I didn’t trade yesterday because I thought everything looked ugly. Today, I thought lots of trades looked good, but I was usually wrong. I had 1 small win, 1 small loss, and 2 break-even trades. In total, I lost 0.02R, but in dollar terms I lost maybe $150 or so. No big deal, but a sucky close to the month and it’s looking like a less than satisfactory week ahead of me. I have a number of things to do this week that may keep me from trading much the rest of the week.

Even when the markets go down, like today, they finish the day flat. It’s sickening, and I think it is the cause of all the brittle market action. Whoever is holding up the markets needs to take a rest and let things stabilize. rrrrrgh…

Four trades for Zoomie today… -0.75R total. My day was very similar. I’m in a bit of a hurry due to Halloween stuff, so…

Celgene (Nasdaq: CELG):

FARO (Nasdaq: FARO) Trade #1:

FARO (Nasdaq: FARO) Trade #2:

UBS (NYSE: UBS):

Stocks Mentioned In This Article
Stock	Links
CELG	| |
FARO	| |
FARO	| |
UBS	| |

Zoomie found two trades to make in today’s choppy market action.

First, a loss on Max Re Capital Ltd (Nasdaq: MXRE):

Second, a break-even trade off the 15-min charts on Diebold Incorporated (NYSE: DBD):

It looked rough out there this morning… I decided the markets had given me the day off. Hopefully tomorrow will be better for both of us!

Stocks Mentioned In This Article
Stock	Links
MXRE	| |
DBD	| |

I haven’t been backtesting much lately. One problem I have noticed with backtesting trading systems, is that there’s no way to account for the effect that your trades have on the instruments you are trading. I have been noticing that effect more than ever, recently. If you look for it, I bet you can spot it, as well.

It should be obvious, if you think about it, that interacting with the markets can change their future direction. When you buy shares of a stock, no one else can get those shares anymore. So, if there are 2000 offered at a price, and you buy 1900 of them as other market orders come in, chances are good that the ask is about to go up. With all the backtesting systems I am aware of, though, you get your 1900 shares and the system keeps on playing back its canned market data. Unfortunately, in that data, someone else may have gotten the same 1900 shares as you did. In real life, that could not have happened.

But, it’s no big deal, right?

At this point, you might think, “so what? the ask moves up a cent, momentarily…” First off, on some stocks your buy order could eat through 5 or 10 cents of ask levels. Even on a small order, I’ve been victimized a number of times by pesky specialists who find a way to raise the ask, fill my order, and then drop it back down (probably laughing at me the whole time). But, that’s still a small effect, that you could just call slippage in a backtester, right?

I say, wrong. Sometimes even a single cent makes a big difference. It’s like how they say a butterfly flaps its wings in Kansas, and causes a typhoon in Asia (as if foreign countries needed more reasons to hate the US!). What if that one cent ripple is a new high that triggers a wave of computerized institutional buying? After a couple more cents, shorts get nervous about the volume and start to cover. Then, any idiot can see the stock is moving, and more money pours in. etc. etc. None of which would have happened if you hadn’t eaten up a few shares a couple minutes before.

To take it even further, what if all that buying in your stock pushes your sector’s index through an important technical level? Perhaps that causes a huge number of participants to pile on to several stocks, adding more fuel to the fire. Or perhaps not, but it grabs a lot of attention, regardless.

It’s Not Always A Rosy Experience

The previous example is the case we want, where our buying helps cause a wave of additional buying. Score! I’m far from the first to notice that this can happen. I was reading an old elite trader thread about tape reading the other day. In it, someone pointed out that when they are long a stock, they’ll buy 100 more shares at stalled new highs, to keep the ball rolling. (I don’t normally read the elite trader site, but this post from Tyro Trader pointed it out to me.)

However, it’s easy to imagine cases where your effect on the price action can work against you, as well. Take the case where you sell a stock short, and the specialist manages to pull that trick where the bid drops 5 cents just long enough to fill your order. Then, the bid pops right back up. That sucks, but it’s just part of the game, you think. Then, a couple buyers pick up some shares and the stock moves up a couple more cents. Hmmm… What does this look like on a 1-minute candlestick chart? If you sold enough shares short, it can look like a relatively high-volume hammer candle! That’s a bullish signal that could cause trigger-happy speculators to start buying more. The more they buy, the more interest is generated. Had you not shorted those shares, it would just be a flat 2 cent green candle that no one would care about. It might have even gone on to drop hard, just like you imagined when you shorted the shares in the first place!

