The letter of the day way ‘A‘ today. Zoomie traded AUY, which trades on the AMEX. I’d give this setup an A as well. Really nice, all around. Here’s the chart, with Zoomie’s description on it:

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

I started researching investments and how to trade in 2003 after I started working professionally, when I quickly found my ignoramus college-graduate dreams of riches dashed against the rocky coastline of reality. (Who knew that I couldn’t drive a Porsche and have my own island on an engineer’s salary? And what’s with the whole soul-crushing corporate behemoth thing?) After I had recovered my faculties, I realized that if I were going to be financially free and independently wealthy, I’d have to learn how to do it myself. What better way than trading? Besides, I’m a “brilliant” engineer, right? (I actually AM a rocket scientist by degree, and a jet propulsion engineer by trade.) I could learn this whole trading thing better than all the other pinheads out there. I’d have it figured out quicker than you can say “second-order partial differential equation”!

Riiiiiight…

I went on a personal crusade to learn the ways of trading. Where to begin? Well, who’s the greatest investor? I started by learning fundamental analysis and value investing a la Warren Buffett. The whole thing makes sense, but you have to wait about 5 years to find out if you’re right or wrong! Maybe value investing is rational if you can avoid the duds, but I needed results now! Plus, I didn’t have any real capital to speak of.

On to short term trading: technical analysis, exotic indicators and tea leaves. I hopped from one methodology to the next, and this is what I discovered: Predictive TA is amazing—it usually works unless it doesn’t! Great; this is nothing like science and engineering, which are full of laws and absolutes. Time to try to learn by “doing”, I guess.

I opened a virtual stock trading account to start paper-err… computer-trading. I chased the daily % gainers and losers, bought some options, rolled the dice on earnings reports, and lost fake money; but hey, it’s just a simulation, right? I’d do better when it was for real. My intention was to fully learn how to trade profitably before going live, but in the end I couldn’t resist and opened an online discount brokerage account with $1000 that was burning a hole in my pocket. This wasn’t money that I needed to pay living expenses or anything, and if I lost it all nothing bad would really happen. But I wouldn’t lose it all—only an idiot would do that…

My first trade was AAPL, based on some iPod news release. If you bought the rumor and sold the news, you sold to me. Thanks. :-P I carved off about $300 as a prudent risk management measure (LOL) and bought a whopping 6 shares. I was sweating bullets on every tick: Red, green, red, green, green, red… After a few days I closed out the trade for an incredible $3.50 in profit. Easy Street here I come! That stellar result also included two free trades as a promotion for opening the account! Still, I had survived my first trade without “losing”, though I got lots of “loser practice” after that.

Fast forward to 2006: My account is down big time. On top of that, the brokerage executives are rolling around naked in a big pile of commission money, about $300 of which was mine. Eww. The traders who lived by the mantra “If you can’t see the other side of the trade, it’s you” saw the other side of my trades. So what happened? What was my downfall—diving in to manic stock rallies and getting left as the bagholder? Allowing a short-term trade to turn into a long-term investment, hoping to get bailed out? Trading options as cheap proxies for stocks? Technical or fundamental analysis errors? Poor stop selection leading to whipsaws? Mixing trade timeframes during the trade? Skipping from system to system? Widening my stop loss points after the trade went against me? Position sizing errors and crappy risk management? Revenge trading? Trading with Regulation T / Pattern Day Trader restrictions in force, limiting my options?

Actually, all of the above and more. I started out as a classic adrenaline-junkie knee-jerk mouse-clicking sucker, and thanks to many great teachers, I have now progressed to the point of understanding risk management, position sizing, expectancy, trade plans and rules, investor psychology and the importance of having an edge. I’ve learned that the first, early loss is the best loss, and to not only let winners run, but to add to them. I’ve learned that in the markets there are no absolutes, only probabilities. But even after learning these valuable lessons, I continued to make these same mistakes until I realized the underlying cause of all of the above symptoms. If you’re a neophyte trader, chances are it’s affecting you too. My fatal flaw? Undercapitalization! (I know, who woulda seen that coming…)

To my thinking, the big problem for those who want to learn how to actively trade comes from three incompatible things:

1. To really learn trading, you have to have real money on the line or you’re missing some of the most important lessons.
2. While you’re learning and you have no clue what you’re doing, you don’t want to lose your precious trading capital!
3. Speaking of precious capital, if I already had a lot of money, I wouldn’t really need to trade to generate capital, would I?

