Archive for August, 2009

Trading From the Inside, Out… By Option Prophet

Ok, here’s the deal…

The last thing you want to see at a prominent social gathering as you glance across the room is your very own financial portfolio hobbling in on a cane, wearing a neck brace with its power arm in a sling and ordering up a double of “whatever he’s having”. 

Your trading account is slowly recovering from a fat lip, a black eye and more than a few after hours pot shots to the won tons. Your account has seen better days and you absolutely refuse to (feed the machine) continue wiring capital to re-fund your account every other week. You’re on a nickname basis with the accounting department at your favorite brokerage although you have never met in person and you’re beginning to dread the next time you come face to face with… (Cue the Tuba’s – enter ominous foreground music) “The Market”

Smell familiar? – Yep – it stinks! 

You’re on the fence about throwing in the towel or taking that “one last shot of miracle cure, hold the ice” Better known as a snifter of Hope with a Prayer chaser. It’s a mild demotion from a Lick and a Promise. 

Like a windup toy destined to walk the straight and narrow from here on out in a world of twists and turns, you elect to join the ranks of Team Insanity and take the plunge. Eyes wide shut, arms at half mast resembling that of a forklift and zombie stomp in full stride… destination… the same old thing! 

Sound like someone you may know? – Perhaps… 

The sad fact is that, that somebody also knows someone that rides that wheel. 

I realize that there are many traders that are in this position and that there are just as many traders with their boarding pass in hand, ready to climb aboard the “Flying Dutchman” and set sail into the great unknown just one more time in hopes to wander upon that Mystical Island of Wealth – Fantasy Island.

Overcoming traumatic trading losses is devastating to your financial situation as it is to your overall state of mind and state of being. 

When you sit too close to the core, the essentials the ride about the rim become hazy and out of focus. 

This article is not intended to be a sermon nor is this article intended to be a term paper on the subject. I merely feel that some light on the subject should help bring some awareness to unconscious decisions and actions made by many traders… at least the many traders I continue to meet and help.

The Scenario:

You’ve calculated your Trading Plan based on mathematical information with chart patterns, indicators, fundamentals and such. You say to yourself, “ok this looks good – this should work” after you have paper tested your ideas a few times. The possibilities look promising and the results you’re achieving meet your required expectations along with your risk profile. So you get the green light and prepare to put your live capital down on now what you believe to be a “probability” not a “possibility”. 

Now, you have reached the point of Testing with Live Capital. Paper trading is a great resource for learning mechanics and is even an asset for developing alternative trading skills, depending on the types of trading you engage in. But paper trading really is in no way comparable to trading a live account with real capital. Understanding the divergences of live trading versus paper trading is essential. Every serious trader should have stock in this understanding. (Pun intended!) 

Some things to consider while foregoing your next round of testing: 

*Remain objective throughout your modes of testing. If you are unable to establish an unbiased perspective of your theories while in test mode, probabilities are you sure as hell won’t acquire one during other aspects of your trading venture. 

*Avoid skewing your criteria to fit the result you desire. In testing theories you should be continuing to disprove any notion that the “Holy Grail” you just developed works as calculated. Nothing is perfect and you should be insistent in proving the same is true for your methods. 

*Question your motives for taking a trade prior to the trade, after the trade, but not during the trade. If the trade goes wild while in the position, your Trading Plan for that specific strategy should already have the guidelines on how to handle the situation. 

*Keep a record of your trading activities. If you have no record of events you have no measuring guide as to where improvement is needed or where enhancements can be made. Most traders look at stock charts to gage a stock’s performance, why not look at references to gage your own performance? (Rhetorical) 

*Don’t bring your prior trades to the table for prospective trades whether you’re dragging yourself up from a bad trade, a good trade that went south, or simply coming off a nice win. Every trade is unique. Every trade is new and unlike the last one, as it will not be the same for the next one.

The only thing that repeats is an echo.

