Archive for June, 2009

Do you trade the Emini Using Stops

By , 25 June, 2009, No Comment

I hope so.

I think it is important for traders to use specific targets that address their loss tolerance and profit targets.  There is a temptation to ride losses too long in hopes that the market will come back to a break even.  This can be a tragic strategy and result in unacceptable losses when trading the emini contracts.

Why would people ride their losses?

Emotional involvement in trades is generally the culprit in any kind of trading, and especially for scalpers, as the markets swings in intraday trading, sometimes violently.   It’s is this emotional involvement in a trade that accounts for a tremendous number of trading losses.  It’s more than difficult to accept a trade as a loser and move on.  Say,  for example, you get what you consider to be a perfect setup and take a trade, and most perfect setups (whatever they may be) have resulted in handsome profits.  The assumption, then, is that every trade where that setup is utilized will result in a winner, sooner or later.  Bad strategy.   There is no foolproof trade, and every trade (no matter how nice the setup) results in a loss.

It’s difficult for me, and most traders, to accept that a certain trade has resulted in a loss.  After all, the 5 identical trades before it produced sizable gains.  Learning to cut your losses and move on to another trade is one of the most difficult exercises a trader must execute.  Set your loss tolerance and if you blow out of a trade, move on.

This is much easier said and done, and even with stops in place there is a temptation to drag a stop a couple of points lower to salvage a trade that is not working out.  I’ve been there, I’ve done it, and I’ll probably do it again.  It is always wrong to do, though.  My experience has taught me that I enter bad trades when I try to pick a counter trend trade.  These trades can be very tempting, but price exhaustion is one of the most difficult trades to execute successfully.  For that reason, I like to strike an 89 point SMA and when the market is significantly below the 89 point SMA I stick with short trades, and visa versa for price action above the SMA.   This should keep you nicely in the trend.  It also weeds out those disasterous countertrend trades.

In volatile markets I detest trailing stops, and I generally don’t use them.  I am not against moving a stop loss up, but the normal market action often gets you out of a good trade before completion.  Be careful using trailing stops, while they sound great in theory, they often have to be very wide to be of any real value.  For myself, I prefer to bracket trade, using 3 point (12 tick) stops for my loss and profit targets.  I have found this to be fairly flexible for trading in normal markets, and in volatile markets, which we saw early this year, I allow 4 point stops (16 ticks).  These numbers are for trading the ES contract.  For the YM contract, I like to use 25 points bracketing long and short positions.

But remember, don’t attempt any trade without preset stop loss and profit targets established.  Good luck trading and come back.

Emini Trading for 06-23-09

By , 23 June, 2009, No Comment

Emini tradin for the posted date, and some observations on futures trading.

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Should you use Tick Charts or Time Charts

By , 23 June, 2009, 3 Comments

In heavily traded and trending markets I like tick charts, and in more stagnant, choppy or consolidating markets I use time charts. The best idea is to use the charts to practice and flip back and forth with your charting software. You will be amazed at how the greatest set-up with a 233 tick chart looks when you see the same information graphed in a 3 minute sequence.

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Goldman Sachs: Record Bonuses

By , 21 June, 2009, No Comment

Goldman Sachs staff can look forward to the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year … Staff in London were briefed last week on the banking and securities company’s prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever.
…
In April, Goldman said it would set aside half of its £1.2bn first-quarter profit to reward staff, much of it in bonuses. It is believed to have paid 973 bankers $1m or more last year, while this year’s payouts are on track to be the highest for most of the bank’s 28,000 staff, including about 5,400 in London.

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In the just when you thought you had heard it all category, this is really quite a revelation.   Of course, does anyone besides myself wonder why Goldman came through the credit crisis in such great shape?

Have anyone taken a look at the composition, especially past employers, of the late Bush-era and present Obama staff members.  Guys like Paulsen…..

Hmmmm……

More on the Economic Recovery…(?)

By , 16 June, 2009, No Comment

With the current unemployment picture, where will the spending for this recovery originate? I would think any recovery would need some encouraging jobless numbers to be authentic.

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Is Inflation Looming On the Horizon?

By , 15 June, 2009, No Comment

The chatter in the financial columns has turned from trumpeting the economic collapse of the developed world to predictions of Zimbabwe-style hyper-inflation.  I suppose there is a certain logic to these predictions, after all, we have flooded the economy with dollar bills in unprecedented fashion.  Of course, there is the usual blather from the conspiracy theorists who are convinced that our recent problems are self-inflicted at the hands of the Federal Reserve Board.

But the world has not ended yet, and there are tentative signs some sort of recovery is developing, though I think it is premature to embrace any sort of “green shoots” view of our economy.  I think it is safe to say that things have stabilized some, and leave it at that.  The folks at CNBC are upbeat and gushing good news, as usual, and the market has recovered a significant amount of ground from the bloodbath of late last year and earlier this year.