No experience + no knowledge + no capital = no margin for error. Remember my AAPL trade? When you factor in my commissions, equity and position size, I would have had to make almost 5% on the trade just to break even! Can you say “Negative Expectancy”? Basically, as a noob trader I had to be right in a big way just to stay alive. Yeah, good luck with that.

So what can a beginner like me do? How do you learn how to be profitable and trade the right way with proper money management if you have to risk ~5% of your account just to cover commissions? Short answer: You can’t, so don’t even try. Seriously. As I found out, it doesn’t take a rocket scientist to pull it off—it takes a fortune teller! You’re better off paper trading, studying and saving up until you have enough capital to go live.

How do you tell if you “have enough”? Rule #1 of trading is to immediately bail if your trade is not proven correct within your timeframe and criteria. If the trade transaction costs are influencing your willingness to punch out of a bad trade, you’re undercapped. Without adequate funding, this will happen when you have a few losses in a row and you need a win to get your commission/equity ratio back down. If you’re in this situation, you’re dead. Realistically, if the amount you risk per trade (no more than 2% of your equity!) is not at least an order of magnitude (10x) bigger than your commissions, you need more capital.

Here’s an example calculation:

• Assume a $10 commission each way, for a $20 round trip
• Your ‘R’ value should be at least $200, or 10x the costs
• $200 is 2% of $10,000. That’s your minimum starting equity!

This can be reduced to a simple rule of thumb:

Your starting equity should be at least 1000x the cost of a one-way trade!

Most retail “discount” brokers with ~$10 commissions will let you open an account with only $1000! That can only end in brokerage executive moneypile-rolling. Gives the term “Naked Put” a whole new meaning…

There are deep discount brokers out there that let you trade for about a penny/share with a minimum of $1 per trade. With this structure you could get away with a $1000 starting account, as long as your trade size is 100 shares or less. (To their credit, some of these same outfits require you to start with even more money than that.) This is actually what I’m going to do next.

The bottom line: Find a broker that charges commissions that your equity can afford according to the 1000x rule. If there isn’t one, save your pennies before you even think about opening that account. Undercapitalized trading will only get you even further undercapitalized. Now that’s not rocket science.

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

Tough day for Zoomie. Stopped out for break-even on Sigma Designs Inc (Nasdaq: SIGM):

… and then stopped out for a loss on Shanda Interactive Entertainment Ltd ADR (Nasdaq: SNDA). And then tried again and stopped out of SNDA. And then tried a third time and stopped out of SNDA. I remember when I was first trying daytrading, I went short SNDA and it went against me, and I was dumb enough to hold it overnight. It opened down big the next day and I even made a profit (but don’t you ever ever EVER try that–I was just lucky!). So, I will always have a soft spot in my heart for this stock, even if it did beat up Zoomie today.

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SIGM	| |
SNDA	| |

One pattern I’ve noticed being pretty powerful lately, is like what Patterson-UTI Energy Inc (Nasdaq: PTEN) did today. Here’s the 2-day 30 min chart so far:

The key is that the openening range tops out right around yesterday’s HOD. It seems like when it breaks through that, it tends to do well. I mentioned this pattern about a week ago in regards to a trade I made. In that other post, I mentioned two examples I had spotted. I’ve been noticing it more and more.

I should also point out that the OR high was near (but not exactly at) round number 26. That was a factor in the trade in the older post, as well.

I didn’t notice the PTEN setup in time to trade it today… the daily trigger for a trade was around 26.40, well into the run.

