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Psychology of a Professional Trader (Part 2)

attractionRemember that the stock market has its own rhythm and while trading is never 100% accurate we can learn to stack the probabilities of success in our favor.

What things can we do to stack those probabilities in our favor?

  • Make sure to align the proper style of trading with your timeframe. For example buying stocks and hedging with Put options are ideal for individuals who do not want to be involved in the day to day monitoring.
  • Trading without fear is not the same as being “fearless” in trading. Trading without fear simply refers to not being concerned with the outcome. The way to trade without fear is to trust the strategy you are participating in. How do you trust the strategy? You have already virtually traded sufficiently to recognize that a losing trade or two will not define the entire strategy. The strategy will go out of sync with the market and when it resumes will more than make up for the time period it was out of sync! The key is not to give up.
  • Feel positive about yourself, your efforts at success and you will attract all that you are seeking from the Universe.

Attracting Trading Successes

The mind is an amazing and powerful tool.

Nothing can exist without it first being a thought.

Remember too that the Universe responds to positive and negative thoughts equally. So given the choice don’t we want to make sure that
our thoughts are always positive?

Remember that I am saying our speech or that which we talk about.  Of course what we talk about can impact how the Universe responds, however I am saying what we think about.  That has the greatest impact in our lives.

Once we learn to master the positive energy of our thoughts we can live amazing, prosperous and healthy lives.

The Universe conspires to make sure that we get everything that we think about – so make it good!

Just remember that when the Universe begins to respond to your positive energy the amount of time that it appears to have taken for us to see results will be a very distant memory so make sure to stay positive, decide to succeed and never give up – it is a Universal Law!

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Psychology of a Professional Trader (Part 1)

When I began trading live I believe I became my own worst enemy – sabotaging certain successful trades into losing trades because I became emotionally involved in the outcome.

My issue was specifically closing out winning trades too soon and hanging on to the losing trades too long.

I read many books on the subject of the psychology of a trader and realized that most of those books were written by psychologists who dealt with traders who had one issue or another on my same matter.

The writers of these books were individuals who did not actually trade. Believe me (and I am sure you will agree) there is a difference.

The recent webinar with our members was quite exciting since it covered certain psychological traits that a successful trader could utilize in our quest for success through trading.

It was all based on my own personal experiences and while there was so much content I had to condense it a bit so here we go.

The stock market is and continues to be an enormous source for the generation of wealth.

It is a place to conduct business and having that business mindset will enable us to see trading differently than if we were participating in a hobby.

What I mean by a hobby is we are casual about our trading parameters especially in the area of money management and virtual trading.

We can however swing in the other direction and that is that we find ourselves to be reaching “information overload on the market.”  We need to get up first thing in the morning to see how the market closed and if it rallied we need to know why. So we read everything we can about the markets.

That other side of the coin can be equally damaging since the markets do not behave in the fashion that most people think. The market does not respond equally to certain economic news environments.

One day housing data is a cause for celebration and the next time it is a cause for selling off the market.

Could that have been the intent all along? Could the news media be nothing more than an arena to justify market moves?

If that is the case then could we place our energies elsewhere and not allow ourselves to get “sucked” into the black whole of stock market media analysis?  It does not matter what we think, believe or feel – the market is always right.

Remember that the stock market has its own rhythm and while trading is never 100% accurate we can learn to stack the probabilities of success in our favor.

What things can we do to stack those probabilities in our favor?

(… To be continued in part 2)

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My Trading Methods

method

Today I like to talk about some of my trading methods.

Retirement Portfolio Trading Method

We are fast approaching the end of our time period for the completion of the retirement portfolio. Of course I have since been out of the trade and the feedback we received from some of the Smart Traders who participated was nothing short of fabulous!

One of our beloved members shared her experience:

“I would like to thank you and Mirriam for teaching us the strategy of how to trade to the  S&P 500 option as the retirement portfolio. I attended the Oct 2012 class, and tried this out in last Nov. I’ve achieved 83% return in 5 months. It not only recovered the tuition but also built up my retirement portfolio greatly. I am here to let you know that I’d appreciate the opportunity that you’ve given me…”

Congratulations to you and all the Smart Traders who participated!

Volatility is on its Way

Within the next few weeks we can begin to see some changes in the US market environment (undoubtedly this can impact global markets as well).

It is something we have been sharing with our Smart Traders for some time at previous webinars where I shared how the market has a bullish 4-5 year cycle followed by a 1-2 year bear market.

This time period will soon be upon us and the reason why I am mentioning this is for us to begin to prepare.

I myself will only focus on being in hedged positions and these include:

  • Purchasing Stocks with Puts (as long as the SPY is trading above a key moving average);
  • Investing After Earnings
  • Hedged with Weekly Options where I am in the trade for no more than 4 days being in cash over the weekend.

As far as directional trading goes I may participate in fading Earnings candidates and when the VXO goes into the high to extreme price I can then fade stocks.

Being hedged enables us to hold our trades through all sorts of economic data such as FOMC and Non Farm Payroll.