*Don’t trade scared. There’s a big difference between pulling the trigger too early on an emotional surge and pulling the trigger early because your trading plan calls for it. Whether you’re entering, exiting or scaling, if you need to be a bit more dynamic or adaptive in your trades, write it into your plan. Driving the stake down on paper before hand is merely a guideline to give you reference…it’s not the “end all, cure all”. Everyday life is a dynamic process, so why would trading be any different? (Rhetorical) 

*While trading, be aware of, but don’t isolate the focus to your current P&L. Emotions have sharp teeth and aren’t afraid to use them. Numbers and calculations should have all been figured into your trading plan ahead of time.

In other words, by focusing solely on the potential result of your methods you tend to dampen the process that should be taking you there. 

*Stop loss management. This is in regards to trading an underlying (Stock, ETF, Future and is not intended for the experienced Option Trader. The experienced Option Trader understands that as a buyer of Options you acquire a dynamic soft stop within the Option or the Option Strategy itself.)

Don’t choke your position with a stop loss. There’s a time within the trade to tighten the stop on your position, but initially you need to let the position breathe. If you’re feeling as though your stop is too tight initially then perhaps you need to re-evaluate the type of market you are trading, (ie: highly volatile chop), the entry on the position, your risk profile, the size of your position or your profit objectives on the position. Don’t just put a stop loss on for the sake of security by telling yourself that your position is protected. There are times during the life of your trade that a stop has no immediate effect on your position when tagged or touched. In live trading, stops are sometimes blown through and triggered with a lot more slippage than anticipated. Stops need to be calculated and managed as part of the initial position. This is another nuance that should be written into your plan. A stop can be your trade’s saving grace, but it can also be your position’s extinguisher. 

*Trade from abundance mindset. Your mindset should be free from all anchors when you’re actively trading. Don’t risk more than you can afford to lose, don’t trade the mortgage payment, and trade clear in mind. When trading from scarcity, you tend to do things you wouldn’t normally do. 

All in all it is imperative that the active trader or investor have the proper education and hands on experience to manage one’s capital.

I wish you all good fortune

Peace-

Option Prophet

Advertisements

Last Night I had The Strangest Dream….continued…by Option Prophet

* Here are just a few things that honk me off, but I still find them extremely amusing (below) – I just about laughed Congress’ balls off – perhaps you can finish the task…if there’s anything left…

 (Reads nicely while having a nice hot bowl of popcorn with movie theater butter)

**Eco data report comes out (pick one) – there’s the consensus then the actual figure…. and then, ta dahhhh… it’s revised! (WHY?)

 (Here’s a solution)

If there isn’t enough time to get an accurate report out on a continual basis – then change the cycle on which it operates or simply complicate the Eco reporting process even more by creating an additional report and schedule it to be released on an adjacent day. Then combine the reports, skew the numbers in a separate report for the following week! (That’ll help keep the markets frantically swinging back and forth and aid in the rise of split personality disorders) – *Clue: Aim for the one in the middle – It’s an easy target!  (Problem Solved)

**Eco data report comes out (pick one) – “Here’s the core number after stripping this out and that out and this out and that out….”

 (Here’s a solution)

Either leave all the data in the report right from the beginning and give it to us real or just omit the entire report.

I realize and understand that in some cases adjustments need to be made, but come on!

**Hurry, Hurry, Step Right up….

In the midst of the most chaotic financial and economic meltdown in history November 2008, a spokesman for Ringling Brothers or was that Lehman Brothers… got all decked out to the nines and the elevens in his custom tailored clown costume and proceeded to heckle unsuspecting investors with the notion of a “Full House Buy”. Everything is on sale right here, right now. “Step right up and get ’em while they’re hot… we’ve got exotic toxic mortgage backed securities, junk bonds, recycled toilet paper, gum wrappers, tape and I’ll even throw in the neighbor’s dog….if you want it – we’ve got it!” Nobody was taking the bait, but the sound of the ground crumbling beneath this man and his organization was growing more intense. He pleaded with the few unsuspecting investors that were nibbling at his offer as he quickly snatched up their buy orders while simultaneously pushing his sell orders to the open market. As we all know that didn’t work out very well. The ground parted, the institution collapsed and down into the fold they all went. In just a short time after the fall the pitchman came face to face with his fearless leader. The leader was greeted by the pitchman using only five simple words. “Welcome to the Fuld, Dick!”

