When things are too lcear

What a rally today. After seeing yesterday's post fed action, most of people I know thought markets are in a deep trouble. I, too, thought the same. I guess when things are too clear, markets do the exact opposit.

I plan to enter a few position trades in my Roth IRA and now seems like I have to sit on my hands a bit longer. I told myself, I would enter after the annoucement yesterday, but I ended up chickening out just like I did on Gold a few months back. Had I bought a few stocks that I picked, my Roth account would have been up 5% from today's gain only. It's all hindsight and hard to get over. What I have to be careful is whenver I have 'I missed it' mentality, I lose a big money.

At this moement, I'll sideline. Things just don't look clear in all the markets.

Long 2 YM at 12530

Results:
+13 and +2 or $75 (before commissions)

I missed the short at Daily R2, so I bought a retracement to R1 for a scalp.

Where are we going?

After Fed's emergency rate cut of 75 basis points, markets have bounced. Last night European and Asian markets collapsed at least 3%. Surprisingly, the U.S. Markets are holding well, rather +74 on cash Dow now. Where are we going from this point? We have a FOMC meeting this week. There were some talks about the fact that the emergency cut would have not needed. Thus, we'll not see another cut this week. If the Fed doesn't cut anything this week, it'll be another disaster. I think the Fed will cut .25%, which will result in still a significant drop in stock indexes with a disappointment. .50% cut would be too much after cutting .75% although that will likely keep markets steady.

So many people are still long markets. What I mean by that is not from traders but from our neighbors or investors. There is a big cycle in economy. In the past a few years, money was in real estate markets and that was moved to stock markets, I would say, since 2003. Smart people slowly started moving their money from real estate to stocks in 2003, where they dumped theirs before real estates picked in 2005-2006.

Investors who saw a massive sell off last week are very nervous. They are hoping that markets just go higher and higher from this point. Their psychological level is that low I think. After the FOMC, we'll see a big sell-off, funds-run, stops run and a new low. After that, I say we'll make a steady higher high. We've seen so many times that after I take a loss, markets go my way!

Markets are designed for 'normal' people to lose money.

Short 2 S at 1238

Results:
+2, +0.25 or $112.50

$112.50 (before commissions)

I was pretty aggressive on moving my stops, so the 2nd contract was exit at b/e.

Short 2 YM at 12220

Results:
+10, +8 or $90 (before commission)

It was another interesting day. I have a lot of things to talk about tonight. In short, last night I talked my friend, JP, about where markets are going to go. I told him if we go above 12140 level, we might expect some short covering + buyers' attraction. We have about 15 min left and let's see where it closes. With stocks rally, bonds collapsed, which is helping on the investment club I'm in.

Short 2 S at 1223

Result:
+1.25, + 3.75 or $250 (before commissions)

It's been a while since last time I day-traded. It happend fairly quickly without taking much heat. Not bad for quick scalp.

As soybeans are falling, my soybeans and soymeal trade came back to my entry level (from a drawdown of -$2100, ouch). I'm looking into $5K target at least, but I would like to see what happens around $3K area first.

Ticked at me

One of high % setup is to fade a gap fill. Just about 5 mins ago, YM was coming to fill the gap, so I placed an order to fade it (short). Yesterday's close was 11955 I think, so I placed a bit higher than that at 11960. I patiently waited and it finally came up, but guess what. 11960 was traded but I didn't get filled. If you know YM, sometimes there are lots of orders sitting, but mostly 5-15 lots. I put 30 pts stop and target. In a matter of 30 secs, the target was hit. It could have been a stopout trade, but I feel like when I don't get in, it is a winner.

Sold Lumber 220 Put for 7.10 or $781

The order was sitting for a while and today I finally got filled. I'm cost-averaging down Lumber from 240 and now at 220. I will continue to average every 20 puts with intension of going long. Selling puts are great when you inted to go long if assigned. If not assigned, you're ultimately 'getting paid' to try to get in. A few things can happen:

1. If LB closes above 240 by the end of Feb, both positions (240 and 220 puts) expire worthless, I collect all the premium of appx. $1500.

2. If LB closes between 220 and 240, I will get assigned on the 240 puts (long from 240) and 220 will expire worthless. I need to roll-over 1 contract to June (I need to double check the next month). Since I still collect all the premium, it's as if I'm long from 228 (240 - $1500 / 110($/pt)).

3. If LB closes below 220, I will have two futures poistions with average price of 230. I will roll 2 contracts to the next month contract. Since I still collect all the premium, it's as if I'm long from 223 (230 - $1500 / 110($/pt) /2).

