First off, a quick review of lessons learned in 2015. Few days left and S&P is closing near unchanged for the year after all the hiccups and whipsaws. Based on these new dynamics, I think it’s important to remember that it could shift again, so it’s key not to convert the lessons learned into bad habits.
- Be mindful of herds. When to follow or fade.
- Think different. Patterns can be deceiving.
- Plan to be imperfect. It’s ok to lose antes as long it ensures you can win the stacks.
- Learn who/what/why is on the other side of your trade. Sometimes there’s opportunity where others are struggling.
- First site of fire, don’t be scared to jump in to take advantage. Top of waterfall => Get out on splash. Some clues VX1>VX2
- Execution pays. Get paid for your ideas and risk taken. Be patient, let the trade develop, trust your work. Not much else matters.
- Plan for less follow through days; 53% up 47% down days
- Rising vol environment
- more 1%+ days in indexes
- Prey and pounce
Happy New Year and Good Luck in 2016.
It’s been a while since i recorded some thoughts. Been very busy, poor excuse, but I hope to get back to form if I want to evolve and move forward. Not much else to say.
Today was a good day. Best trade was 1988.50 out 2015 for +26.50 ES on the intraday trade. By no means this is a nailed it trade. I’m only thrilled because i traded with plan and had patience to follow it through. I stayed active with bias and managed risk. What else could I have asked for. Things worked out today and i’m grateful.
Per a request on twitter, i’ll briefly discuss the thought process. as usual, it’s important to understand the narrative along with the chart. (rising fear mainly around high yield capitulation, FANG, XLE)
- VIX above 20 – higher vol/variance/risk, above bollingers
- ES was water falling multiple days and under bollingers
- Sentiment extremes, DSI, IV of VIX, VX1>VX2, relative detrends ES
- Breadth extremes – NAMO, NYMO
- Positive divergences on ES 60, 120mins
- Bias was to buy a dip but be patient with range moves for potential reversion into FOMC at minimum.
- My risk ranges for today:
Going forward, i’ll watch for a constructive low to hold near channel lows with reversion to at least to 2040-2060 range pre fomc.
Remember, price doesn’t pay.. its the execution!
Note: This is a working declaration; Rule #13 – Stay flexible.
Trading is an elite performance. Not everyone can do it. Like any professional I need to put the time in to improve. Below I put together a working list of intangibles I believe will keep me on track for FU trading going forward.
- Model 3 high probability ideas – trades that present 3R+ risk/reward ratio. Don’t waist my time with scalps, stick to trades with high confidence factors.
- PATIENCE, PATIENCE, PATIENCE – 90% of my time should be spent lurking like a lion
- Try hard NOT to scale – I need to get paid on the RISK I am taking. Let the trade come to fruition before thinking about exiting.
- Hit Hard – great setups are rare opportunities, so size right.
- Accept losses – its part of trading, but DON’T GET EMOTIONAL. There is no forgiveness for revenge trading and bad executions.
- Respect Stops – I should know where i’m wrong. There’s nothing wrong with taking a stop and folding your trade. There’s always another trade.
- Plan for Variance – I can’t be perfect so watch how markets trade around key areas or events. I can dabble before pouncing. But be swift and quick to make that decision.
- Embrace volatility and risk – I can’t win big without being a little uncomfortable.
- Prey on where others will be trapped, or where they will ‘fold’.
- Have an understanding of other participants; are they weaker, stronger, herding or aggressive. You’re competing with the smartest of the world, possibly less information – it’s always a poker game. They are waiting for you to make a mistake… Don’t
- Listen…. Mr. Market is talking to you. There is a tempo. He doesn’t give a shit if I have bills to pay or would like a new Lambo. He is telling me to get in or out of a trade. It’s an art, but learn to open your ears and eyes.
- Milk the trade – when you’re in the zone stay calm and steadfast with strategy. DON’T GET SLOPPY (see #1).
- Stay flexible – Learn to reverse a trade or exit early if it doesn’t feel right, else see #3.
- Be humble – It’s a lonely world. Life is short. Share any success with those close to you or less fortunate. volunteer, hug the kids. Learn to love things that are not material.
- Rinse and Repeat the process
Trading is only fun if i’m executing well and winning. Follow rules or be unhappy.
After a great trading streak of have a downward bias I finally woke up to a gap lower in an area I was watching – 2050 ES. Most of the day markets had trouble gaining ground and ended up closing at lows. It was a an ugly combination of de-risking, low volume/liquidity, fear of rate hikes, earnings all being a reason. Basically a recipe to get run over if fading.
…and guess who tried fading it?! Well i did. I came in neutral but was looking for 2050 to hold for an upside swing. Positive divergences and favorable risk/reward being the short term thesis on the trade. Kick in a little overconfidence and it can be a cognitive disaster.
What worked right?
I had good entries from areas planned pre market. On any given day other then a gap and go type of day, they would of worked well. Entries 2056, 2051, 2046 (red arrows below). MFE (Maximum Favorable Excursion) was 7,6,3 on each of those.
What didn’t work?
I tried to be too complacent with swing long thesis. Assumption was that we’re in a correction, not a crisis but with all the de-risking with low liquidity up ticks kept getting slammed.
Cognitive bias strikes again. Operate like an algo. That is my bread and butter. To add, trade the odds vs the rewards. I had the tunnel vision goggles on for a swing thesis while ignoring the intraday metrics – bearish internals, lower highs, rising vol to name a few. It’s ok to swing big and sometimes go for the homerun, but varying time frames should trade and be sized differently to avoid larger drawdowns and more variance.
My go forward thesis needs a little resetting short term. I am not looking to short so will play a defensive long until new opportunity comes again. Again, the goal is to trade the model and what I see and not to get run over.
Hitting the channel as described few days back (http://vadercapital.com/?p=4692). Will be patient for flagging action or 50% retraces.
ES finally hits channel low as speculated on 11/3 (http://vadercapital.com/?p=4667)
Rising rates and unsteady earnings keeps this as a peculiar trading market. Negative divergences still persists with weak cumulative leadership but my expectation remains for a ranged market into Nov and Dec. I assume we’ll have our baskets of out-performers and under performers in a seesaw environment.. something for everyone who does their work.
“With stock prices well above average by most measures, the ratio of prices to earnings should decline as rates rise, meaning stocks will likely rise more slowly than profits. … That combination leads to a slowly rising stock market,” – GS
Mid term model would template something like this.. again, something for bulls and bears with the right timing and work on individual stocks and indexes.
with vol curves in contango