I was speaking with a new member this weekend about their individual circumstances, a heartfelt chronology of their trading and investing experiences. I thought the dialog was very logical, well thought out and something worth sharing, as there were many points this trader made that rung true to many of us early in our journey.
We can all identify with some of these observations over our trading career. And, I’ve talked to many now successful traders and investors who had similar issues with their trading and investing over the years.
Today I would like to write to you and talk about my trading career so far.
Because you took the time last week to explain some parts of trading that helped me, it made me think, and I just decided to write you this.
I started trading in 2007, buying some shares in a local bank in my home country, a bank that would finally go bust with the credit crisis.
I lost a significant amount of money. I added on the way down.
In the years that followed I worked mainly my day job and then I invested mostly my money in real estate.
This went well, my day job and real estate, the trading has never been great, in fact, you can call it a source of money wasting. Still, for some reason, I just kept going and always were fascinated by it, read books, followed a series of professional traders, subscribed to their service.
And the result is? I never really improved.
The problem lies with me, there is this recurring pattern that happens. I tend to step into the new trading scene, see, understand the trading method used, and after a while I ‘deviate’.
The problem is always just the same, I never stick to the rules, never follow the discipline, no matter what the style of trading is, whether that be buying the dip, oversold stochastics, setting a stop loss, trading short term frames or long term frames, trading options, writing options or selling.
After a while the ‘deviation’ took place, I tend to lose interest and well, switch to another.
But in the end, all these professional traders I followed, are very successful, and for some reason, I just see/interpret it differently and decide to switch. I have come to a point now, that I can not continue any further like this.
I really want to become successful in doing this.
I gave up my job in July 2018, and do this now on a daily basis.
Funding it all with my savings, sold most of my flats to fund it.
But what now happened, the gain I got from several months, gave it up in 2 weeks’ time. It’s devastating.
I thought I was a strong guy, but this has really beaten me severely.
I really thought of giving up last week, forever and not doing this anymore for the rest of my life. But I will give it one more shot.
I realize it is up to me. I need to be open, be disciplined and stick to a trading plan. Set a stop-loss and set target.
So, in order to achieve these goals I will do the following:
- Past Friday I have protected all but 2 positions in my trading account with puts or written calls, this to not be biassed or influenced during the trading day.
- I will only paper trade, for the whole month, will not take any real trades, except for possible trades in the current positions that I have to get out of them, not for opening new ones.
- I will follow the trading plan, you mentioned, referenced to me the 21d strategy. I will apply that and stick to that trading method only.
So, if I would break my own rules ( 2 and/or 3 ) I will inform you about and answer why I have not followed my own set rules, there would be no sane reason to do so.
After 1 month I am going to evaluate the results and send you a report about it.
Here is my response. Do note this is not meant to be an all-inclusive commentary of all the things we look for on a daily basis. However, it is particularly noteworthy considering the current market sentiment.
Dear KM, this is a very logical analysis of your situation.
First, the weekend video is designed in such a way that it allows us to analyze the market direction and sentiment. It’s for our benefit, as this analysis allows us to make risk assessments. Where is the money flowing? And, it can also tell us whether we can be bold and aggressive or whether we should be cautious and take less risky trades.
Basically we’re looking for green, amber or red lights.
The two weeks towards the end of January prior to last week WERE NOT conducive to AGGRESSIVE trading. We sold most of our positions into strength, sweeping profits into cash in the middle of January.
Then the Coronavirus hit. We started thinking, “opportunities” would present themselves if we were patient. We switched to day trade mode.
The virus news is still very much a part of daily conversation, therefore we should be more cautious using a day trade approach until the trend resumes or we get more insight into what institutions are doing. If they are buying we can safely assume that doing what they are doing will work for us too. If they are quiet (no BLOCKSIZE trades) or selling like 3 weeks ago then we want to be in cash or trading short.
Second, until we start trending again, we will and should take profits quickly. Also, try to focus on “one good trade” at this time; one per day or one per week. Trade smaller size. If you lost 2 weeks gains in a day or two, you must be trading too big (options no doubt.)