Let's see how it turns out.

Too volatile for me

As everyone should know, global markets tanked over the U.S. weekend. Fed came up with an emergency 3-quarters of key interest rate cut. FOMC being 1 week from today, the fed's move was really bold and shows how serious our situation is. So many countries depend on dollars. If we collapse, chances are global economy will struggle as well.

I've been watching markets since right after .com bubble. I've been through many post FOMC move, news, earnings etc... I thought the move in early 2007 was probably the most volatile market I will ever see. Not until today.... 20-30pts in YM move in a matter of second. The only way to survive in this market is to use a wide stop. I mean at least 40 YM pts or 4 ES pts. Of course, you don't want to take your profit at 5 pts. It's either make lots of money or lose lots of money.

One to keep in mind is don't over trade this kind of market. I've done that and lost a lot. I'll probably lose if I jump in, lose money, and start doing the 'revenge' trading. Keep a daily limit loss too. If you look back, don't you sometimes wish that 'if I could just get rid of one or two bad days...'

YM is up 412 as of 10:20AM. I guess the Fed's cut's been working ok so far. Monthly chart looks very ugly breaking a key support in trendline. I don't think this rally will last long, but I definitely like to see where it closes today. I've seen some people over-trade and exited their positions, which is ironically where pros will go long.

Gold was down at 850 level at one point, now 890. What as I doing. I've been talking about getting in gold again, but not doing any thing. For some reason, I have a hard time pulling the trigger this year.

Grains and oils are also down quite a bit mostly due to fear of recession. If recession comes in, people will reduce cost on everything / commodities. The position I'm holding (Soybeans-Soymeal spread) will benefit from falling in grains. It is again s position trade, so I will just sit back and watch. I put an order to sell another put in Lumber. The Lumber at 240 was cheap and 220 is a bargain. I will continue to add every 20 pts. I'm prepared until Lumber goes down until 150 or so.

Outlook for Jan 16, 2008

Let's look at a few markets.

1. Crude Oil DailyLooks like CL is setting up a swing low. Ideally, if it pushes through 86 level to run stops and head higher, I'll be all over. As you see we went just above 100 and now 91. This is exactly what pros do. They want people like me to feel fear. People were panic and bought Oil ETFs and oil stocks when CNBC talked about 100 on CL all over. Since then, about 10% drop! I bet people who over-leveraged are losing lots of money. Their stops are likely below that Dec low, which pros will look for before heading higher.

2. Wheat Daily

Above all grains, this wheat looks the best. Wheat is relatively thin, so it can be so explosive. If you can recall the run from May to Oct, about 80% gain in 5 months. We are not talking about stocks, but we're talking about commodities almost doubling its price in such a short period of time. Since then, it's been consolidation in its upper range. Grains usually move together, but I would say Wheat is a completely different animal. It can do whatever it wants. While I'm looking for a top in Corn and Soybeans, Wheat's gonna go $11 /b.

3. Gold Daily

Gold is due for a consolidation. Since mid Dec, this is the first time we see some weakness. Gold seems to respect 50EMA, so I'm looking forward to that, which is currently 832, but it'll come up as we just hang out here. Ideally, I would long around 845 level. I plan to buy futures and gold company like GG on my Roth IRA.

4. YM Daily

What can we say about this chart. Sell every rally I would say. Tons of stops under March low. Looks like we'll break 12,000 line giving people some panic. Our economy just doesn't look good at all. When markets are not good, it sells off of any news sometimes without any apparent reason. Remember, pros traders that I know love falling markets because things happen quickly and if you are right your reward is very high in a relatively short period.

TradeStation Backtesting

I have passion on writing programs. I'm not that good, but still have a full-time job as a software engineer. My ideal retirement would be to let my system trade for me while I play with my kids. You probably know pros and cons about system trading, so let's just get to the meat part. I've been working on a simple break out system on grains. I tried this in all grains, but my setup seems to work the best in wheat.

I used TradeStation (TS) for back-testing. You simply attach a code you wrote in EasyLanguage onto your chart, and the TS will automatically generate a performance report as follows.

The back-testing was done for the period between Aug 07 to Jan 08 or last 3 months. The total net profit for this system is about $11K. The report includes a lot of information such as gross profit/loss, winning/losing trades, largest wins/losses...etc. As you probably noticed, I only won about 52% time, but made about $3K per month. Not bad trading one contract at a time and one trade max per day.

