Today I was thinking back over the last three months and how difficult they have been. For one reason or another, we have been getting pole-axed every way we turn. After the disastrous month of January, I gave up on swing trading and Tradeitup gave up on futures for the time being. February wasn’t much better and I had to go on Trading Probation for several weeks while Tradeitup continued to struggle with swing trading due to the volatility in the market. This week we finally put on two swing trades. We closed FO on Thursday for a $254 profit and are currently holding 200 RBA with a little over $125 built in.

I have mentioned several times before that the market is currently in a funk and next to impossible to trade. In January there were scores of traders that either had large drawdowns or totally blew up. Everyone knows well the plight of HPT because of his viral video of his blowup in futures. Less well known are the silent killers, the slow death that is a losing streak. Any of our readers that have just begun to follow this blog since we took over the VO, or the ones that have come to us from our handful of linked posts by WallStreetFighter, all you have seen here is the losing streak that we are currently in.

For the newer traders like us, and for the veterans that might have forgotten, here is a little reminder of how quickly things can change in this business. A quick history… We were very conservative the first 6-8 months after starting to trade full-time in January 2007. We had a few good weeks and months here and there, but we were mostly just “learning the ropes” so to speak. Come October, we had finally gotten settled into our individual styles of trading and we felt like we were making progress. The market was a breeze to trade and it seemed we were on the one way train to trading success.

In the last three months of 2007 we pulled in $8,689 day trading and swing trading stocks, effectively digging ourselves out of the $10k hole we had dug the first nine months of the year. We went into the end of the year net short but decided to close out most of our swing positions on Dec 31st. Those last few trades in December were really the last of the winners. January, February and now March have all been losing months. We have been able to cut back on trading to curb the losses, and some of the market action is a little bit easier to deal with, but we are still fighting to get back on stable ground.

In case you were wondering what three months of winning and three months of losing looks like, I have provided a little eye candy. Have I ever mentioned that I really, really hate the color red?

Just remember, no matter how good or bad your trading is right now… Things can always change, and change much quicker than you can imagine.

No Patience

Patience is a tricky subject for me in trading. I am a very patient person by nature, but when my money is at stake, I often find myself grasping for straws. The patience thing is a two-edged sword that can either slice through barriers that lead to profits, or cut you down in capital and self-esteem.

My trading philosophy is to have patience on entries and to have very little patience after I open a trade. I execute this philosophy in the following way. I have a specific setup that I look for, and until my criteria are met I do not trade. I don’t chase stocks that are moving, and I don’t try to profit from short term price discrepancies, I simply wait for the trade to come to me. Once I am in a trade I put a mental time stop in place. If the trade does not begin to work within my time frame, I will exit the trade with a small profit or loss and begin looking for another trade. To put it another way, I am like a predator quietly stalking his prey.

I did some research and found that I employ many of the tactics that Bobcats use when hunting. The bobcat is an opportunistic predator that hunts animals of different sizes, and will adjust its hunting techniques accordingly. The Bobcat is able to go for long periods without food, but will hunt aggressively when prey is abundant. The Bobcat hunts by stalking its prey and then ambushing it with a short chase or pounce. Because of the Bobcat’s lack of speed and stamina it is better served to save its energy for the next victim rather than to expend energy chasing prey that it may not catch. I’m sure you can see the similarities here.

There are only two times in trading where patience matters, at entries and at exits. Having a lack of discipline at either point will be detrimental to your trading. What makes patience so tricky is that you can have too much patience or too little patience, both of which will not allow you to maximize profits and curb losses.

As a stock begins to setup and slowly meets my criteria for an acceptable trade, my struggle with patience becomes the determining factor between profit and loss. If I don’t have enough patience and enter the trade too soon, then I am much more likely to be stopped on the trade. However, at the same time I can’t let my patience overpower the need for a nimble entry. Having too much patience oftentimes leads to bad entries or missing a trade altogether. So, the question becomes “How do you find the optimal amount of patience?” I don’t have an answer to that. All I can do is look back at my trades and try to find where more or less patience would have made my trading more profitable, and try to glean some useful information in the process.

