I’m back from my end-of-year travelling now, and normal posting will resume here soon. Since the markets will be closed until Wednesday, I thought I’d start off with something from my home life:

I am an avid loose-leaf tea-drinker. When I used to work in an office, I’d make constant use of the coffee maker’s hot water spigot. That was great, but now that I trade at home, I always have to heat water up on my stove. It’s like moving from cable or DSL back to dial-up internet service… the wait is excrutiating once you’ve had access to instant near-boiling water. Well, it finally bothered me enough to look into solutions, and I found this:

It’s the Zojirushi CD-LCC30 Micom 3.0-Liter Electric Dispensing Pot, and it’s everything I was looking for. For me, this is much better than buying a big coffee maker and running a water line to it. Now, for things like soups, oatmeal, tea, hot chocolate… just about anything that calls for sitting around and heating water… I no longer have to wait. And, while I’m not sure, I’d venture to guess it uses less energy than boiling water on my stove does.

I mentioned in my last post on the topic that Ugly took a hit trying out futures. Now, it looks like Phileo caught “futures fever” and took a bigger loss than he wanted.

Phileo’s smart, and will recover stronger for it. In a way, this is the best outcome when you lose sight of proper risk management (which has happened to all of us at least once in our careers). Imagine what might have happened had the trades gone his way… He might have made a big happy post about how he made. — oh, let’s say… — $8k in a day, and kept on placing bets that were too big for his risk appetite.

So, please, everyone, be careful when jumping into a new, zero-sum, high-leverage game. To some degree, trading is trading. But, ask yourself, are you rushing to futures because you have visions of huge, easy gains in your head? Maybe wait until you’ve calmed down a bit. You need a level head in any market! I’m not saying, “don’t try futures”… I plan to add them to my trading in the next couple years, in fact. Just don’t try them because you are excited about money money money.

On the positive side of the coin, I should point out that CalTrader made an excellent post about one of the types of plays he likes to make. I hope he makes more posts like this, and in particular I would like to hear about in-trade management.

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

Well, here’s how my “overnighter” in Onstream Media Corp (NASDAQ: ONSM) turned out:

Bought 20 @ $3.24, sold 20 @ $3.30, P/L=$1.20.

Here’s my analysis: My buy point was too high. I should have waited until today and bought near the $3.00 floor. Holding overnight was a SIRIously flawed plan. ;-) I am happy with my read of this morning’s price action though, and my decision to stay in through the first pullback after the breakout. I watched Level II during all of this, but I can’t really make heads or tails of it. It seems like the price moves towards the big size, rather than the sizes moving the price. Anybody have any LII comments?

Anyway, this turned out to be a Rumsfeld play: I had no exit strategy. I had no profit-taking target other than “the most I can get”, so I was doomed to get taken out by a stop of some sort. If my buy point was lower I would have had more margin to play with, but after the $3.40 support failed, I sold at market so I wouldn’t get stuck with a loss. Any insights or tips on exits for this trade are requested!

So while it’s no $8000/day, at least I was net profitable and I’m learning more all the time. I love this game!!

This trade brought to you in part by Zecco Trading, helping undercapitalized n00bs learn the ropes since 2006.

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

I took today off (and tomorrow, as well). Zoomie traded, though, and had a nice strong finish for the week. He traded Varian Semiconductor (Nasdaq: VSEA) for 2.63R. Here’s the chart with his comments:

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

Here’s a departure from my usual Trader-X style dummy play. I’ve watched stocks gap up and surge over and over for days lately, like Mamma.com Inc. (NASDAQ: MAMA), all the while shaking my head at the idiots who are buying:

Well, call me an idiot, but I decided to try to catch one of these, and not as a daytrade, but holding overnight. So I opened a position in Onstream Media Corp (NASDAQ: ONSM). I got in at 3:59 PM, just before the close (20 shares, baby! Livermore, eat your heart out…). Here’s the chart of my entry. It’s a tick chart, so each candle represents 30 ticks:

Another note about this chart: I’ve got volume by price plotted there, so you can see the blue horizontal lines showing at what price the volume took place. The orange bars are 90% markers (almost 2 standard deviations in a normal distribution), so 90% of the day’s volume happened within the two orange bars; transactions outside of this should be outliers. Also, the yellow bar is the midpoint, so half the volume was above that price and half below biggest volume price point of the day. I’ve been watching this lately to see if there is some significance, but I have no real observations yet.

Why did I decide to buy?

1. I saw tons of buy size on Level II, which looked like buying support at the opening price near $3.00. Was I scammed through LII games, or is the support really there? I’ll find out tomorrow…

2. I’ve ended up buying tops and selling bottoms usually, and I wanted to be a trading contrarian on this one, so I stepped in to buy from the daytraders who were getting out before the close. Am I an idiot or a genius? I’ll find out tomorrow…

3. My entry was still within my 90% volume marker, so I should be buying cheap according to the day’s average of value. Bargain or bagholder? Tomorrow again…

4. Zecco makes it cost effective to play small trades like this one, so the stop I defined at $2.60 (midpoint of the gap-up this morning) and my 20 share size puts my R at just about $13. What if it tanks to yesterday’s close of $2.13? then I’m out $22, which is not much more than I’d throw away on commissions in the past for a more “rational” trade.