**Not so slick…

What’s his neck….anyway, a former chairman of the Nasdaq takes down an entire financial structure spanning from insiders to globalized funds to gothic sized pension funds single handedly, supposedly without so much as a wingman and went undetected for over 20 years while doing this. Man, that’s slick! I wonder how he would’ve made out as a used car salesman … or if he would’ve “Madoff” with those people’s hard earned coin too…

**This is interesting –

Corporation X beats earnings estimates (courtesy of the company’s paid analysts) by $0.18 (due to creative accounting which should have been minus $0.08) and reports for the very first time in their history, GAAP “and” Non GAAP numbers…oh yeah and Corporation X’s revenue was down 15% year over year… but that didn’t stop almost that entire Broad Index from getting a dose of shock therapy and kicking off another rally. 1 stock, immediately following a brief dead spot in A.H. trading (and who really cares what the actual beta is) causes almost 99 stocks out of 100 to follow…just like sheep…? Perhaps INTELling investors that their money is safe in this company’s stock would set the tone for this index to rally. I would expect this type of behavior from an ADR, but on Wall Street…nahhhh!

But I must say that it is out of sheer morbid curiosity that I continue to safely watch this particular scenario play out from the bleachers….

(Taking a hand full of hot popcorn with movie theater butter)

**Oh yeah, it gets even better…

(As Michael Buffer introduces the next act…)

“In this quarter…weighing in with $3.9billion in losses (minus their 3rd and 4th tier assets), wearing torn oversized trunks with a matching eye patch we have Financial Institution X. Right off the stretcher and fresh out of the I.C.U., who was able nail down some part time employment washing dishes in a local restaurant before they were thrown from the back seat of a moving SUV while attempting to  sleep off the drunken stupor they were wearing, compliments of a tax payer funded wine tasting party … just hours prior… !”

Awww… just a little late to the money party boys n’ girls, comes stumbling in on their knees like a strung out junkie trying to score some “H” in the 11th hour, all out of breath with one hand clutching its chest and the other hand pointing to the 9 inches of money scattered across the Fed Chairman’s desk, claiming they were stuck in traffic when the announcement for the “Free Tax Payer Money Give Away” was made on public radio, T.V. newspapers and the web.

Holy C.I.T. – what a rush! – But there’s more…

**How did this play out you ask?

*Result — Denied! – Too funny! – The Prez tells them, No more room at this feast, No soup for you, This car is full, The train is pulling away from the station, Step away from ‘The Hill” and proceeds to hack the teary eyed institution off at the knees. All hope diminished….? – Nope!

Not so fast!

And who appears like Super Heroes just in the nick of time to save the day….?

Surprise!! – It’s the Dynamic Duo – Goldman and J.P. Morgan to the rescue (which one is Robin? – I’m leaning towards Morgan as being Robin)! – Just like the Federal Reserve’s Zeus and Apollo … obedient lads….

Prepared to throw endless buckets of money (O.P.M.) at the distressed institution to put out the flames, while continuing to put the squeeze on their lending… as they secretly peck away at the distressed institution’s decaying carcass, all in the name of feeding the machine.

It has all the illusion of a “happy ending” without the smile.

This whole thing stinks like a bad television series that should have been canceled before it began.

But in the interim, I guess I’ll just sit in the bleachers with a butterfly net and catch the dollars that float away from greedy fists that can’t line their pockets fast enough. The slippage appears to be in abundance…

I feel bad for all the innocent people who became victim to this whole debacle and the ones who were lassoed in under false pretenses. It’s up to all of us to learn from our own history as well as other’s mistakes.