Since I don’t have a record of all the trades I missed because of too much patience on entries, I can only analyze trades where my abundance or lack of patience on exits yielded an undesirable result.

Southwestern Energy (SWN)

On occasion, I will get into a trade like this long SWN where it just trades sideways for 30mins or so before breaking one way or another. In cases like this I am always at odds whether I should keep my firm stop in place and just forget about my time stop. My initial capital risk on average is between $100 and $150 on each trade, so if I let a dead trade hit me even though it is past my time stop, the losses can add up quickly. Not that risking $150 on each trade is too much, but when I am having an off day (like every trader does) getting 3-4 trades will lock me out of trading for the day. I don’t necessarily think I should have stayed in SWN given the amount of time it took to move, but it could have been a profitable trade despite the chop.

Sunpower Corp (SPWR)

What can I say, this would have been a monster trade for me. I was patient with SPWR as you can tell by my entry point. Had a hard time finding a reasonable stop level on this trade (yellow lines) and the choppiness that SPWR was exhibiting made things even more difficult. I got an excellent entry considering the one hammer bar just before I got my entry. I set my stop and waited. I was watching the 1mins as it chopped around and then added up to 400 shares before the trade started going my way which was mistake number one. After adding the second 200 shares I set my stop at the lowest yellow line which was 62.55. Well SPWR continued to trade around and eventually up to and through my stop. Afer trades went through at 62.58 and I wasn’t hit. Way to go IB! Then I moved my stop to 62.62 and it traded right on that number and again no stop out! I was down $160 and starting to worry. The stock then proceeds to drop quickly and instead of moving my stop down to break even I bailed on the short feeling lucky to get out with a profit.

What does this have to do with patience? Surprisingly I think I had too much patience with this trade. I should have gotten short after the first 20-SMA touch when SPWR retested the highs and was rejected. Had I taken this entry, I could have set my stop above this double top (top yellow line) and added to the trade as it went my way.

Part 1, Part 2, Part 3, Part 4

Bad Trades

If you talk to a trader for any amount of time the subject of trade setups will surely be discussed, and often this is the most in depth part of the conversation. Everyone has their own way of making money in the market, and no two traders use the same strategy. One point of interest for any trader is how to distinguish between a “perfect setup” and your average run of the mill setup. One of the most important questions you can ask yourself as a trader is “What are the criteria that are required for a perfect setup?”

In my opinion, the strategy a trader employs takes a back seat to how well a trader defines the system and ranks setups based upon specific information. If a trader can avoid the average setups (or at least trade these with smaller size) and focus on taking only the high probability trades, then he will be able to profit from trading with more consistency and with more frequency. In the process of developing my trading system I set out a list of rules and criteria that embodied the perfect setup for me. I have added to that list over time by analyzing my trades and market conditions. However, this past week of trading has forced me to look more closely at each trade. I have subsequently added a few items to my list of things to look for in a perfect setup.

Out of the eleven trades that I took during the week there were only four that wouldn’t have worked no matter how good my mechanics were. These bad trades were caused by different elements that I should have recognized, thereby avoiding these trades altogether or only trading them with small size.

National Oilwell Varco (NOV)

Looking back at this trade on NOV it wasn’t immediately obvious what went wrong with the trade. I waited for a 20-SMA touch with a high MFI reading on a stock that was trending down. I got a good entry and had a reasonable stop level. My mechanics were very good on this trade, so I initially blamed the loss on Murphy’s Law. However, after a second glance, I realized that the time of day could be the problem. I entered this trade in the last 30mins of trading, which is unusual for me. The problem that I have with taking trades near the end of the day is the fact that buying or selling pressure near the close does not reverse often. Normally, if there are buyers in the last 30-45mins of the day, they will continue buying into the close. Being that my system attempts to take advantage of short term reversals, trading at the end of the day will most likely be a losing proposition. From now on, I will not be opening any new trades in the last 30 minutes of trading.