Comments or analysis are encouraged, heckling is tolerated, and stinging criticism will send me to cry under my desk…

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

I am glad that my post on futures trading is getting some attention. Over on Tyro Trader’s blog, John asked, legitimately, where did CalTrader tell people they should quit their job?. And, he’s right, CalTrader did not come out and say: Quit your job and make a living off a $5k stake. But, I could tell from the waves that $8k/hour story was making that it was capturing people’s imagination. And, that’s dangerous to people that don’t know better.

Check out this comment I found on the Fly on WallSt. blog

I just tried to trade the futures for the first time and lost 20 points on the DowEmini. Little did I know that each tick was more than 1$ and I had bought 20 contracts. So my account was officially cut in half. Damnit why the hell does everyone make it seem so easy. Every f**king guru is making money but I lose thousands. F**k it.

… and the post was in reference to the enthusiastic futures-trading comments that CalTrader has been leaving around. I don’t hold CalTrader or anyone else responsible for this person’s obvious, let’s say, terrible judgement. But, it’s a sad effect of too much hype, and I’d like to counterbalance it anyway I can. After all, the whole purpose of Move the Markets is to help beginning traders succeed.

I see that Ugly agrees with me on the dangers of stirring up unwarranted excitement:

I am sure many blog readers will lose all their money because of the futures trading hype that has been going around recently, despite the warnings. That is a shame.

But Let Me Be Clear

I am not saying that futures trading is too hard, or cannot be done responsibly. I also have nothing against Cal Trader, and hope he succeeds, and blogs about it. I’ll be right there, reading it and learning what I can from it. But if there’s one thing that Fooled by Randomness taught me, it’s that you have to be very careful when separating out luck and skill. It’s hard to do. Here’s one reason why:

They make it look so easy!

Consider two hypothetical traders with blogs in late July. One says “I’m going to show you how I can easily double my money trading options,” and loads up his account with SPY puts. The other says “I’m going to show you how I can easily double my money trading options,” and loads up his account with SPY calls. Neither of them says much about their risk of ruin, beyond some fine print about how some risk-averse people might not be comfortable trading that many contracts.

A month later, the trader with the calls announces victory, and suddenly there is a lot of interest in his “strategy” and market timing ability. The other trader takes down his blog and everyone forgets about him. So, later when some wannabe who hates his day job does web searches, he only finds the “successful” options trader. It’s like a speculator version of the survivorship bias. It puts stars in people’s eyes. It’s what makes people go to hollywood and try to get in movies… they don’t see the 200 waitresses for every actress who manages to get a bit part.

Did that successful blogger tell the newbie to quit his job, and do I blame the successful blogger for spreading misinformation? No on both counts. The successful one may not even know about good risk management, so it would be silly for me to expect him to explain that information to others. But big talk coupled with big gains == an undeniable influence.

Summary

When someone is succeeding despite taking on too much risk, that doesn’t make them good; that makes them lucky.

I’m not saying anything about CalTrader’s skill or prospects for success… I don’t know anything about that. In fact, I’d love to know more about it… I would be first in line (and kicking down anyone in my way) to make 20% a day if there’s a sane plan behind it. :-)

Zoomie took two small losses today. It was a choppy, unforgiving environment out there!

Juniper (Nasdaq: JNPR):

Coach Inc (NYSE: COH):

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What a tricky, choppy day today. Hopefully something will wake up these markets later. Check out some examples:

QQQQ chop chop chop

GLD chop chop chop (notice how the colors are opposite QQQQ’s, in the standard gold-to-market relationship)

SMH chop chop chop (I was considering trading it, too… )

… and there are plenty more, but I’m starting to feel like Trader Tim, so I’ll stop with the index charts already… :-)

Often, I go take a nap about now, but I usually wake up and find that I’ve missed a move. So, I’ll try to stick around and see if any buying kicks in around 1 EST, which it seems to often do…

I, for one, welcome our new futures-trading overlords…

Well, you gotta admire the enthusiasm of CalTrader, who wants to show you how to build wealth by simply making 20% every day you trade. Needless to say I’m skeptical. That doesn’t mean I’m a naysayer like he’s complaining about in his post. I know nothing about CalTrader, so I’m not opining on whether he can pull it off or not. But, I want to caution people about getting too swept up in all that enthusiasm.

The key red-flag, from my perspective, is that he’s not talking about the risk of ruin. With so much leverage in play, and so little starting capital, you are essentially banking on not having a losing streak, ever. I’d like to know more about the expectancy/win rate of the system being employed. Hopefully some of those details will come to light soon.