But therein lies the rub, economists are a bi-polar bunch(at best) and have stratified in their predictions of either dire consequences in the economy or a view that envisions a healthy but gradual recovery is under way.  Since the eventual outcome probably lies somewhere between these two choices, ones finds himself scratching his head.

Are we in for a raft of hyperinflation?

In a perfect constellation of horrible circumstances, it is possible.  But my gut feeling is we will get some inflation and the Fed will begin the process of raising rates to combat the problem.  It is a ticklish paradigm, though, as it requires perfect timing, something the Fed has never been adept at pulling off…not that anyone can know until “after the fact” whether a rate adjustment is properly timed, and hindsight is always 20/20.

Fitch Ratings statement from Friday

By , 14 June, 2009, 1 Comment

“Fitch Ratings today made massive downgrades on various vintage ‘05 through ‘08 subprime residential mortgage-backed securities (RMBS), indicating the extent of the fallout related to subprime defaults has yet to subside.

The rating agency slashed hundreds of RMBS ratings further into junk territory”

Then went on to say:

“The projected losses also reflect an assumption that from the first quarter of 2009, home prices will fall an additional 12.5% nationally and 36% in California, with home prices not exhibiting stability until the second half of 2010. To date, national home prices have declined by 27%. Fitch Rating’s revised peak-to-trough expectation is for prices to decline by 36% from the peak price achieved in mid-2006. The additional 9% decline represents a 12.5% decline from today’s levels.”

Fitch explains this:

“The home price declines to date have resulted in negative equity for approximately 50% of the remaining performing borrowers in the 2005-2007 vintages. In addition to continued home price deterioration, unemployment has risen significantly since the third quarter of last year, particularly in California where the unemployment rate has jumped from 7.8% to 11%.”

One of the nice things about scalping emini index futures contracts is the freedom from predicting long term, or any term, for that matter, pricing trends. I simply trade what is on the chart in front of me. I will surely admit that much of what I see leaves me scratching my head.

Did I mention that the stock market, by some indicators, is in positive territory for 2009?

And while I am in a questioning kind of mood, can someone explain to me just how the stock market could be in positive territory for the current year?

I don’t spend much of my time pondering the mysteries of life, such as, “what is the meaning of my existence”, or matters of metaphysical consequence. But the rationale for the recent rise in prices is beyond my little one-watt brain’s ability to compute. I have never seen the economy in such shambles, nor the employment numbers, nor the GDP numbers…..

The Fed has taken extraordinary measures, of questionable theoretical value, to prop up the economy, and the government has spent itself into oblivion.

Did I mention the stock market is up this year?

Maybe I should start contemplating the meaning of life.

Efficient Market Theory in Practice: How do you account for Long Tails?

By , 12 June, 2009, 3 Comments

I was reading an interesting blog post yesterday on Falkenblog that seemed to defend, in part, efficient market theory. One of the most basic tenets of efficient market theory is the assumption of investors as rational individuals. Further, this rationality is a function of the dissemination of information in our society so that all is known about a certain stock or equity instrument. The conclusion, then, is that the market efficiently distills this information, via the rational persons buying and selling of certain stocks.

Twenty five years in the stock business long ago dispelled any notion I learned in college that investors are anything close to rational, though the law of large numbers would seem to apply in that the more individuals participating in an individual issue the more likely the issue is likely to be priced properly. But history has, again and again, made it apparent that rational investors are a scarce commodity. Whether it be tulips, dot.com IPOs or houses, we are NOT rational, we are irrational. Lemming-like.

Mendelbrot theorized in “The Misbehavior of Markets” that long tails exist along any dispersion curve. With that statement he infers that catastrophic or unique events cannot be nearly encapsulated in any market theory for the exact opposite reason efficient theory draws its premise: Investors are rational.

For example, the premise during the dot.com bubble was something like this: things besides information can be efficiently distributed over the internet. I can remember looking at the business model for a dry dog food distribution operation and wondering how in the world a rational man could believe such a business model could work. It didn’t, even though the initial IPO skyrocketed, irrationally, to dizzying heights in early weeks of trading. And no the dot.com IPOs are resting in peace, after relieving millions of rational investors of their money.

Is the housing bubble any different? Well, maybe a little, as there was an overriding greed component to this bubble. Which brings me to my point: Investors aren’t rational, they’re greedy. Now don’t think for a second I believe greed is a bad thing, for it is greed, or the desire to earn a higher rate of return, that fuels capitalism. But this greed component often leaves up out on Mendelbrot’s long tail, and we have to find our way out of the long tail wilderness and back to the cozy equilibrium that exists in the main Bell curve structure.

But if Efficient Market Theory and it’s CAPM component are bunk, why is it taught at the university level with the reverence afforded holy books? Well, it’s partially true, until it comes to Long Tails, and then it falls apart. Boy, economics is tough stuff

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