Continuing the example, let’s say the stock keeps moving up, and you decide you must have been wrong, so you cover your shares. This eats through some ask levels (at which point you swear to yourself you will never trade this stock again!), and causes another wave of buying. The irony is, had you not covered, maybe the stock would have fallen back down.

Then again, maybe not. You’ll never know, and your backtester won’t tell you, either.

Another Example

Your order doesn’t even have to be filled to make a difference in the price action. How many times have you put in a limit order that splits the bid/ask, only to see other buyers step in one cent in front of you? You chase the bid, but they keep one-upping you before you can get filled. Who’s to say that would have happened if you hadn’t put in your greedy limit price?

Just backtest very liquid stocks?

Of course, your influence on a market is minimized if you trade instruments that are highly liquid. Even so, you do have an undeniable effect on the supply/demand when you trade. Further, only the most liquid stocks are truly liquid all the time. To minimize your effect, you should really only enter your trades at times when $/sec churning through the stock is pretty high. I mean, it doesn’t matter that 2 million shares traded in the opening hour, if only a few thousand shares are trading right now.

I’ll add that backtesting fewer shares might help preserve the integrity of the simulation, but it would also make the results useless. You can’t take those results, trade larger in the real markets, and expect proportional results.

Summary

Because of the deficiency I’ve described here, I’ve lost some of my interest in backtesting. Or, at least, I’m now more interested in scanning for potentially good setups, than I am in going through an entire trading simulation. The simulation simply cannot account for my effect on the price action, which is very real. Look for it in your own trades, and you may be able to discern the difference you are making. All too often, I can look at a chart and spot my trade on it. The effect may be pronounced for me, because I am primarily a breakout trader, and often my trades help fuel the breakout (and sadly, sometimes my trade represents the upper wick on the highest candle of the day).

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

10-27-06, Short ISRG, 30 min chart:

I went short Intuitive Surgical, Inc. (Nasdaq: ISRG) at the green line ($100.09), as I saw it break below the opening range low and crack $100. There were lots of red flags on this one, but I chose a very aggressive stop anyway ($101.50) which made my reward:risk potential look really good (over 3). In retrospect, that stop was not justified since the entry was so far below the 5-ema, along with the wide range in the second bar. I jumped in on a quick down movement inside of the third bar, and ended up getting stopped out by the formation of the third bar hammer. I skipped down a timeframe and traded a 30-min setup on a 15-min chart and got nailed for -1R. I really need to stick to my timeframe instead of reacting to smaller order movements. If a trade doesn’t work on your chosen timeframe and you have to jump down midway, then you’ve misread the risk:reward. Don’t quit your day job…

Stocks Mentioned In This Article
Stock	Links
ISRG	| |

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This week was pretty positive, though not as profitable as I would have hoped coming off of last week’s losses. Let’s examine it a bit.

I traded 3 days this week. I passed on Monday, and had lots of things to do Thursday which kept me from watching the markets too closely. Even so, I still made 8 trades. So, that’s two weeks now that I’ve been able to get my per-day trade count up. Last week, that resulted in losses. This week, I showed I can up the trade count and still make money. In a post I’ve been promising you all forever, I’m going to show that making more trades is the only way to statistically assure myself that I will consistently make money. That’s why it’s been such a focus for me.

The main reason I didn’t have a record week was that I was really jittery about holding onto winning trades. I like Ugly’s idea about at least holding onto half the shares, and may see about incorporating that. I just know for certain that holding onto all my trades is not a good idea until the markets get less strained and overbought. New highs and new lows just don’t run far enough for comfort before reversing. Most of my losses this week were caused by buying new highs that immediately stalled out.

The table:

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

This week was a short week as I only traded 3 days due to the Fed meeting and my scanner being down today (Prophet.net). I tried to use a couple other gap lists today to trade with, but I just wasn’t in the groove without my regular scanner. I am happy that I waited for my targets this week but not so happy I took sub-par setups. My charts say it all of course.

Lessons learned: Just because there is a high probability of a stock moving in your direction does not mean there is a low risk opportunity to trade it. And trying to enter it 3 times is not such a good idea either ;).

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I thought I’d take a moment and talk about why I give thanks every day that I’m a a stock trader.