[edit: I see that Grant Prideco (NYSE: GRP) is another example from today, minus the round number.]

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PTEN	| |
GRP	| |

So, yesterday, I managed to stay awake until 9pm my time. I was planning to be up by 5am. Not ideal, but at least semi-normal (for a 70 year old!). Instead, I woke up at midnight, feeling good, even though I knew I needed much more sleep. I was too alert to sleep any more, though. I got up and did some food shopping (am very grateful for 24hr stores and supermarkets). It’s 74 degrees Fahrenheit outside right now, but tomorrow it is supposed to accumulate 1 inch of snow, and never get out of the 30s….. that’s just crazy. Then, I did some testing on a new StockTickr feature (have you checked us out yet? We are adding new features all the time, with a couple big ones about to be made public).

Then, I slept from 6am to 9am my time, which meant I missed the market open. And, this time, I feel groggy, like I could sleep on into the afternoon. geez… But, I don’t think I missed much in the morning market. I haven’t taken any trades yet. Here’s some example painful breakout reversals from today so far:

Potential short of Sandisk Corporation (Nasdaq: SNDK) around the horizontal line turned aroud (30min chart):

Potential long of Nutrisystem (Nasdaq: NTRI) failed. You might say, yeah, but it ran a point first. But, what you can’t see in the 30min candles, is that during that first candle, it dropped all the way to 67.08 after triggering the trade. Then it rose back through the trigger point and ran a point before falling apart again. So, maybe if you bought the second run you could have gotten out with a profit (or cancelled out your loss on the first run):

And now, Frontier Oil Corporation (NYSE: FTO) triggered, but at the top of a pretty big, sudden run (10min chart):

… so I didn’t buy in, but so far it hasn’t reversed. :-( Sometimes it seems like the bad setups work better than the good ones.

yes… time to look for a strategy that’s different than this one. Not that this one’s bad. But, I want something to do when this strategy is not working. No strategy is right every day. Normally what I do is scalp the high-volume weekly watchlist stocks. Trade-Ideas, for the past couple weeks, though, has been telling me that there’s basically no high-volume (5x ratio) action in my list. Like, today, the only alert since I drug myself out of bed was on INFA. 177 stocks on the list, and INFA is the only one doing anything with 5x volume today.

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SNDK	| |
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FTO	| |

Zoomie’s trade on Tellabs, Inc (Nasdaq: TLAB) initially looked good. But, after a while, it turned on him and took him for a loss. Reminds me of my ex-wife… :-) (the trade, not Zoomie…)

Zoomie’s description is on the chart (click to enlarge, as always):

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TLAB	| |

In my last post I mentioned opting not to buy into Grant Prideco Inc (NYSE: GRP) at 42.60. How did that decision turn out? I’d say it was right on. It did make it up 16 cents before reversing. But, 16 cents would not have been anywhere near 1R on that trade, and I’d have broken even if I was lucky. Here’s current 30 minute chart as of 12:48 or so:

I had Harmony Gold Mining Company (NYSE: HMY) trigger by breaking 17. It got all the way to 17.03 before falling back away… 30 minute chart:

Fairchild Semiconductor has been in range of breaking 15.54 for about an hour now, but so far can’t do it, and then it’s got round number 15.50 to deal with, which means I’d wait for 15.49 to do anything. 30-min chart:

AAI and ARNA, which reversed this morning, are still nice and reversed, so no joy there either. That’s all the evidence I need. Breakouts aren’t really sticking, today, and I’m not going to bother looking any longer. I really should get around to trying a completely different strategy for days like this. It would seem like the most natural extension “new” strategy would be to take the opposite side of the breakout trade, since I’m expecting them to fail. I have trouble making myself do that, though. I need to sit down and study it.

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GRP	| |
HMY	| |

Looks like another one of those days I don’t like, so far. I took a small position in Airtran Holdings Inc (NYSE: AAI). Here’s the daily chart, showing where I wanted to go short. But, I got out of it because it reversed and decided it would rather go up. rrrrgh..