Ultrashort Financials (SKF)

Every trader probably has a favorite stock to trade. As a matter of fact, some traders only trade one or two stocks and get to know them so well that they have no reason to trade anything else. Last year my favorite stock was FSLR. I made more money trading that stock than anything else. Even more engrained into a traders mind than their favorite stock, is their arch nemesis, that one stock that they lose on almost every time no matter what they do. SKF is coming close to being my arch nemesis. I’ve only traded SKF eight times, but almost every single trade ends with a loss. I can’t pinpoint exactly what it is about this stock that throws me off, but I’m very close to putting it on my blacklist.

International Business Machines (IBM)

There isn’t a lot to say about IBM. I entered this trade in the first 30mins of trading, again something that I don’t normally do. For the most part I try to avoid taking trades near the open and close because there seems to be more volatility at these times and I often get chopped up quite a bit. Another thing I noticed with IBM, which might or might not be substantial, is the extreme highs of the 2^nd, 4^th, and 6^th candles. These extreme highs with lower closes seem to indicate a continuation of the current trend. With this type of volatility it is also very difficult to set a stop that won’t be taken out immediately. I will have to watch for these type candles and be more cautious with entries or avoid the trade completely.

Dryships (DRYS)

This trade was a total waste of time and money. I shouldn’t have even been in this trade. Looking back at the 5min chart, there were two other Holy Grails that broke through the 20-SMA. To me this chart is just ugly. There doesn’t seem to be any predictability (and I use that term loosely) in the price action. There is a big gap down on the open and one bar of selling that is quickly reversed in 15mins, only to reverse half of that move once again. There was very little consistency in the price action. If I were looking at this chart without the volume and not knowing that it was DRYS, I would probably think it was some obscure inverse ETF that traded about 50k shares a day. Additionally, where I entered the trade there was not an extreme reading on the MFI and the moving average was flat. Not a good candidate for a trade. This was my last trade of the day on Friday, and my losing streak for the week could have factored into me taking a less desirable setup because of the desire to make money.

Part 1, Part 2, Part 3, Part 4

After having a very frustrating week of trading, I spent the majority of today going back over every single trade I took this week to see where I needed to make improvements. This week was my third week of Trading Probation and the first of those three that ended negative. My loss this week wasn’t bad, only $252.50, but my accuracy was horrific. Out of 11 total trades I was profitable on only 1 trade. Yes that’s right a 9% win rate. Seeing how bad my numbers were this week, I set out to find the problem with my trading. What I found was very interesting.

My first observation after crunching the numbers was the shift between long and short trades this week. The first two weeks of my trading probation I was 50/50 long/short on my full size trades while this week my long/short ratio came to 25/75. Now depending on how you trade, a shift of this nature might not be a big deal, but for me this is a big change. I am not afraid to be long or short, but from my experience my setups most often work better on the long side and I am also a little more comfortable with longs. However, this change is not totally responsible for my shift in performance.

After printing out the charts of every single trade this week and making notes, I have placed each trade in a mistake category. Four trades go into the Support/Resistance bucket, four trades go into the Bad Trades bucket, two trades go into the No Patience bucket, and one trade goes into the Stick to Your Plan bucket. Out of the eleven trades, seven would have worked and four would have been either a scratch or a loss. That is to say, 63% of my trades should have been profitable instead of 9%. What happened; one word, mechanics. I picked good setups, stuck by my rules in almost every case, and didn’t commit any trading sins such as revenge trading, but my trade mechanics were terrible. I will explain each trade in each category showing charts and giving ways to improve my trading.

Support/Resistance

Everyone that has traded for any amount of time knows what support and resistance levels are. As a matter of fact, support/resistance is usually one of the first “systems” that traders use when they start trading. However, after trading for a while we learn that support/resistance levels alone are not enough of a predictor to base trades solely on them, so we seek out other ways to profit from prices. Upon reviewing my trades, I realized that I had gone to extremes and totally forgotten about my old friends Support and Resistance. I failed to take these important price levels into account when developing my system and my lack of planning caused me pain this week. Four of my trades could have been improved by simply looking at support/resistance levels. You can bet that after reviewing these trades I will be paying a lot more attention to these key pivot points.