My Typical “Work” Week

On average, I trade about 4 days a week. When I trade, I actively watch the markets for about 4.5 hours, and set alerts to pull me back in if something comes up later. You can see from my video on my nightly trade prep that I spend maybe a half-hour each night on preparations. So, that adds up to 20 hours of dedicated work I put into trading per week. At my old job, it wasn’t unusual to do 20 hours of overtime most weeks, on top of the normal 40 hours. And, since a lot of my “work” hours are basically just waiting for opportunities to arise, I have a lot of freedom to multitask. Because of this flexibility, and the fact that I work at home, I can:

• Shop when there’s no traffic to fight
• Sleep in when I’m tired
• Go for a walk, or go swimming when the weather’s nice
• Cook healthy meals while I “work”
• Do laundry while I “work”
• Wash dishes while I “work”
• Vacuum while I “work”
• Exercise while I “work”
• tons more, but you get the idea…

Those entries about house chores may sound unremarkable, but think about it. It means that when I’m done for the day, I’m really done. It means my free time is really free. When I was working 60 hours a week, I let my apartment, and my health, go to hell. I didn’t want to spend the last half hour I had to myself cleaning up or cooking.

And, I used to commute about a half hour each way to work. That was an additional 5 or 6 hours a week of driving on top of my work hours (when there were no wrecks blocking lanes). It’s money I don’t have to spend on gas, and wear and tear I’m not putting on my car. Fantastic!

Plus, the time I spent actively paying attention to trading is very mentally engaging. It’s a constant challenge, and putting your money on the line is never a dull experience. I get to constantly learn new trading ideas, as I go head-to-head with the best and brightest traders in the world (and, thankfully, the dumbest, as well).

The Free Time

So, I just sit around staring at the television when I’m not trading, right? Well, I certainly could, but one of the reasons I couldn’t stand working 60 hours a week at my old job was that I have too many hobbies that I couldn’t pursue. I recognize what a gift it is to have this time available, and I try to use it to its fullest. Some things I’ve had time to do are:

• Write this website, and other blogs. I like to write, and share what I’ve learned with others.
• Put a real focus on finding my own inner peace and stability. I don’t mind saying that getting divorced and getting near 30 years old were really messing with my head. I’ve had time to read a bit of philosophy and practice meditation, and just generally take the time to really think about stuff
• Contribute code and ideas to StockTickr. Check it out, if you haven’t!
• Play Guitars. I still can’t play like I could in college, though. How sad…
• Start learning to play piano.
• Start learning french, and reading about auxiliary constructed languages like Ido and Novial
• Keep up to date on computer science and math topics I enjoy, primarily in the areas of programming language theory, and abstract algebra
• and much much more

Worst Case Scenario

This is my favorite part! Sometimes people I know ask what happens if I wipe out my account. With the kind of risk management I employ, that’d be a statistically difficult thing to do. But, lets ask a more relevant question: Currently I barely cover my living expenses, and sometimes I don’t cover them. After last week’s bad losses, it looks like October will be one of those doesn’t cover expenses months. So, what if I can’t improve on that, and slowly eat away my account? I would call that the worst case scenario. Let’s look at it:

I’ve been at this for 7 months now. Outside my trading account, I have about a year’s worth of living expenses sitting in risk-free savings. So, in the worst case imaginable, I will seek full time employment in the computer science realm, after a year and seven months of the paradise I’ve just described. Wow! Since I actually enjoy computer science work, that’s not a bad deal at all. After another year, it might even be a nice change of pace! And that’s the worst case scenario! How amazing is that?!

My parents told me a story last year, of a couple they know. These people worked hard up until retirement age. The saved tons of money. They bought a dream house to retire in, and rented it to someone else to bring in more cash while they continued to work. Then, right before the time came to retire and enjoy the wealth and amenities they had amassed, the husband became ill. He didn’t die, but he can’t really enjoy things like he probably imagined he could. For instance, he lives on a golf course but can no longer play golf. I bet he regrets every game he passed up because he wanted to work through the weekend.

So, I say, in the worst case imaginable, I will have had almost two years of retirement at 29, in the prime of my life. That’s an age where I can really enjoy it. But, don’t count me out, just because I’ve thought through the failure case! I think I am on track to “make it” in this game…

Isn’t There Anything You Don’t Like??

Um… nope.

Oh, Come On…

Ok, there is one thing annoying me about this lifestyle. Working by myself, from my home… well, I don’t immediately see how I’m going to meet the girl of my dreams this way. And, I would really like to meet her. Any female readers out there want to fix this problem for me? :-)

I’m trying to figure this part out. I have a general aversion to on-line dating services. Doesn’t seem very natural, plus when I did break down and sign up with eHarmony they actually refused me service! ouch! I had no idea they would do that. Someone suggested later it’s because I’m not religious. I wish they had told me that up front, before I wasted time filling out their personality profile.

I could use my free time to do some sort of social activities, maybe… take some classes, or something? I dunno. The kinds of hobbies I like are generally solitary ones. I read. I program computers. etc…

So, If The Stock Trading Life Appeals To You…

Then, do it! Map out your own worst-case scenario, and see if it doesn’t sound at least a little fantastic. Going into trading is a little daunting, just like starting any other business. But, it is also extremely rewarding. Just don’t imagine getting rich in two years (even though there’s always a chance). Instead, imagine how rich your life will be, immediately!