I also took a small loss on Akamai (Nasdaq: AKAM), which rushed up along with everything else around 10ish. So, with those two stocks clearly not acting like I wanted them to, I passed on Arena Pharmaceuticals Inc (Nasdaq: ARNA) when it broke 14. Which was a good idea, because it reversed from 13.99 and is only just now as I write this drifting back down.

I also passed on GRP at a minor (fuzzy on daily charts) buy point of 42.00. I was happy with my decision when it reversed, but then around 41.78 it turned back around and never looked back. My target would have been 42.60, which was a clearer buy point on the chart. When it got to 42.60, I couldn’t see buying because of how much a move it had just made, and because the dow and naz were dropping by then (again). Time will tell if that was the right choice. Here’s the 5 min chart so far:

So, not a lot of profit this morning. By which I mean, no profit. Or, more precisely, losses. :-) I wouldn’t say I’ve done well this week so far. But, there will be plenty more opportunities I’m sure. Due to my incredibly elastic (by which I mean, wacky) sleep schedule, it’s almost time for me to go to sleep, even though I’m in the USA. Maybe I will dream of profits instead.

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AAI	| |
AKAM	| |
ARNA	| |

Zoomie did great today, as usual (and especially compared to me!). He stuck with stocks associated with countries starting with ‘C’. A strategy I had not considered :-)

He traded Central Fund of Canada Limited (NYSE: CEF) for 2.1 R:

and then traded China Unicom Limited (NYSE: CHU) for -0.43 R:

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CEF	| |
CHU	| |

What I dislike about all the “down” days we’ve had recently, is that it’s just the high-flying stocks that really lose. The stocks near new lows (at least the one’s I’m watching) don’t really drop. Today, in the afternoon, Spansion Inc (Nasdaq: SPSN) finally triggered as one of my short candidates. But, I was skeptical that this would be another case of a quick reversal.

So, I didn’t take this trade, but I was watching it to see if I should go short anything else.

The line’s around the area where my watchlist number was (13.56 or so). Had I taken this trade, I’d have perhaps gotten out break-even, but most likely would have taken a small loss. The 30 minute candle I’m showing is really too generous… if you look at the 5 minute chart for that candle, you can see that it chopped all over the place, and went up before it went down, only to come all the way back up.

So, I had my answer! Right after I took this screenshot, I turned off my platform. It’s not the right market for me. Tomorrow may be much better… it will be interesting to see what the daily charts look like after a day like today.

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SPSN	| |

Went long on minor daily buy point of 26 on Massey Energy Company (NYSE: MEE). It was also above Friday’s high. My target was a test of the HOD, 26.27, set in the first 30 minutes. I didn’t expect it to break out of the OR, since everything was so negative. But, it had good volume, and was going up, so I wanted to ride up at least that far with it.

You can see how well that didn’t work out! :-) This is the 2 day 30 min chart so far…

It went up a tiny bit, and then straight down to my stop (at Friday’s HOD 25.88ish). I watched it go all the way back up in the next 30 minutes, which made me want to get back in. Luckily, I decided to wait for it to get at least a few cents higher before making another move (maybe like 26.12ish), just to show me it meant business this time. It never made it, instead falling all the way back down again.

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MEE	| |

Phileo’s playing the $1000 Experiment Prosperity Game here on MtM (though we’re both going by $500 increments, it would appear). How exciting! He has a trading blog you might want to check out. You can play, too, if you’d like; just contact me. Here’s what he sent in for the first day:

I actually went through a couple of items that I would like to buy, but they all turned out to cost more than $500.  I actually wish I was at day 2 or day 3, because it is harder to think of something to buy with only $500!   So I really had to take a few days to contemplate what I would want to buy, that would make me genuinely happy, and would cost as close to $500 as possible without going over.

