This chart is also a good example of why charting performance is so transparent. Some folks may wonder why I don't just post monetary gains or losses for the month. If I did that, the month would be positive as my actualized gains easily exceeded my actualized losses. By charting performance, I have to show what's going on in my whole account during that time period whether I actualize the gains/losses or not. It prevents me from potentially hiding internal losses that haven't been actualized yet- which is something many dubious trading sites that are trying to sell their services do.

 

January Performance Vs Indices

 

 

I'm disappointed that I made a directional mistake like I've done in the past, but I've learned some more things this month that should prove to be very useful. Trading is essentially creating your own learning manual of "Do's and Don'ts" based on your particular trading style. And unfortunately, the typical way to figure out what the "Do's" are is to experience what a "Don't" is first hand.

Imagine if you were on the street without a rule book and had no advance knowledge of how the traffic system worked. You would have to figure out what all the behavior and symbols mean. You would notice the pretty lights changing colors but only after having accidents would you realize you need to stop at red. Or that a stop sign means just that- but for how long? This is basically what trading is like - trying to figure out the "rules" and how they apply.

This is also what keeps trading fascinating for me- it's a continual learning experience where I get graded by the quality of my trades and my ability to learn from my mistakes.

 

 

 

Normally I'd title my entry "Trading Update", but I didn't place any trades this week, as I'm still kind of mired in my trade from last week. I've been waiting for a pullback that has yet to happen. The market has been on a roll and today the Dow has reached the 14K mark, a level not seen since 2007.

It's kind of amazing where the market is considering the state of the economy. The "old" me would have shook my fist and railed against the illogical market and that it was only a matter of time before reality would hit. The "new" me pays little attention to current economic news for the most part, knowing that market behavior can often be out of sync with what we consider reality so it's best to judge the market by its own behavior rather than comparing it to current events.

Take today for example - the jobs report showed a less than expected number of jobs created and the unemployment rate edged up to 7.9%. The market took that in stride and rallied over 1%. Definitely counter intuitive as those are typically bearish signals, but the market always has the last word. A lot of Bears threw in the towel this week, which is a good sign at least a short term top is near.

The good news is despite my negative position  in the market, I know what my exact errors were and what I should have done in taking on this position. I "thought" I knew what to look for to confirm a trend change, but it wound up not being the case. But now I do know and updated my methods to reflect that, which will make my trading more profitable going forward.

In the meantime I have to wait until next week to see if the market finally starts pulling back for a breather, or continue to power forward, requiring me to start closing out positions. All my analysis points to an imminent pullback, but the fact that we're near all time highs may give the market more staying power.

 

The lesson of the week is the same as last - "The trend is your friend, until the very end. " Staying with the current trend would have resulted in some highly profitable weeks.

 

 

Last week I was lulled into thinking that sledding was going to be fairly easy relatively speaking compared to last year when I was still early in honing my trading skills. Then I got a bit over confident and broke one of my prime rules in waiting for the market to tell me what the trend is through reactions at support/resistance trend lines and jumped in feeling pretty sure of what the market would do.

Turns out that was a big "Nope!" as the market proceeded to ignore my plans an move to its own beat which was not on my expectations list. This is a common trap for all traders - jumping in ahead of an anticipated market move, only to have the market do the opposite.

Two areas that can be trap prone are at near term market tops or bottoms. Market Makers know traders are trying to step in early so there will be numerous false signals to lure in folks, only to have them stopped out of positions. However during this time, the cycling/chop can be extreme- which means serious profit potential for those able to sync up with all the zig-zags.

It took me most of the week to figure out the flow of market gyrations since there were no large scale moves- just lots of chop with a slow and steady grind higher. By the time I figured it out and recalibrated my analysis, there wasn't much to do except watch and see if the market will confirm my assessment.

Had one closing trade this week for a loss as the market moved higher than I had planned. The sad part is the overall trade was profitable at one point after being in the red, but I didn't close thinking the top was in- my mistake which cost me.

The good news is this was an excellent week to get in the weeds of sharpening my scalping trading skills which should prove to be a great asset in getting future market profits.  Lots of chop and false moves for analysis. It was also a good lesson in being patient- easily one of the most important aspects in raising the odds for a profitable trade or investment.

The market showed clear signs of topping action so a pullback appears to be imminent. Based on what I've seen, I wouldn't be surprised if next week started with a gap down.

In other news, there were big market moves with earnings reports coming out. Google, Netflix, and Amazon soared to new heights while Apple's stock value dived even though they beat estimates. This is why I always stress never to fall in love with a stock. There are people who bought Apple at $700 thinking it was a short time away from $1000, only to see it drop over 35% since those highs. It's almost where it was a year ago before the parabolic rise- so those who didn't take profits during the past year have given back almost all the gains.

And you have people still trying to preach the virtues of "buy and hold".