It’s also one of the easiest businesses to get into and out of. To get into it, open a big trading account, and establish things like health insurance for yourself. To get out, simply transfer your trading balance back into savings or whatever, and move on. Compare that to getting in and out of, say, the restaurant business. Or real-estate. Ick! A trader’s life for me!

Harmonic Inc. (Nasdaq: HLIT)… three strikes. What sucks is that he was basically right about the stock… the trades themselves just didn’t work out.

Skechers U.S.A., Inc. (NYSE: SKX)… played for a rally into the close that didn’t materialize. A break-even trade.

Stocks Mentioned In This Article
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HLIT	| |
SKX	| |

It was an unusual day for me. First, I overslept, and the trading gods punished me for it by making some of the best picks from my scans cross their triggers early in the session. So, I missed a lot of nice morning action. That’s really too bad, but then again, it’s nice to be well rested, too! :-) Life is good…

So, with the main list candidates already through their target prices, and an FOMC event coming up, I nearly just walked away. Instead, I thought it might be fun to scalp on RDC some (it was one of the profitable candidates I missed). I traded it 3 times, for 2 wins and 1 loss.

Ok, so the Rowan Companies, Inc. (NYSE: RDC) trades:

First I bought the break of 35.00 around 11:50. My target was the HOD, since I thought it would run up to it and fail. I got characteristically jittery since the dow was pretty negative, though, and bailed too early so I would start the day with some profit.

Then, completely contradicting the logic from my first trade, I bought the new HOD. It was acting pretty strong, so I called it a “just in case” trade. As I had previously expected, it failed, and I got out for a mere 4 cent loss. No big deal. At least I didn’t let it go all the way to my stop like last week!

As it kept failing, I decided to enter a trade when it fell through the trough between the double top. (you can see it @ 34.86 or so at around 11:15). So, to avoid getting mindlessly chopped up again, I let it drop to 34.80 before going short. It stalled out @ 34.73, and I bailed at 34.74. That turned out to be a good decision, as it was stuck between 34.70 and the HOD for the rest of the trading session.

What can we learn from this and several of my trades last week? Stocks are not breaking out at HOD or LOD very reliably right now. They just, aren’t, unless they have a ton of volume. It would actually make me a lot more money to short the HOD and go long the LOD, but I am not quite ready to put a strategy like that into effect yet. Would have worked out great today, though…

I haven’t totalled it up, but I can tell in R terms that I haven’t made up for last week’s losses, yet. But, it sure feels good to be making money again! And, even having taken Monday off, I already traded 5 times this week, so I’ve still kept my number of trades up a little from my July-September timeframe. That’s all very good.

Stocks Mentioned In This Article
Stock	Links
RDC	| |

Long-time reader/contributor ExEngineer e-mailed me today, wanting to share a trade with all of you. I’ve posted it below. He has a trading blog, but I’d also be happy to start posting his trades here, anytime he wants. The more styles and viewpoints I can represent here, the better. Especially if it’s from fairly new traders (like myself!) who are learning something new about trading every day.

As with my trades, and Zoomie’s, any feedback or questions are always welcome. And if you would like to have your trades posted here, just ask!

On this trade on Level 3 Communications, Inc. (Nasdaq: LVLT), ExEngineer says:

This was a quick one. Green line is my entry at break of 2nd bar low ($5.46), target was 15 min opening range low ($5.33), with a stretch target being the fib extension below ($5.10) if it acted right. Stop (red line) above 2nd bar high at $5.57, also above the OR high and the 38% retrace. I liked the descending 5 ema too. The only red flag was that strong first candle after the gap down. Whadda ya know, it rallied and stopped me out. Anybody want a surefire system? Fade my trades. :P

Stocks Mentioned In This Article
Stock	Links
LVLT	| |

My original review of HighChartPatterns.com covered their first three weeks of operation, or so. I wanted to give you all an update now, since you can only lock in their promotional $29.95/month price for a few more weeks. After November 12th, new subscribers will be paying $37.50, which is still a great deal in my opinion. But, if you are on the fence you might want to decide in the next couple weeks so you can get the lower price if you subscribe.

I think everything I said in my original review is still valid, and I won’t repeat it all here.

They have months of performance data available now, and they’ve been very consistent during some pretty rough months. They stuck to their guns during the worst weeks, and several days offered no picks when they couldn’t find anything good enough to recommend. Many of us would have been wiser to heed the warning and take those days off, rather than get chopped up like we did!