He’s not exactly saying it’s easy to make so much money, but if you are the type that is easily excited about wealth, think about this: it is practically impossible for a beginner to make “easy” money in a futures market, because it is a zero sum game. That means, you literally cannot make money unless someone else loses the same amount of money that you made. So, what is more likely… a small set of insanely rich people lose everything every single day, to fuel moderate gains for the majority of people? Or, a small set of rich people get even richer, as hopeful newbies are sucked dry. My guess is, it’s mostly that second one…

People think the stock markets are the same way, but that’s not true. The stock markets do act like a zero sum game to a degree, but the options and futures markets are designed that way. Leverage like that does not come free!

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

I took a trade in Valero GP Holdings, LLC (NYSE: VEH). Here’s the chart with comments:

Any comments on the setup selection or a read of the price action during the trade are welcome, please!

As an aside, I opened an account with Zecco, which has solved my undercapitalization problems with their offer of $0 commissions. My maximum risk for this trade was $15, or 2% of my account equity. With my old broker, it would have been $14 commissions, or 1R, just to play the game. Now I can trade and have a chance at profitability! I still use Quotetracker for my charting, with TD Ameritrade providing the data. I’m very impressed with Zecco’s executions and my fills, even on stops! I recommend them if it fits your style and budget.

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

Zoomie was on the short side of Salesforce.com Inc (NYSE: CRM). The trade looked good to me, and I know from correspondence that other traders took this trade today. I’ll add, as well, that the daily chart even made it look like a pretty good swing short (except that the drop through support was pretty abrupt).

Nevertheless, CRM rebounded enough later in the day to take Zoomie out for a small loss. His comments are on the chart, as always.

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Have you ever noticed how sometimes a stock seems to have some artificial barrier keeping it from falling through a certain price? Here’s two examples from today, in Genentech (NYSE: DNA):

… and Biogen Idec Inc (Nasdaq: BIIB):

(both 30-min charts)

In DNA’s case, I even remarked to Dave Mabe over IM that someone seemed to be holding it up at 80.50. Those wicked upper wicks on the candles made it impossible for me to go long. But, the Ultimate Trader would not have been so cautious, and gone with the pattern he’s seen again and again in the markets: when someone is holding a stock up, and the markets turn in their favor, usually the opposition just gives up. So, today, when the markets went positive, so did DNA.

You may recall from the scalp on BIIB I posted today that I went short the only time BIIB fell through 49.00 by more than a couple cents. After a bit, I should have noticed how strong this support was, and gone long the stock. But, because I was focused on some other things in the early afternoon, I missed my chance. The Ultimate Trader ignores email until the markets close…

Maybe this pattern happens on the short side, as well, but I haven’t really noticed that as much. I think it’s harder for this pattern to emerge with resistance, than it is with support.

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Here’s one I missed, but which the Ultimate Trader would have grabbed. I lost track of Business Objects (Nasdaq: BOBJ) in the morning when I thought it was trading sloppy, and in the wrong direction. Of course, in the afternoon the overall markets started heading north yet again. I’ve circled the obvious consolidation area, which played nice with the 5MA. Even if you are too squeamish to play that break, the OR high was just a little above it, and still provided a nice tight stop.

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A played a dip below 49 on Biogen Idec Inc (Nasdaq: BIIB). As you can see, I got out at the bottom of the move, which is very satisfying. :-)

(1-minute chart)

Unfortunately, because of the uptick rule, I only got filled for 1/3 of the shares I wanted. Oh well. I was on the fence about whether to try to make a full trade out of this play. I know biotech in general is very choppy and tricky. With only a partial fill, I decided it should definitely be a scalp, and I hopped back out at first sign of reversal. Commissions are a larger drag on profits when I trade 1/3 size, and 1/3 total profits are just not worth the stress of staying in a trade that’s not dropping like a stone. Just my opinion.

This trade was scary at first, because my platform froze right after I clicked the “sell short” button. I didn’t know if I was filled, or not, or what the price was doing for 20 seconds or so. When the connection re-established, I was partially filled, and the price was close to my exit, already.

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Check out Steve Pavlina’s post about fields with low barriers to entry, where 99% fail. Seems very applicable to trading. A quote:

Imagine starting as a white belt in kung fu with no previous martial arts experience. You go to your instructor and say, “I want to compete in sparring tournaments at the black belt level.” Your instructor will probably laugh at you. If you were to spar a halfway decent black belt, you’d take a beating every single time. If you spar 100 matches, you’ll lose 100 matches. This is where the dabblers conclude that it’s impossible for them to succeed in kung fu. Those who are committed, however, know that they have a long road of skill-building ahead of them. Becoming a black belt is a choice, albeit certainly not an easy one.

What’s unfair about easy-entry fields like blogging, acting, or music is that white belts and black belts are thrown into the same pool. White belts are forced to compete against black belts who’ve been honing their skills for years. It’s totally unfair. But that unfairness is what provides the challenge and makes it fun.

There are lots of other interesting posts on his blog, if you aren’t familiar with it.