DummySpots.com

Wanted to note that 12/27 bar on Apple:

The action of that bar contains some very important points:

• Opening Gap Reversal (OGRe)- the stock opened over 3 dollars down, spiked down another buck and a half, then reversed very strongly into the gap and rallied all day long. The OGRe was of course a signal for shorts to cover by around 78.50, which would have locked in a nice short-term profit for anyone who was short. I was not. Don’t know whether to be happy or mad about that. Missed the quick gain, but stuck to my guns on my resolution to wait on longer-term entries.

• The volume was the heaviest since July, and one of the top few days of the year. As you know, I frequently point out that VHV (very high volume) days often mark tops and bottoms, and can be tagged as very strong support/resistance for trading decisions.

• The day’s range was the largest since… April, I think. Wide-ranging days, like high-volume days, can mark a change in direction.

So, what… look for an opening to get long on AAPL now? Well, for very short-term swing traders, perhaps. Not for the newer, more patient me. And after all, this is Apple, and I’m duty-bound to watch for short entries on it. So I’ll be watching this rally and seeing if it shows signs of failing, in which case, you know what I’ll do.

First a quick look at my two swing- shorts- to- be:

Watching the recent drop has been agonizing, because my “usual” form of trading would have me short in both of them already. However, this is nearly a new year, and is already a new trading season for me (see next paragraph), and I’m trying to wait patiently for the drop and pullback. The newer, more patient Dummy.

Speaking of changes… I’m doing no daytrading whatsoever at the moment. Remember my little scalping experiment on December 15, where I made 32 trades in just over two hours? Well, I ended in the red, as I expected. Tuition, I called it. Couple hundred bucks. Lost 30, lost 20, lost 60, made 100, yada, yada, yada. Very interesting learning experience, and some useful info for the future.

Fast-forward to yesterday. I was printing out my 2006 account history from every angle, for my year-end analysis and resolution-tweaking. The one about not trading options is on the list every year. Every year I have a list of puts and calls near the “biggest losers” end of my printout. Well this year, they were there again, but not as the biggest losers. The biggest losers were all from December 15, 2006, where the printout shows I lost over $7000 in one day. Merry Christmas!

Yeah. I started to puke in the trash can by my desk, but was able to choke the feeling back. Deep breath. Another deep breath. Then a cold beer.

This is just a numbers error. I have the individual trade confirmations showing where I lost 20 or 30 dollars on most of the losing trades, not six or eight hundred.

So, I’ll be spending the days from now into the new year getting things straightened out. And working on my Schedule D.

My taxes are always 15 minutes for everything else, 4 hours on the Schedule D. Gonna be longer this time around- nearly 600 trades. And believe me, that is gonna factor into the ‘07 resolutions for sure. That’s too damned much trouble for someone who still works for someone else. I’ve gotta get to fewer, more profitable trades. In my situation, I think that means more swings, less days.

Also, the last major site redesign was (gasp) four months ago! That’s probably my record. I usually get sick of a layout after a few weeks. So, ‘07 is likely to see a new look for DummySpots.

But I’m getting ahead of myself. For now, I’m going to observe my new, earlier bedtime. ‘Nite ya’ll.

You know sometimes I wonder when I ain’t gettin’ nowhere
What would old Willie do when it all gets too much to bear
And I can see him on his lonely old tour bus
And he’s got his problems just like any of us
Well he’d just take a deep breath and then he’d let it all go
And he’d take another deep breath and let it all go
And he’d take another deep breath…and he’d hold it…
Ah and I bet he’d feel hungry in a way that seems strange
Yeah hungry for all the things that he just can’t change
Like the time he passed out in is own bedroom
And his wife sewed him up in the sheets and beat him with a broom and he forgave her
(from Gary Allan’s song “What Would Willie Do”)

So I’m looking at the Qs, and in the newer, mellower, more laid-back style I’ve adopted for my swing trades, I ask myself, What Would Dave Do?. Dave Landry, that is. Swimmin’ Pools. Movie Stars. (You’re forgiven if you’re too young to get that).

I think Dave would take that chart and draw a couple of big arrows on it. His are blue, mine are green. I think he’d say a breakdown out of this sideways range would be tradeable on the first pullback. I don’t think he’d say jump in at the first break of 43.20 and set a stop a few pennies above that.

So rather than mull over “at which penny to set my stop limit short order” and exactly where my initial stop and tah-dah! “R” will be, I think I’ll just wait for that break, if and when it happens.

In the meantime, I’ve got about two more sips of wine in this glass, then a little reading and it’s off to bed, gotta get up for work at 0530 in the morning.

Hey, I could get used to this.

• After work/before blogging: Took the younger two to "Charlotte's Web" ... terrible, terrible directing
• Listening To: Steve Earle "Train a Comin'"; bought mostly for "Goodbye"

We love trading. We wouldn’t be here otherwise, reading others’ thoughts on it and writing our own. One sometimes overlooked fact is that for some of us or our fellow traders, maybe it’s not just a pastime, and maybe it’s not a passion that they can put down and wait on for 5 years if they aren’t financially prepared to pursue it just yet.