Well, since there are no rules that stipulate that the $500 must be spent on one single item, what I came up with was this:

Start off with a dinner for my wife and I at Morton’s SteakHouse:

I would order the following:

• Appetizer => Smoked (Wild) Pacific Salmon
• Salad => Spinach Salad (gotta stay healthy, you know!) with Raspberry vinagrette dressing
• Entree => Double Cut Filet Mignon (has to be done somewhere between medium rare and medium) with  Steamed Fresh Asparagus (no butter), sauteed Wild Mushrooms, and Lyonanaise Potatoes
• Dessert => Grand Marnier Souffle

To be conservative, I would estimate dinner for two to cost about $120. After that sumptuous dinner, I would go to see my favourite Hockey team, the Vancouver Canucks, play the Tampa Bay Lightning.  Since they are visiting Vancouver only once in the whole season, the game has already been sold out, so I will be lucky to be able to get 2 tickets in the UPPER sections near the blue line for about $230.

I got hooked on icewine ever since I went on a wine tour out in the Okanagan, so after all that cheering and yelling at the game, we would head home and relax and wind down over a bottle of SummerHill Estate Platinum Series Pinot Noir Pyramid Aged IceWine 2002.   This particular bottle of pyramid aged icewine, being low in supply and high in demand, is asking for a price of $128. 

Any money left over would hopefully be enough to pay for babysitting!!!

Well, the end of 2006 is nigh, and many of us celebrate Christmas or similar gift-giving occasions. So, I thought the time was right to start putting together some gift ideas for stock traders, stock brokers, financial advisors, etc. Of course, lots of us have refined tastes, and like nice, expensive, things in general. Here, I just want to focus on trading/finance themed gifts.

Here are the ideas I’ve found so far. I may make additional posts as I find more items.

Novelty Items

• There were several fun items at www.stockmarketstore.com. Here were a couple of them that stood out to me.
  • Apron that says “Will Cook for Money to Trade”, for the trader that also cooks.
  • I Trade, Therefore I Am Shirt
  • A “Hope” Candle, may it burn brightly for you in your time of need.
• Another site I liked was GiveAShare.com, which allows you to gift an actual framed share of a stock. I’ve traded millions of shares, but never actually held a share of stock in my hands. Kind of neat.
• There’s the We have charts and graphs to back us up, so F$@K OFF Buttons and Stickers (I originally saw this on Tim Knight’s Blog). Right now, it looks like they’re selling the button but not the sticker, but I suppose you could inquire with the bitchybuttons.biz store.
  
• If you have Jim Cramer fans to find gifts for, you can get Mad Money paraphernalia at The NBC Universal Store.

Trading/Finance Related DVDs

• Trading Places the comedy with Dan Aykroyd and Eddie Murphy as commodities traders
• Rogue Trader. A true story. I’m not kidding, I seriously never get tired of watching this movie… I think all traders can sympathize with how strong the urge is sometimes to make the same mistake that guy did (essentially just doubling down over and over on more and more margin). It’s incredible that he wasn’t stopped sooner.
• Barbarians at the Gate, a comedy loosely based on the leveraged buy-out of RJR-Nabisco
• Other People’s Money, a fictional comedy about a corporate buy-out, starring Danny Devito.
• Wall Street. Do I really need to say anything about this movie? Great film. Youtube has the famous Greed is Good speech, if you haven’t seen it.
• Wall Street’s ugly stepsister, Boiler Room. I thought the best scenes in Boiler Room were the scenes when they were watching Wall Street, but people seem to like this movie, so I’ll include it in the list.

Trading/Finance Related Books

There are a few in my Books I Enjoy page. Of books that came out in 2006, I thought these two were good:

• Confessions of a Wall Street Analyst: A True Story of Inside Information and Corruption in the Stock Market. It was an entertaining book, but also very informative about how the lines between the analysts and the investment bankers at major firms were scandalously blurry.
• Winning the Day Trading Game: Lessons and Techniques from a Lifetime of Trading (Wiley Trading), centered on the idea of keeping a 24-hour multi-market context in mind, and the importance of key numbers like round numbers, and the opening price for the year, etc.