The above two show some more additional information about back-testing. It looks like my setup worked better in recent 100 trades compared to the first 200 trades.

I think TS' back-testing tool in really good. I used eSignal's one, but was not impressed. One feature I found really useful is its 'optimizer'. For my setup I have stops and targets, but how do I know which is the best? The optimizer checks every possible combinations that you define (e.g. $50 interval as a target between $50 and $1000). I ended up using the stop of $425 and the target of $975 were used.

$975 is almost 20 pts, which is 2/3 of limit move in Wheat. While this is very extreme, since my back-testing says it has the highest %, I will use it. My plan is to run the back-testing every once in a while to adjust stops and targets to meet current market volatility. I hope this is helpful for whom are interested in system trading.

Correction in Grains

I hear people talk about a huge correction in grains. Falling dollars, bonds sky-rocking, inflation... etc all have made grains go higher and higher, not to mention without any pullback. Grains used to be the way farmers hedge their profits, but now all the institutionsare using them as part of their portfolios. One of guys told me that the run-up in Dec 2007 was from institutions adding Grains into their portfolios to 'show off' to their customers. The same reason goes to the current run since the beginning of 2008.

While it's very dangerous to pick a top, but I'm expecting a huge correction, I mean 10% minimum. Remember, topping patterns usually look like interveted 'V' shape whereas bottoms look rounded.

Keep missing

In the previous post, I talked about shorting at daily R2. Indeed the opportunity came, but guess what. I was in a meeting missing the 100 pts drop. That level was also pullback to 8EMA on daily chart (YM). Now it's about 140 pts off that level. Dagger!

Have you ever felt that when you don't get in the market, things go in your way, but when you do get in, things just go against you without any hesitation? I feel like that at least since the beginning of 2008. I back-tested a simple setup on Wheat, so I was ready to implement, but on past few days, the setup happened every time I stepped out. I guess I'm full of it giving a non-sense excuse.

One of reasons I started this blog is to record this kind of frustration, but eventually I would like to work way out of it to become a better trader.

By the way, my money for Roth IRA should be cleared soon. Do you have any recommendation on stocks for a looooong term basis?

Bernanke

Dear Mr. Bernanke,
Why do you have to come out and tell us Fed's going to cut the rate? We all know you will at this month's FOMC meeting anyway. Gold and Euro shot up and I'm losing money on my investment club account. Low interest rate means basically printing more dollars. If there are more dollars, USD rate goes down and futures such as gold / grains go up.

I guess he wanted to lift the stock markets, but look at where we're now. It initially shot up, but now we're about where we were. I was looking to short at daily R2, but never got there. The daily R2 coincides with 8EAM on daily chart.

Bernanke, I know you need to clean up the mess that Boo-sh and Greenspan did, but will you just leave the market alone?

Update

I've never seen stock indexes continuously go down like this (Gee, 7 days in a row?) without any pullback. It's almost as if by the time stop-runs are done, new sellers step in and this cycles steadily. This is where I shouldn't do anything. Yesterday, I tried to catch a falling knife with an aggressive stop, but given today's action, I wouldn't jump in.

Updates on my current positions:

Although both spread and lumber trades are long term (minimum 6 months), it's painful to watch my P&L goes down. I'm willing to risk my entire portfolio. If I need to, I will not day-trade to maintrain these two. It was a great buy and it'll be a better buy if price comes down.

Although I was not in, I know a guy who was in Coffee or Silver trade for 2+ years before taking a real decent profit. This kind of opportunity doesn't come everyday. I'm prepared for futher down move, stagnation and spike up move.

Swing Long 1 YM at 12660

Catching a falling knife is definitely not a good idea, but I do have a protective stop. I see lots of fear in markets now, which means we're ready to bounce up.

Entry: Long YM at 12660
Stop: 12567
Target: Open (Will trail)

Result: +$10.74
Stopped out at 12663 or +3

Maybe I was too aggressive for a salmon trade. :(

Long 2 YM at 12690

Falling sharp here, but I faded it anyway. I don't know how to explain, but markets came down without any pull-back, so I found that it has a high probability.

Long at 12690
T1: 12700
T2: Open
Stop: 12670

Result: +$71.52
T1: 12702 or +12
T2: 12694 or +4 (trailed to b/e)

My b/e stop got hit one tick shy, but oh well, that's the trading. Now it bounced off nicely at least 60 points. One thing to note is that if you bought 10pts 'in front of' pivots levels, you probably got stopped out. With this kind of action, you want to go behind pivot levels as markets tend to push and run stops before bouncing back.

