July 28th

Very little time to spend in the markets with the day-job being busy. Between appointments, I had a chance to stop at the office and get into the markets for about 15 minutes and took one trade in my live account, a long in SKF. Scalped $25 and scooted out to my next customer.

After completing my regular work day, I started watching the market again about 2:30pm. Then in my paper-trading account, my first trade went quite well, going long near the LOD around 2:35 pm. Indicator of potential reversal was the huge volume spike in the ETF at the 2:30 candle along with the overbought condition of the SPX and QQQQ in the same timeframe. On the five-min chart, I held through the tall 2:40 pm candle and into the 2:45 candle, selling when the 2:45 candle went red (the volume spiked during that 2:40 pm run-up candle). It started to re-trace so I decided I should grab and run with my 15 cent gain. Thereafter it did re-trace to within 4 cents of my entry but never did actually reach it before starting back up on a nice run. It would have been great to stay in but I couldn't pass up taking the winner.

The next two trades were stop outs and basically scratch trades. Both would have given a chance at gains had I stuck with the plan of exiting only on a stop-loss while in the initial candle. The second bail-out trade actually continued another 16 cents. There's a lesson... the problem is, I am still trying to formulate an exit strategy that will ensure long-term success. Call it "Road Under Construction." I should add here that after reading Scott Farnham's most recent post at www.fearand greedtrader.blogspot.com, I moved my QuoteTracker watch-list with its bid/ask quote boxes beside my 5-min chart and moved my 3-min chart out of the way. I was then watching all my stocks including the indices go green and red with the pulse of the market. It was quite fascinating and I felt it may have helped out. Not sure as yet, I have to continue to monitor it. I found myself skipping trades and just watching how the greens, reds, and blacks (stalled areas) behaved at critical points like S&R, and especially at places where changes of direction took place; reversals and pullbacks. An hour of watching it doesn't give me any clear sense of it's value but I am intrigued enough to keep watching. I liked what I saw as it brought some clarity to the movement on the chart. I checked and it appears neither QuoteTracker nor Interactive Brokers has an HOD/LOD list so a true reproduction of what Scott watches is not achievable with my current set-up. I know that ScottTrade has a scrolling HOD/LOD list but does not offer a filtering feature (at least it didn't when I had an account there and was using it last fall). As a side note, this ScottTrade list was a valued trading asset for the moderator and very effective trader at the old GOTS chat room. With Scott Farnham, that makes two successful day-traders who use an HOD/LOD list. I sense a trend... maybe an opportunity to go "long."

In the waning minutes of the session, I took a trade long with the feeling that the market might continue to divert from the mean causing SKF to pop as it reverted to mean (10 day sma). It did although it was sketchy... I held the trade as it touched the stop-out point a couple times before going my way. I sold for a small gain in the last minute of the day as the stock continued to climb beyond my exit. I had gone long at a good spot after the reversal, as it turns out.

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3 for 5 winners, a 60% win rate. Gain of $ 105; $25 in 15 mins of live trading and $80 in 1.5 hours of paper-trading.

July 27th

Ok, my first day trying to catch momentum in a bottle, so to speak. Didn't go as well as I had wanted. I did not add to losers today, although with so many manual stop outs, I sure had plenty of opportunities to do it. My average stop-loss was a shade over 7 cents so that seems ok. Largest stop loss was 10 cents. In a number of cases, I took tiny gains rather than letting it stop out and in virtually all of them, I was right to do so, preventing the inevitable stop-loss. On one stop-out that I remember, it turned out to be a pullback. I stopped it out, then it promptly turned back to trend and kept on going. That was a bit frustrating. I think the most frustrating thing is looking back at a terrific trend and knowing that I had managed to lose on it. But, as all of you know, it's not necessarily a trend while it's going on...only when it is done.
So, I was hoping to get a good start today but the market said no. I hooked into a good trade of 18 cents at 11:01 am through 11:11 am. That felt great and got the day back on track after a slower than necessary stop-out just prior. It was tough going from there with only one winner out of 6 until after 2:00 pm. I was looking at all the right things, it seemed. I was constantly asking myself, often out loud, "what is volume doing? Are the indices in my favor? Is price stalling here or is it just resting? Is that change of direction just a fake-out?" Etc. Talking to yourself does not help, as I found out. I hope this isn't coming across as defeatist, it's supposed to portray frustration. Some days, like today, I think the opportunity costs are too high and that I should be working on my business instead. Yet, I keep plugging along. Trading will have to yield to my day-job soon. I have been neglecting my work in favor of the markets and for a couple weeks really felt like I was on the right track... that is until last Thursday. Clearly, I have a long journey in front of me to learn the markets and I must work the day-job more than I have been. I have been taking the day-job for granted over the past two months in anticipation of making up the difference by trading for winners. I'm sure many of you have encountered the same thing in one form or another.
I wonder if I'm fooling myself by thinking that if I study enough FNG charts and map enough volume spikes off today's charts that I'll get the answer. I still have the notion that it is like cracking a safe; you try and try and try, then finally you get it!! You've stumbled on the combination! "There it was all the time, and now I've got it, " you would say to yourself in that glorious moment. After all, I and many of you are looking at the same things (for the most part) as the people who do this successfully; five-min candlesticks, charts of the indices, average day range, volume bars, etc. What are we missing if we see the exact same picture as them? Is it one of those optical illusion pictures where you can either see the Old Hag or the Pretty Lass depending on your perspective? If so, I'm ready to see the pretty lass. That Old Hag is making me sick! Ha! Ha!
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Mrs. Bluecollar and I were having this discussion on the way home from an errand about the apparent "mystery" or "hidden secret" and I thought I would vent it to the blog.
I just seem to have a hundred questions today and no answers... Without a clear sense of direction, I wonder how long it will take? I think of all those people who have been lost in the Maine woods over the years and died wandering in circles, never knowing that they were only a few hundred yards from the logging road that would have led them to safety.
My kingdom for a compass...
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7 for 14 winners, a 50% win rate. Loss of $181 in 6.5 hours of paper-trading. Average loss was $77.29. Average gain was $51.43.