…and here’s a good book I read this year, but which came out in 2004:

• Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, which really made me think a lot about how much I owe my success to skill, and how much to dumb luck.

I just listened to a pretty good lecture on happiness by Daniel Gilbert, a Harvard professor, and author of Stumbling on Happiness. The talk was about how the brain is able to synthesize happiness with just about any situation. The corollary is that striving for the best possible outcome usually makes us less happy than just choosing any option and never looking back.

This is the mp3 (about 20 minutes long): http://ted.streamguys.net/ted_gilbert_d_2004.mp3

I thought three points were particularly interesting:

• Experimental evidence seems to say that, if something happened more than three months ago, it generally has no bearing on your current level of happiness, no matter how good or bad it was
• While most people prefer to have freedom to choose between options, and freedom to change their minds later, this tends to lead to less happiness
• An experiment on people with no short-term memory gave evidence that the brain actually re-tools its aesthetic preferences based on the situation it is stuck with. In the first phase, they were made to take their third choice of paintings. Later, even though that had no recollection of the earlier phase, they tended to prefer the paintings they were “stuck” with before.

The talk is short, and entertaining, if you like to think about things like this. I haven’t read the book yet, but it looks interesting.

Here, I’m going to cover the next 5 TRIZ Principles, as they relate to trading. There are 40 in all. You might want to glance at the Kick-off Article in this series, if you haven’t seen it, for further explanation. Basically, these are principles derived from an international study of patents. The idea is to isolate the foundations of innovative ideas, which can be applied to any creative endeavor.

These principles, and the examples from trading below, are meant to get the mental juices flowing. The idea is to apply these principles to new problems. When you think about how to improve your trade execution, or your trading system, or the way you track your performance, or whatever else, you can read through the principles and see what kind of ideas emerge.

Perhaps some of you will read these and immediately think of other trading-related examples of these notions. If so, don’t be shy! Post it in a comment. The more the better, and there are no wrong answers. If the description makes you think of it, then it is TRIZ at work, and it is always correct. Let’s get started!

Principle 11: Cushion in Advance
This is similar to principle 9 (prior counteraction). Here’s the difference: counteraction wards off failures, and helps keep something from failing. The advance cushion referred to here merely helps soften the blow when an unreliable part does fail. Examples in trading include:

• having a second internet access method, for when your service goes out.
• putting reliable secondary streams of income in place, to cushion down cycles in trading profits

Principle 12: Equipotentiality
This principle is essentially about getting rid of unnecessary movement and rearranging (either physical or mental). Think about the difference between a chest of drawers and a trunk. If you want something at the bottom of a trunk, you have to move around everything on top. In a chest of drawers, you just open the bottom drawer. Examples of equipotentiality in trading include:

• Moving to multiple desktops and/or screens, so you don’t have to work hard to see everything you need to at once. Using tabs inside windows can really help, here, too.
• Reading all your favorite trading blogs at once via RSS, rather than going to each site individually all the time.

Principle 13: Do it in Reverse
Perform the steps of a process in reverse, to realize some benefit. Examples in the trading arena include:

• the premier example is short selling, of course. Selling before you buy, to take advantage of downturns in stocks.
• Some days it’s easier to look for setups and then check the volume. Other days, it’s easier to check for volume, and then try to find a setup.

Principle 14: Spheroidality
This refers to replacing flat surfaces with curved ones, and hard edges with rounded ones. In trading, an example of this would be:

• Moving averages, and some technical patterns like cups and handles, smooth and round-out OHLC data.

Principle 15: Dynamicity
This principle involves allowing the design or characteristics of an object or process to change over time, rather than remain static. For some problems, change in real-time is the only way to optimize the solution. Examples in trading include:

• I prepare watchlists/rough trading plans every night, and then dynamically adjust them once trading starts.
• Taking new market conditions into account during trade management, vs just waiting for your stop loss to get hit.