Their performance already looks good, but I should point out that on many days they record a trade as a loss, when many real traders could have made money on it. This happens when the first time a stock touches their number, it fails, but then it sets up again for large gains. If you’re like me, and you’re used to services taking credit for the high of day minus their trigger price, then you find this refreshing. Granted, on some picks the setup or the bid/ask action makes it hard to get in the trade anywhere near the trigger price, but that is the case with any stock service.

As I hoped, they have continued to provide great commentary and recaps of their trading days in their newsletter. They pick especially informative trades and break them down in detail for the readers. You can see some of what I’m talking about on the highchartpatterns blog.

I have found their picks to be relatively easy to trade, when they set up well during the day. They try to warn you about the tricky stocks, both in the text of their newsletter, and by relegating trickier picks to their “watchlist” section rather than the “primary” or “secondary” sections. I will say that they sometimes pick stocks that trade less volume than I’m comfortable daytrading. Unless those are trading multiple times their normal volume on the trigger day, they are automatically N/A for me (and I hope most other daytraders follow my lead on that). Those low volume picks would probably be decent to swing trade, since people tend to swing trade less shares than they daytrade.

You can see in my video about my daily trading prep, I incorporate the highchartpatterns picks into my nightly routine. I have plenty of my own scans and ideas, but there are days when they make a good back-up for me. Sometimes, the stocks on my scans just aren’t ready to break out, so it’s good to have another set of ideas to work with. Other times (like last night!) I got tied up and didn’t even have time to run my scans.

Bottom line: Both trades I made today were picks from their newsletter, and I made enough money to pay for their service for more than a year in the first two hours of trading. If you read my post about those trades, you’ll see that’s even though I left at least half my potential profits on the table due to my own overcautious trade management! When services are $100 or sometimes even $300 a month, I have to think hard about how much I get out of it. At $30 to $40, it’s a no brainer when they pay off like this.

I’m not affiliaited with highchartpatterns, and am not getting paid in any way for this. In fact, I am paying them!

[Update: I just found another viewpoint on highchartpatterns, at Phileo's site. Like my review, it says the service is well worth the cost.]

As Zoomie put it: “Holy overtrade Batman!” A rough day for Zoomie… 5 Trades and 5 Losses. Give him some encouragement, would ya? Sometimes a simple “that stock kicked my ass, too” helps a lot.

United Therapeutics Corporation (Nasdaq: UTHR) Trade (click to enlarge):

RC2 Corporation (Nasdaq: RCRC) Trade (click to enlarge):

Zoran Corporation (Nasdaq: ZRAN) Trade (click to enlarge):

Centene Corporation (NYSE: CNC) Trade (click to enlarge):

DSP Group, Inc. (Nasdaq: DSPG) Trade (click to enlarge):

Stocks Mentioned In This Article
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UTHR	| |
RCRC	| |
ZRAN	| |
CNC	| |
DSPG	| |

I had an okay day today, which could have been a great day. I had two problems. One, I was pressed for time again (I have lots of social obligations this week). Two, I was a bit jittery about how subdued the markets were, and how the nasdaq was generally pointing down. So, I took profits way too early.

This really should have been a 2 or 3 R day, at least. Oh well. Instead, I ended up for the day by about 0.7R for the day. I think in the long run, I think it pays to be careful when breakouts have been failing lately. I’m hoping to see a couple more good days like this over the next week or so. It’s good to finally have an up day again!

Here’s the Titanium Metals Corporation (NYSE: TIE) trade. The Allegheny Technologies Incorporated (NYSE: ATI) trade is at least as embarrassing, in terms of profits left behind! Click to enlarge, as always:

Stocks Mentioned In This Article
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TIE	| |
ATI	| |

Well… I had a couple choices today. I could go have fun outside, or have fun trading inside. What a hard life I lead! :-) I sat down and saw Continental Airlines (NYSE: CAL) set up beautifully in the morning, and then stall out. Hmmm… I saw Reasearch in Motion (Nasdaq: RIMM) set up pretty decently under 114, and then stall out and fail.

Outside fun it is! No trades today. After having such a bad week for breakouts last week, I want to use the first couple setups I see as a kind of predictor of the kind of action I can expect in other stocks. I may just watch it, like today, or I may get out at the first hint of reversal and watch from there (essentially a 1 cent stop). This will tell me how cautious I need to be for the rest of the day. I think all these up up up days for the major indices have made the stock markets a very brittle place to be. Be careful out there.

Stocks Mentioned In This Article
Stock	Links
CAL	| |
RIMM	| |