As for the masterminds and ring leaders in all these charades… may you all rest in pieces!

I want to wake up now. Man, it feels as though I’ve been asleep since February 2007 – … What a drag!

And this isn’t even a cool nightmare!

Uuuup…that’s my alarm clock sounding off now….

(As my sexy voiced alarm clock coaxes me from a deep sleep)

Ahhhh yes…awake at last! That had to be one hell of a nightmare …it must have been! Nobody in their right mind would ever believe that all these things could’ve happened…for real!

Time to get up … Time to Rock N’ Roll!

Last Night, I Had The Strangest Dream…by Option Prophet

Well, today I had another great day in the markets, despite the market having all the appeal of a runaway train on Thorazine.

After dinner I studied my daily data sheets, made my notes and prepared for the next session before calling it an evening and targeting my bed with a nightstand stop loss.

As I drift into sleep I can’t help but hear the lyrics in my head of that 90’s Styx song “The Grand Illusion” when I gear up each day and evening to get in harmony with the markets.

Although I am not really a Styx fan, the lyrics to that song seem to tune in to the frequency of this facade we have all become part of thanks to those who participate in the mask of leadership for our great nation – A.K.A. the government.inc.

I do believe that there are some good intentioned “officials” working for a good cause, as they believe it to be, but the fact remains, as spoken by a pocket full of our public servants through the years and as of recently… that …either you’re with us … or … we’ll take your home away, make a run on your business, seize your assets, condemn your land, hijack your internet, eves drop on your conversations, build main roads that bypass your town, intercept your mail or simply just cut you off at the mainframe!” Ya’ know what I mean, Chip?

And that’s just the prelude…

How’s that for some high octane motivation? – Quite honestly I would venture to guess that downing shots of 104 would go down a hell of a lot smoother.

In regards to “…either you’re with us….” Does this “with us” apply even if what’s being laid out there is highly questionable to even the average intelligence?

Maybe it’s just me, but it sounds like some heavy ideals that were laid down back in the mid 1930’s and early 1940’s in a not so distant land.

The way I see it, it really doesn’t leave you with much of an option if you’re in touch with the reality of what’s really going on… or does it?

On a much smaller scale, sounds to me, like grabbing a group of charged up individuals, a stampeding herd if you will, after a motivational conference and asking them if you can “count on their support…”(support for what exactly?), “help the greater cause…”(what greater cause – what’s so great about this cause and in comparison to what other causes?), “do whatever you can to overcome…,”(can you be more vague?) Once the gung hoes have committed (to what, they’re not really sure…) they’re given their orders and sent out to uncover hidden land mines while each one of their hands are fitted with a hammer.

That’s just Gr8… I mean G3, uhmmm, no, I mean G20…. well anyway that’s just great!

I can only imagine, what thoughts race through the good hearted people’s minds, “Can’t turn back now…what will the others think” “…now they’re expecting results”… “is it a crime if I opt out now?” … “was it a crime that I so graciously accepted this task in the first place?”

My, oh my, what a heavy cross to bear! – If you could only imagine just how heavy that naked cross can be!

It really all depends on where you park your beliefs, what your current perspective is on events and what your current position is within them at the time.

Do you truly believe everything you hear on one of Nicola Tesla’s great inventions, the radio, and that, oh so popular, idiot box the television?

Don’t get me wrong, I really enjoy watching 42 minutes of useless commercials during a 1 hour show.  Commercials so desperately trying to expose me to the idea that I absolutely need this drug and that drug , a product or a service that I have no desire or no intention whatsoever of ever being interested in, using or ever needing. If I didn’t know any better, I’d think that there was some heavy mind washing going on… it’s just an observation.

The sad fact remains…. a majority of the masses do believe it. Why wouldn’t they …it was on T.V.!