I’m not looking at positions for long term swings right now because of the above. Lately, we only have a few short-term swings. IBM is one example.
When we do take swing positions in this environment, we analyze each trade at the end of the day. We typically take half of the position off by the end of day one (profitable). If we think we will see more upside, we’ll swing the rest. In order to swing the rest, we’d want to see a close in the upper half of the daily range and preferably at the high of the day on the close.
Finally, and especially in this current environment, we only take positions that show above-average relative volume (RVOL). The stock is “in-play.”
You can see that on the ZTO trade, you referenced when at 9:54 AM we alerted the trading room. ZTO was moving fast on high RVOL:
After the alert the stock formed its 1st flag, it then broke higher. That turned out to be the HOD 23.49 (it’s hidden behind the legends on the left). Note: we would normally take the trade from the dip once it started moving higher. You were very close, 23.15 ~ 23.20.
Being ZTO was a new trade we would be scaling in. Therefore, if I had thoughts of trading 1000 shares, I would be taking 200 ~ 300 shares on my first entry. That way if the stock fell apart, we would only be wrong in a partial position.
ZTO instead lost VWAP (trailing stop). We were looking for another flag #2 (which never happened) and a dip to add once the price action started moving higher again.
Reference the Trade of the Day (ToD) setup video I shared with you when you joined. This shows an “Opening Range” breakout, followed by flag one, flag two, etc, and trades that close at HOD as examples.
The reason(s) a stock closes at HOD are many. Usually, its institutions filling a large client order. This can take days and weeks to complete as they don’t want the stock to go vertical. It’s one reason we look for high RVOL. This is usually an indication a client wants a large position in a stock. Volume should return day after day.
These are observations of course, not guarantees that we know anything.
If you refer to the chart below you can see that ZTO closed in the upper half of its daily range on Tuesday. Thats good when the environment is bullish. However, since we are in day trade mode, we would normally take 1/2 off at or near the high of the day, swing 1/2 only if the markets are conducive to follow through and are bullish.
For the most part, the market was working well this week. The indices gapped higher on Tuesday, Wednesday, and Thursday.
ZTO gapped up too and immediately reversed on Wednesday. Then price action unexpectedly backtested the 9/21d. Price action closed in the lower 1/2 of the daily range but remained above the 9/21d.
This is where taking “ONE GOOD” trade per day comes in. If you were watching ZTO only, you would have been able to take the other 1/2 of your position off for a profit just after the open, once you saw price reverse back to where you sold the first 1/2 on Tuesday (Day 1).
You’d have no position and would have missed the pullback on Wednesday.
Luckily, we see Thursday and Friday gave another opportunity to sell had you stubbornly done nothing. Remember, in this current environment we are in Day Trade mode, so we want to take profits quickly. Take swings only when the market is trending and strong.
Ok, so let’s say the markets were fine and they were trending. We would most likely have stuck with ZTO 23.27 (your entry) with a stop under the 21d around (22.75). The stop was never triggered at the close. We could then let the stock perform and plan to take some shares off into previous pivot highs at (24.19 +/-).
If we get there you’d make nearly $300 on your 200-300 shares. Again, if the markets were trending we would be able to add and likely have close to half a position once price started rising again on Thursday.
The key is the focus. And, what kind of market are we trading in?
Trending is best. Range bound is ok or neutral. However, if we see a bearish trend, we want to take no trades, remain in cash positions or take short positions and puts.
One or two trades are easy enough, whereas five or six is a problem if the markets start to fail. The markets are sending caution signals. It is not a time to be aggressive.
We want to play the probabilities.
If you can identify an edge and manage losses you should be fine.
Futures are flat to bearish. They were higher earlier. As mentioned in the weekend video, we are waiting for direction from institutions. Sit tight and wait for their signals. TICK should be rising and green. We should see numerous “block” size trades which will tell us institutions are active.
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