Anyway, a very nice stop run on daily chart. I'm expecting we'll slowly head back to 13100 level as we sucked in lots of shorts. I'm looking into long at the close.

Stops 101

On Friday, we had a huge downday. Today as expected, we're consolidating so far. In the morning, we surged down quite a bit, but snapped back since. I bet some people bought at the close of Friday expecting for markets to bounce up based on maybe Trin or something. But this market is not setup that way.

If you look at daily chart of ES or YM, we're sitting on support level from Summer spike lows. If you're big institutions, what would you do? Or ask yourself this, if you're long now, where your stops would be? Below those support levels. What institutions do is to push markets lower until they 'wash' out stops on those levels before snapping back up. Have you ever felt that markets know where your stops are? You get stopped and price goes even beyond your target level? This is exactly what's happening.

Also take a look at October 2007 high, markets went just a little tiny bit higher than prior high and headed lower due to the exact same reason! There are markets where you can put stops around support/resistance level, but not certainly for stock indexes, which are 'fading' markets.

Now, pros are looking to short this market, but where? I would say around 13100 level, which is where I plan to enter, expecting to run stops from summer spike low. The ideal entry would be pivot levels after drilling down in 30 or 60 min chart. I probably need to give some room to breath due to volatility.

Wheat Long at 931.25

Long at 931.25
Exited at 931.75
Result: 0.50 or +$18.96 after commissions

Wheat was the weakest one among grains. Normally I would short the weakest, but with all the grains trending high, I thought it'll follow. However, if you buying a lagger, it'll likely be the first one that drops if all other markets go lower. Therefore, I used pretty tight money management. Sure enough, I was lucky to get out about at break even.

Sold Lumber Mar 240 Put for 6.10 or $671

Lumber (LBH08) is down 1.5% today and I was able to sell 240 put for 6.10 bringing $671 as a premium. This contract expires on 2/29/08, so I will be holding this quite a while. Here is my plan:

1. If LB closes above 240, the option expires worthless, I collect all the premium of $671. I will sell another put option on the following month.

2. If LB closes below 240, I will be assigned a long position from 240. I will try to sell it at 240 and roll-over to next month. If the price is significantly lower, I'll just roll-over. On the roll-over contract, I will sell 280 call or so against the underlying position craeting essentially a covered call case so that I can generate some income in case of stagnation.

You can look at the options price here.

2008 Portfolio

I rebalanced my 2008 trading accounts. Adding and withdrawing money is a headache, so I will try to minimize that process.

Swing and position trading in pit/electronic options/futures markets: $15000.00
Day and swing trading in electronic futures markets: $8744.04
Roth IRA: $4000.00
--------------------
Total portfolio: $27744.04 (as of 1/4/2008)

Trading futures options can be pain in the butt because you need to have a pit trading account, which is what my $15K account is for. I will not only trade options on that account, I will also trade longer term position trade to give more room on my electronic futures account. On my Soybeans and Soybean meal spread, I could have used the electronic account, but that will reduce my buying power for day-trading. Note that commissions are slightly higher to trade pit/electronic ($3.03 per side) account as opposed to electronic only account ($2.40-ish).

I finally opened my first Roth IRA account! If you don't have one, I highly recommend this to anyone because you can always withdraw money you funded without any penalty, but gains are not taxable if you take out after 59.5 years old. I chose to open Equities account instead of futures or Forex because nowadays you can mimic all of those using ETFs. What I will likely do is to buy a few strong companies that I really like and hold them for a long time unless a significant break happens. I have one rule though. I will never put more than 20% of my portfolio to one company for diversification. Eventually I like to have less than 10% per company.

Other than this, I'm involved with a club that utilizes pretty aggressive trading method, but I didn't include this because I don't manage it. I can voice-out a few things, but members' votes are needed before any action is taken on that shared account. Even if significant amount of my money is there, it didn't do much last year. At one point it went -10%. Gladly, it ended up a whooping 1% gain for 2007, we'll see how it turns out on 2008. I plan to give another 6 months before making a decision. I'll write about how it goes.

I may open a Forex account again but still debating between spot Forex v.s. Forex futures. They are basically non-regulated v.s. regulated, but one huge advantage of trading spot Forex is that I am able to trade exotic pairs such as EURAUD, EURJPY, AUDJPY etc (non-USD-related pairs). I did pretty well (+79%) last year on $1K account, so maybe that's what I should do.