Maybe instead it’s something they can’t resist doing. I think for all of us who are human (and yes, I know some of you guys and gals are pure tradin’ machines!), many of these types of thoughts and feelings appear from time to time, or ride along under the surface chronically during our trading.

This is a great time of year to explore this subject. Trading has all the necessary ingredients to become an addiction, and can sneak up, take over and destroy our lives just as easily as can alcohol or various other substances or habits. The most similar addiction is the addiction to gambling, so I’ve used some gambling references for this post. Let’s get started:

And now, a paraphrase of the Custer Three Phase Model of gambling addiction:

I doubt there’s anyone for whom some of the above doesn’t hit pretty close to home. If it sounds less like familiar feelings and more like the story of your life, there are many places to begin to explore what’s going on and how to begin the process of change. One online example is Your First Step to Change from the Massachusetts Council on Compulsive Gambling. There are also various 12-step group programs and such, but traders often tend to be somewhat group-averse, so don’t feel like that’s the only source of help.

And of course, there’s always this.

I’m thinking of Tom T. Hall singing an old song that went something like faster horses, older whiskey, younger women and more money…

The fact has not been lost on me that I’ve recently been stopped out of two excellent swing trades by mere pennies, and if I ever want to get on board for a longer move than my typical 2-5 days, I’m gonna have to make some changes. So, one of my resolutions for 2007 is going to be to switch from swing trading off of charts like this:

And relax it a bit to trading off of charts like this:

This will necessitate my waiting patiently for days or weeks after I spot topping or bottoming action and not jumping in on the first break and setting a tight stop, as much as that pains me. I may need some rehab.

The good part of this change is that my swing trading should become positively laid back. I can go about the business of fatherhood, work, etc and not have to worry what the stock is doing at that particular hour, or even on that particular day.

No definitive resolutions on the daytrading yet. But there are gonna be some.

• Accomplished Today: Installed dual 12" subs in the trunk. Finally the bass sounds like it should on Dark Side of the Moon.

Been pretty tied up with work and trying to land some presents before the Big Day gets here. (A Wii, A Wii, half of my kingdom for a Wii). But another thing is taking up all my limited computer time this weekend: a review of Friday morning’s activity.

With the chance to trade Friday (I didn’t work till noon), and with it being options expiry (nothing likely to move very far), I took the opportunity to try a little experiment I’ve been thinking about: trading one-minute bars.

There have been many times when I’ve seen a clear few-minute-long move beginning, and have wondered if my home-based equipment is sufficient for me to take advantage of such a move, and trade in and out in a matter of seconds without getting buried.

And then there’s the wondering about me. Everyone who’s traded at all can relate to the phenomenon of pulling your stop at the last moment, deciding to “wait just another minute or two and see what happens.” If you’re trading exceedingly large positions where a few-penny move can amount to what would otherwise be days’ worth of losses, you can’t afford to wait one SECOND after that stop is hit. And the only way to know for sure if you can resist the urge to pause is to test it with actual trading.

This experiment also called for me to do a new kind of scanning: searching for high-priced stocks that have the potential to move at least 10-40 cents in short swings, but which also trade so much volume that the spread is only a couple of pennies wide and so that one could get in or out at the market instantly, with as little slippage as possible.

You may be surprised at how short the resulting list is.

Anyway, I chose Apple. I love Apple. I mostly love to short Apple, but hey, I’ll go long if I gotta.

From experience, I knew I had to sit out the crazy first few minutes after the market opened. Let things settle out a little. So I jumped in at about 0950. I missed what would have been my biggest money-maker of the day by a few minutes, but this was my first time, testing the waters and all. I was expecting to pay some tuition for the education I was about to get.

In just over two hours, I made 32 trades. I stayed in anywhere from 15 seconds to about four or five minutes. I tried different lot sizes to see how the execution went, had 4 different charts of the same stock up, plus time and sales, and for a little while, Level II… which I promptly turned back off because it didn’t help at all and actually hindered me by taking my eyes off the chart.

I printed out my transactions and took them to work with me, and started studying them and scribbling and calculating there. When I got home last night, I pulled up the day’s chart and went back over it minute- by- minute, comparing what my trade confirmations showed with what the chart showed. That’s a long process, and I’m still not through with it. But I definitely learned some things and saw some patterns emerging.

Here are a few observations:

• The fact that the stock market (NYSE and NASDAQ combined) account for approximately 105 billion dollars in trades a day suddenly doesn’t impress me any more. In fact, I’m a little underwhelmed by that figure now. I saw how one individual of modest means, and daytrading from their home, could easily account for 4-5 million dollars’ worth of trades in a 6-hr trading day, even with a very small account. Combined with the fact that there are so many professionals who trade accounts worth hundreds of millions of dollars, and probably easily each account for some billions of dollars’ worth of volume, that leads me to believe that the actual number of serious individual daytraders must be far lower than I ever imagined.