Trading the Tape- Another Example

I posted about this a number of weeks ago but want to resurrect it here:

Full story written by Imogen Rose-Smith and discovered on Timmay's site, it covers the story of Merritt Graves, a young hedge fund manager. I have pulled out some details pertinent to this topic...

"...The 23-year-old, who tracks nearly 100 trading positions on his phone’s Web browser, was monitoring the stock market, which by that time had been open for more than three hours.

This college student has an unlikely full-time job: He runs a $4.7 million long-short equity hedge fund.

In themselves, the numbers put up by Caelum Capital, as Graves’s five-person firm is known, are impressive. For a fund piloted by a kid who has no professional investment training and who only recently moved out of the dorms, they are uncanny. Last year, when the average equity hedge fund manager was down 26.4 percent, according to Chicago-based Hedge Fund Research, Graves was up 40.6 percent. In 2007 he returned 174.1 percent, after more than tripling his money the previous year — and nearly doubling it the year before that.

Graves called the subprime mortgage crisis and its impact as early as 2005. He also predicted the severe stresses that hit the banking sector in 2008.

As Caelum’s sole investment professional, Graves has achieved this remarkable record not by shooting for the moon but by maintaining tight risk controls. In addition to holding a diversified portfolio of 80 to 100 stocks, he limits each position to 0.5 to 8 percent of the total and won’t borrow more than 2-to-1 overnight. His fund’s net market exposure — his longs minus his shorts — has typically ranged from –30 percent to 30 percent of the portfolio’s total market value. As a result he has delivered far less volatility on the downside than either the Standard & Poor’s 500 index or the Nasdaq composite index, and his fund’s returns are relatively independent of both benchmarks.

“It has been a long road of constantly getting more disciplined,” says Graves, sounding more like a grizzled money manager than an undergrad who still eats in a college cafeteria.

Monitoring the markets while attending class is something that Graves has been doing since junior high school, when he learned formative lessons about risk. At age 14 he convinced his parents to help him open an account at discount brokerage Ameritrade — and twice lost all his savings from odd jobs as the technology bubble collapsed. In 2002, at age 17, he borrowed $7,000 from a local day trader he had befriended and lost it all again.
“It hurt so much worse losing someone else’s money,” recalls Graves.

After taking a year off from trading to study the markets, the then-teen summoned the courage to borrow another $7,000 from the same individual, who agreed to give him a shot at making up the prior loss in exchange for half of any additional trading profits.

It proved to be a smart bet. Within a year Graves had turned the $7,000 into $340,000, netting a personal profit of $100,000 after taxes. His winning streak continued as he began studies at the University of Iowa, spent a year abroad at Australian National University and took 12 months off to live in Berkeley, California, to focus on his trading before continuing his education at Pomona. During that three-and-a-half-year period, he turned the $100,000 into $2.8 million, which he used to seed Caelum Capital in October 2007.

Arguably Graves’s greatest strength, developed through trial and error, is his ability to interpret buy and sell signals from security-price movements — in short, to “read the tape,” a skill that is tough to teach and that he shares with hedge fund stars who are more than twice his age, like SAC Capital founder Steven Cohen and Paul Tudor Jones II of Tudor Investment Corp.

“Intuitively, I started to feel what the market was doing,” says Graves, reflecting on his evolution as a trader. “Things started to become more visceral.”
...Merritt Graves has always been entrepreneurial. In the fourth grade he baked cookies that he sold in the teacher’s lounge until the school district shut him down (he even had his own business cards printed up). Later he ran lawn-mowing and snow-shoveling businesses and earned money cutting down Christmas trees.

In eighth grade, while watching business network CNBC, he decided to invest his savings in the stock market, convincing his parents to open the Ameritrade account...

...“I thought investing looked cool,” he says.

It was the summer of 2000, and the dot-com boom was going bust. Graves had invested his entire $500 in savings in a handful of high-flying technology companies that ended up going bankrupt. He lost everything.

Undeterred, Graves raised a new $1,000 stake by flipping burgers and running a pressure-washing business. He bought more tech stocks. He lost everything again.

By then, Graves was attending Iowa City High School, where he was a popular and engaging student with wide-ranging interests. Daphne Foreman, his ninth-grade English teacher, says Graves especially enjoyed Fahrenheit 451 , Ray Bradbury’s portrayal of a dystopia where censorship rules, identifying with the free-thinking and insatiably curious Clarisse McClellan, one of the main characters.

“Merritt was obviously concerned about things most kids weren’t,” says Foreman. “He had a presence about him.”

During his sophomore year Graves raised $7,000 from Jeff Larson, a local day trader and entrepreneur he befriended who must have sensed something special in the teen (Larson did not return phone calls seeking comment). Graves used that money, along with $2,000 of his cash, to get back into the market, this time trading small- and microcap stocks.

The third time wasn’t the charm. That spring, Foreman says, Graves began looking more and more tired, missing school entirely some days. He lost everything again. “I advised him several times to back away,” says his father.

Instead, in his quiet, determined way, the younger Graves began to monitor the market rather than trade it, teaching himself to sense where stocks were moving by watching the tape. He read about investing and behavioral finance, and identified a major weakness in his trading: a tendency to double down on declining positions in an attempt to make his money back quickly and end the pain of losses.
By July 2003 Graves was ready to try again. With the second $7,000 stake from Larson, he focused his attention on stocks with larger market capitalizations."