I will also contribute more on 2008 Roth IRA, which will make my Roth IRA portfolio $8K, but not so soon.

Bond (US)

30-year Bond (US) looks pretty good right here. You would buy a pullback to 8ema at 117 anticipating to break above the recent high. The trend has been that people are expecting to cut a rate, so US is moving higher towards to FOMC, and then sell off hard after the rate cut. We will see what happens.

Lumber Monthly

Commodity is a very interesting trading vehicle because it has intrinsic value. Of course there are no intrinsic value on stock indexes or currencies etc, but when we talk about commodities that can be physically delivered have intrinsic values. Where are the intrinsic values coming from? Cost of production. There are cost of production when you produce, for example, crude oil, soybeans, cattle etc. If you were a farmer and you're raising lean hogs, you are there to many money so you will be selling your hogs more than you invested.

If you watched futures options long enough, you know premiums are skewed to call side. Why? Will orange juice ever go to zero? There's no way it'll go to zero. It might get cheaper though. It could go below cost of production. If that happens, OJ farmers will grow something else than OJ. Now there are not enough OJ farmers. What will happen is OJ price will start heading higher (remember supply / demand curve?). This cycles happen over and over again. As a trader, I would like to take advantage of it.

This is the monthly chart of Lumber. The lowest point in last 90 years is 220 level and we're now about 250 level. This is where you can start getting positioned. This doesn't mean that we should just go out and buy futures contract outright. There are a lot more about this type of trading. Unless you do your homework, you'll get hit badly, but its reward is very significant.

Gold and Oil

Gold had a huge move to upside today making all time high. Since Gold started moving from 680 level, I only caught one 10 pt move. I've been just a dick for a tick waiting for a perfect entry. The upside targets are 880 level and 907 level. At this point, I would wait for a pullback to 840 level which is 8 EMA.

Curde oil finally hit $100 today. If you have been watching gold and oil long enough, they tend to follow each other. Why? Rising oil indicates inflation and inflation means our currency is dropping and gold is appreciating. Just like gold, 127% is a slam dunk and will likely test 161% fibb level. The perfect entry would be 97 level.

Soybean / Soymeal Spread

I finally entered Soybean / Soymeal spread trade.

Short Mar Soybeans (SH08) at 1236.25
Long Mar Soybean Meal (SMH08) at 343.9

Since this is a long term position, I used market orders for both. A bad mistake. Slippage kicked in and I got filled almost at the bottom on Soybeans. In fact I placed an order to buy SM first, but got filled on S. I guess whenever you use market orders, someone knows and takes advantage of it. Lessons learned.

Anyway, the spread between S and SM is about $15000, but now it's $27500!!! The profit would likely come when S drops. If that happens it'll happen pretty quickly. Today My drawdown went as high as -$750 (what a way to start 2008) this morning since all the grains are screaming higher and this is a long term trade until it realizes at least $5-10K gain.

Update (on 2/20/08):
I rolled over to May contract by doing to following:
Bought March S at 1391.50
Sold March SM at 360.2

Sold May S at 1409.4
Bought May SM at 367.5

2007 Profit / Loss

Forex: +789.59 (+79% on $1000 account)
Stock options: -1584.16 (-31.7% on $5000 account)
Futures (day-trading, swing-trading and futures options): +15700.9 (+242% on $6500 account)

Total Trading P&L: +14906.26 (+119% gain on $12500 portfolio)

Trading related expense (internet, newsletter, exchange fees, webinar etc): -3317.83
Consulting: +1184.64

Net P/L: +12773.1

The Best and The Worst Trade of 2007

The best trade of 2007, yet the best trade I've ever had, came from Wheat and Soybeans spread. Spread is also a fact based strategy. Many successful floor traders are either scalper playing between bid and ask or spreaders. For this trade, I waited and waited for the price to come down. It went against me about $700, but turned out $7K trade per contract for the course of 2 weeks.

The worst trade of 2007 came on FOMC day, Sept 18. Interesting enough, it was not from swing trading, rather day-trading. When everybody was expecting a quarter point cut, Fed came out and cut a half point! At that time I was not even watching CNBC. I knew the fed announcement would come out, but my fading level was high enough (about 250 YM pts away) that I thought I'd be okay to fade. Wrong. Do you see a reg flag there? I set 20pts stop on 3 lots. Worst yet, the slippage kicked in and got me stopped out for 47pts for 3 lots. I normally use 20 pts stop on day trading max, but 47pts did hurt me quite a bit.