• Ameritrade’s execution is generally excellent. Better than I expected, in fact. But when something happens, it can be very costly. My trades were executed, on average, about two to four seconds after I entered them. Probably about as fast as possible with data packets bouncing thousands of miles all over the internet. However, I had one instance where a market order just sat there for about 20 seconds without executing (while many many trades scrolled past), and when it finally did it was my biggest loss of the day. To do this regularly, one would need a setup that ensured extremely reliable and instantaneous execution on liquid stocks.

• Trading like this could easily amount to over $1000 a day in commissions… a direct-access broker with the super-low commissions for high-volume users would be absolutely essential.

• I verified that I can, in fact, pull the plug on a position instantly with nary a spell of “maybe I’ll just give it a few more seconds and see if it comes back.” That one’s a relief.

• A rapid-order entry system, and practicing until you can enter a full order from scratch in about 4-5 seconds, is necessary. Ameritrade by default has the function of going to a “review screen” of each trade, in essence asking “are you sure?”… I’ve never had the need to turn this screen off before. Now I see why that option exists. What I’d actually need is about four complete, preformatted orders where I could just click on whichever one I wished to execute in that instant, with no typing and no verification. Just pick one (”buy 1000 AAPL market”) and click it.

• Virtually every time, lots smaller than 1000 shares (even slightly smaller, like 800 shares) executed faster than 1000-share lots, and got broken up far less often.

The upshot? I averaged about a 2-4 penny loss on my losers (which pleased me greatly), and about a 15-20 cent gain on my winners. But the losers by definition are gonna far outnumber the winners, and in this case, I ended the experiment in the red, and went to the ICK! other job.

The promising part is that I missed trades a few minutes before I started, and a few minutes after I had to quit, which could have turned my entire day profitable. Also, there exists at least the potential that on more “normal” days (i.e. not expiry), the profitable swings may be wider before they start getting reeled in by the Big Guns.

The downside, and it’s major, is that this kind of trading ages me about a month for every hour I do it. I doubt crack cocaine has much on the adrenaline surge this kind of intensity creates, and that’s both stressful and exhausting. I have an extra dose of respect for the folks who make a living scalping.

I doubt very seriously whether I’ll pursue super- short- term trading any more than this. I’m actually leaning more towards getting away from intraday action and doing more longer-term swing trading, at least while I have another full-time job and three kids in school.

But I’ve always wanted to try it, and the experiment was a blast!

• Supper Tonight: Baked salmon (with Tony Chachere's, of course) and Dr. Pepper
• Watching: Second disc of Pulp Fiction Collector's Edition

Stop got tagged today at 89.50 for a wash:

Time for the usual review, but the questions have been answered before:

• Looking back, am I comfortable with the setup and trade entry?

  Absolutely! The median duration of my swing trades is 4-5 days. This one broke my entry point (89.50) and went substantially profitable almost immediately, eventually reaching almost $4 in the money within 3 days before failing.

  So, given the opportunity to go back 10 days, I would definitely take the same trade again.

• What prevented you from capturing some of that quick move in the direction of your trade. Put another way, how did the price make it all the way back to your entry point without your taking a profit?

  That, my friends, gets back to my old saw about stops.

I had used my old bread and butter trailing stop method which dropped the stop to 89.50 on the nice “lower low” two days ago, and was content to let it do the work. Maybe not just content. Maybe a little neglectful.

What did I overlook? It’s been said variously on this blog and many others that, when managing your stops, you must always consider areas of signifcant support and resistance. Don’t sell down into the 200, don’t buy up into it. Sell half when the position reaches “1R”. On a daytrade watch for resistance if it claws its way to 1) the O.R. high/lo, if that was a significant trip, 2) the 138% Fib extension, 3) the current or previous day’s hi/lo. On and on. These are times when your position (or at least part of it) is stopped by how far it has extended, not how far it has retraced.

Here’s what I neglected- a very significant support level:

Two days ago, that thrust downward put the price 1) below the support of the “-2″ and “-3″ day lows near 87.00 and 2) just above the longer-term support around 86-86.40.

That should have been an eagerly-anticipated range on the part of moi, and was the prime point to either close the position and wait to re-enter on a further break, or close half the position to lock in some of the rapid profits it had accumulated.

I did neither.

So thank you, Mr. Dow and Mr. Jones for the gift of another Apple short, and I promise to be more diligent next time.

P.S. Doesn’t the way today finished look a little weak? Perhaps another pullback and short setup? Kinda sorta maybe? Short the break of today’s low? Short the break of 86? Short the sun rising tomorrow?

HA! I LOVE THIS STUFF!

• Finally Bought: Two Christmas gifts, only a hundred to go
• Supper Tonight: McDonald's Drive-Thru, Yuck

We’re to that wonderful 3-day period again. End of expiry week. Think I’ll take the Lear [car] out to the coast [down to the lake] and cruise around in the mega-yacht [paddle around in a paddle-boat] for a few days [for $10 worth]. Either that or go to work. Which to do… which to do…