There is also the web, billboards, newspapers, public and private speaking and (hold on to your shorts (literally – cause I think the markets are headed South real hard, real soon) Batman) symbolisms built right into some high traffic structures letting you know exactly what they want you to hear, see and think.

Yep, it’s called prepackaged media and the art of hiding in plain sight. The events have already been decided and these devices merely represent the forum for how to direct the masses, skewing sentiment and preying on fears. 

TO BE CONTINUED…A few things that honk me off….

Optimism Reigns Eternal

Everyone is excited about the recent market rally. The excitement, however, may be unfounded. You see, this rally is not about the fundamentals or the technicals, it is about optimism. They say that optimism reigns eternal…..and when it comes to peoples’ hopes and desires about the economy and the market, that statement is particularly true! Everyone wants the market to go up and the economy to flourish. With the help of the media, the Federal Government and Wall Street are striving to give the people what they want even when the market is heading down and the economy is in recession. They simply act as if all is well and the people believe! It is not because those people are stupid; it is the simple fact that it is human nature to be optimistic…….to have hope of better times to come. This optimism is so strong, it overcomes everything….including reality!

Wall Street and the Fed, with the help of the media stoke the optimism that lives in everyone by manipulating some numbers and spinning others. Case in point; last week, the unemployment number came out stating that 6.2 million Americans were out of work. The expectation was for 6.3 million so the number was down 100,000. This number was spun as a positive number….less people collecting unemployment means less people unemployed! The assumption is that those 100,000 people found jobs! But is that what the number really meant? Consider this: also that day, the weekly jobless report came in showing a loss of 25,000 jobs. That sheds a different light on the unemployment rate. If there were 25,000 fewer jobs then how were 100,000 less people unemployed. In reality, the 100,000 people did not get full time jobs. They stopped looking for a job, took a part time job or ran out of benefits.  None of the people in those groups are included in the unemployment rate. A writer for the Associated Press declared, “If laid-off workers who have given up looking for new jobs or have settled for part-time work are included the unemployment rate would have been 16.3 percent in July.”  Spin that how you want but it cannot be good news. As a matter of fact, it is terrible news! But alas, that is not how it was received. The news was greeted by optimism….albeit a misplaced optimism.

This stoking of optimism by the federal government and Wall Street is a major gamble. We all know now that this recession’s (and every other one’s) cure is simply and only time. Government and Wall Street are betting that they can get through the recession by biding time with optimism until a real recovery begins. This last earnings season was skewed to look good when in reality it may actually have been bad. If the Gov and Wall Street can keep the proverbial wool pulled down over the public’s eyes long enough to let time do its thing and pull out of this recession, they win. If, by chance, more bad news hits and hits hard, the Gov and Wall Street will pay a terrible price for building up this false optimism! Let me explain what I believe will happen if this plan backfires on Gov and Wall Street.

First, the beating of earnings expectations (very handily in most cases) will likely prevent Wall Street from putting out ridiculously low-ball estimates this time. Wall Street analysts will have to raise expectations. The problem with that scenario is that the companies will not have the luxury of large cost cutting measures this time around. Last time, most companies beat earnings estimate but had much lower revenues. If earnings are up and revenues are down then it MUST be due to cost cutting. There is only so much cost cutting you can do. To continue to grow earnings, you must start to increase revenues! I do not see that happening this coming quarter if unemployment increases and consumers remain very frugal.

So, if this scenario comes to fruition, next earnings season could disappoint. That could create a sell-off in the market. That will scare investors out of the market furthering the sell-off. The general public (heavily vested) will get hurt again as portfolios take a beating and as a result will tighten their wallets even more. They will lose confidence in the market….and in Government and Wall Street. Big Brother and Wall Street will now look incompetent! So, not only will the consumer lose confidence in the economy, they will lose trust in the government and Wall Street. Optimism will turn to pessimism and we could get ourselves stuck in a recession that lasts for even more years than I was expecting! That is one hell of an expensive price to pay for creating false optimism!