Morgan Stanley (MS)

I entered MS short at 39.87 as price moved up towards the 20-SMA marked with the red arrow. I set my stop at 39.95 which was above the moving average but so close to a round dollar number and the support/resistance level that I was stopped out. You can see the price hesitation at around 10:00 before the .50 sell off. Although this s/r line was not as clearly defined as some others, it was enough that I should have paid more attention to it. The high on the break above the 20-SMA was 39.98, not even reaching 40. I had an 8 cent stop which was much too close and this caused me to be stopped out of an otherwise great trade.

Whirpool (WHR)

I entered WHR near the red arrow at 82.50 and again at 82.26 and 82.18. The trade was going my way almost immediately. This stock was trading a bit erratically and caused a lot of frustration for me. I was up about $350 at the lows on this trade but ended up getting stopped out losing $25. This was a violation of my trading rules on two different levels. One, I should not let any $200+ winner turn into a loser. And two, I am supposed to take ½ to ¾ of a position off at key support resistance levels and trail the remaining with a stop. As WHR moved down closer to the double bottom support level at $82 I should have taken at least half of my position off to preserve profits. As soon as it was evident that WHR was not going to break below $82 the shorts started covering and price jumped .30 in a matter of seconds. Just like that, I had a losing trade on my hands.

Flowserve (FLS)

This trade in FLS was a perfect setup that went bad because of a support/resistance level. There was a gap down in the morning followed by twenty minutes of selling. I missed the Inverse Holy Grail at 9:45, but when price came back up to the 20-SMA just after 11:00 I got short. There was a noticeable decline in volume on the move up, an extreme MFI reading, and two inside bars just before the 20 cross. I entered at 106.02 and was stopped out at 106.35. Again, I didn’t take into account the likelihood of the previous support level at 107.25 becoming a new resistance level. Had I been looking at this I would have either waited on my entry or abandoned the trade altogether. This should have been another very profitable trade for me.

Intercontinental Exchange (ICE)

For my final s/r analysis, I offer up ICE. This was another great setup that was spoiled by price gravitation towards a support/resistance level. You can clearly see that the previous day had two obvious price rejections around 136.20, both of which I overlooked. We had a nice gap down and reversal to the 20-SMA with a slowing in volume, a few inside bars, and declining volume. As you might have guessed, I was stopped out on the one up bar above the consolidation at 135.89 just before the reversal came. The only good thing about this trade is that I realized what was happening and I jumped back in short with small size and covered ¾ of my losses.

 Part 1, Part 2, Part 3, Part 4

Introduction

Since my last post about my current trading slump I have lost another -$982.25. This isn’t too bad considering over half of that loss came from One Bad Trade I made in BIDU last week. This year has been very difficult for me. I have been in the process of honing my skills and focusing on specific trade setups. My weekly results so far this year are as follows: -615.82, +130, +543, -1,080.87, -440.42, -1,180.50, and +395.5. Not the best results, I know. However, there is a little light at the end of the tunnel. The last week’s performance really has me excited about my progress. What’s so exciting about making $400? I’ll tell you…

I admit, the profit isn’t that great, but that’s not important. How I got there is what really has me excited. How did I get there? Two words…Trading Probation. What is Trading Probation? Simply put trading probation is the act of cutting back your trading and risk during a losing streak or a time of market uncertainty. Oddly enough I have been going through a rough patch while the market is simultaneously in an extended time of uncertainty. This is the perfect time for me to take a step back and make some changes.

In January I made a total of 104 trades turning 36,400 shares and February isn’t far behind with 87 trades and 20,040 shares traded. I know this isn’t a lot for some guys like DT and Evolution, but I think that I have been overtrading. I was able to trade actively with success in November and December, but the market conditions were much different then. For me, January didn’t offer the opportunities that I was used to, and since I wasn’t concise in my objective, I got chopped to death. February has been a little more directed, but I still felt that I needed to slow down and regroup. So, after having a discussion with Stewie I decided that last week would begin my Trading Probation.

Rules

As is the case with anyone on probation, there were certain guidelines that I had to follow during my probationary period. I tried to setup these rules in a way that I would be risking very little capital initially. Here’s what I came up with.

Rule #1 – I can only take one trade each day for the whole week
Rule #2 – Each trade must be the absolute BEST trade that I can find
Rule #3 – I must look for Holy Grails with supplemental price pattern formations
Rule #4 – Max size of 1k shares scaling in with 200/200/600 and out with 500/500
Rule #5 – If a trade is not working out, exiting on a time stop is preferred to a hard stop exit

After reviewing the rules, I made one important change to Rule #1. Instead of taking only one trade a day, I adjusted the rule where I would only take one full size trade each day, adding the flexibility to take 2-3 mini trades with 50-100 shares each. To keep from being too lax, these mini trades also had to be near-perfect setups with minimal risk.

Results

Now that you know the rules of the game, here are the results for the week. In four days I took 11 trades with a total of 2,050 shares netting +$395.50 after three consecutive losing weeks. Out of those 11 trades only one trade was with full size with the remainder being mini trades. I only had one losing day out of four and that loss was only -$9. My individual trade results are as follows. Out of 11 trades I had six winners and five losers giving me about a 55%win rate. The real edge in my trading can be seen in the individual P/L. The numbers show that I have been able to keep my losers very small which really helped me keep the profits from my one full-size winner.

Losers: -7, -11, -15, -19, -26 Winners: +17, +29, +38.5, +78, +80, +234

Review

Even though I am somewhat disappointed with my overall profitability for the week, I am very please with the numbers. The fact that I only took one full size trade this week is a little bothersome. There were many more opportunities out there that I could have taken advantage of, both long and short, which would have dramatically improved my P/L. However, I am beginning to realize that my system is setup in a way that I end up passing up a lot mediocre opportunities (unless I take these with small size) to focus my attention on the best trades. Many other traders out there make money buy increasing the number of profitable trades while my system decreases the overall number of trades and aims to increase the profitability of each trade. Knowing your system and where you edge lies is a must in the trading world, but its not enough to just know your edge, you have to be able to exploit that edge with consistency.

The most important thing I took from this week of probation is patience. When you can only take one trade a day, it forces you to pay very close attention to the details. I found myself watching prices very closely and seeing ahead of time when and where a setup would happen. I was able to anticipate the trade and this gave me more time to analyze the specifics to see if the trade had merit before it even happened. This anticipatory analysis is something that I am not accustomed to. The way I was trading before required me to constantly scan the market for setups and when a trade presented itself I had very little time to react. I also had to go through chart after chart and filter out the bogus signals which took up a lot of my time. My other ace in the hole was my time stop rule. Giving myself the flexibility to scrap a trade before my stop loss was hit saved me on three occasions. If I hadn’t utilized my time stop rule I would have lost another $60 or so. Of course, if I had to use a time stop on a full size trade the savings would be substantially more.

Conclusion

After a week of probation and spending a few hours reviewing my trades and performance, I have decided to extend my probationary period for another week. During my weekly review I found some issues that I need to work on, namely missed opportunities. Although I have honed my system down quite well, there are always places for improvement. There were numerous setups that would have worked great, but for one reason or another I was not able to take advantage of those. In addition, two of my losing trades were “discretionary” and not at all part of my system. At this point in time I feel that I need to avoid all discretionary trades and only take what my system deems as tradable. Going into next week I will need to work on taking advantage of opportunities by more accurately reading my indicators, and keeping myself in line and away from discretionary trading. I would recommend that every daytrader take at least a week of trading probation, it will clear your mind and give your more focus and direction.