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Flash Trading

flash

 

On my way back to the US from a diving trip in the Philippines with my husband, I passed a few book stores that were selling a book regarding aware high frequency trading.  I did not purchase the book as it was not something that interested me.

However when I arrived home the author of the book was being interviewed on TV and as it would happen I had brought home a section of the Strait Times from Singapore and lo and behold there was an article on the subject there too.

So while I was still not interested in the book I became interested in the subject.

The reason is that the interview on TV raised some disconcerting questions regarding whether the stock market is rigged against the retail investor or not.

To determine whether this is the case let’s first define what is meant by high frequency trading (“HFT”).

There are individuals who possess computers that are programmed to “see” stocks trades as they are getting ready to be processed. For example a person wants to purchase 100 shares of IBM and the computer quickly purchases those shares and then instantly (in milliseconds) makes them available for that order.

“A controversial computerized trading practice offered by some stock exchanges. Flash trading uses highly sophisticated high-speed computer technology to allow traders to view orders from other market participants fractions of a second before others in the marketplace. This gives flash traders the advantage of being able to gauge supply and demand and recognize movements in market sentiment before other traders.” – Investopedia

The owners of these HFT computers pay an average of US$30,000+ per month for the ability to participate in this type of trading. You can see how they need to extract thousands of dollars just to get to the point of paying for that seat on the exchange. The key is to get in ahead of the investors.

This is called “front running” a trade.

While this is illegal if done by an individual (I want to know how that would even be possible) it is not illegal if it is done by a computer.

Why is this not good for the investor? Because the investor is paying slightly more for the stock than they would normally be paying.

Because of this environment the news in the US has jumped all over the stock market indicating that it was known all along that the markets are stacked against investor.

How can this be? The computer is not concerned with whether the investor is buying or selling a stock.

They are not causing the stock market to either go up or down! They are simply front running the trades which is far different from the rigging of the stock market.  I do not believe, therefore, that the stock market as a whole is rigged.

However can some stocks be rigged?

I believe that stocks that are lower priced, small volume stocks can be rigged.

The SEC has in the past and currently continues to crack down on this type of activity.

If anyone is interested there was a really good movie with the actor Ben Affleck called “Boiler Room” that clearly drives the point home regarding the dangers of investing in these types of stocks.

As Smart Traders how do we make sure that we are protected?

We would want to avoid participating in stocks that have 500,000 shares or less traded per day.

In addition how can I make sure to always get the best possible price when we get ready to purchase a stock?

The key is to always use a Limit order.

The limit order does just that – limit how much I am going to pay so that when my trade goes to the floor I can’t pay more than it was being offered at my time of entry.

How cool is that!

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Market Update – Mar 2014

highspy

The SPY had made a high price of 188.96 on 7 March 2014 which created close to a 10% separation from the 200dma. What follows was a market pullback to close a portion of that space. Remember that we are towards the end of the market’s 5 year up cycle and could begin to see a significant pullback any time.

For those of us that own stocks be mindful that we cannot purchase stocks unless we are properly hedged with a Put option. I have shared this technique in our trainings.

Remember however that we have been enjoying these share price movements to the upside because the overall market’s direction is to the upside. As long as the SPY is trading above the 200dma (daily moving average) we know we can purchase stocks (and still be hedged).

However once the market closes below the 200dma I myself will not be looking for purchase stocks since I don’t want to buck the direction of the overall market.

However realize that when this next market consolidation takes place we will have so many new potential buy candidates and we can see some unprecedented returns owning the stock.

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Why Avoid IPOs in the US?

fbtw

This is an article I wrote to my members back in Nov 2013.

Well it has happened again. A lot of hype, excitement and energy by the brokerage houses over the Twitter IPO (ticker symbol TWTR) much like we had with FB. Of course they are super excited. Who would not be if I was able to participate on the pre-IPO price of $26 (which is where TWTR closed the day prior to the IPO).

The stock managed to go as high as $50 the very next day! It was shy of FB’s high IPO high that day of $45. As we all know FB proceeded to make a low price of $17.55 just a few months later (not too cool if you were the retail investor).

In the case of TWTR, the retail buyer came in at $46-$50 only to see the stock close at $41.65 on Friday. Believe me there will be many opportunities to participate in this stock down the road! Who knows where it may settle before the professionals seek to buy it again.

V (Visa) was another example similar to FB and TWTR. This one was slightly different in that it took three months to attain a high price of $86.96 only to drop to $40.58 in the next eight months. Of course it is now $198 which goes to show that it is best to allow the stock to be traded for a while, enabling us to gain vital fundamental data that capitalizes on the stocks potential going forward.

Of course we are not saying that a stock’s IPO will always cause the stock to go down in price. In the case of MA (MasterCard) you can see that the stock went public in 2006 and was catapulted to $300+ in two years without revisiting their opening price of $39.42! However you can see that the tendency is for the stock to selloff before they settle down.

Best to wait!

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Market Warning Signs

bells

I read a book many years ago regarding warning signs that the market may show and while there were way too many to be even slightly reliable I do believe that this warning sign carries enormous weight – especially when I can see what transpired many years after the book was written.

As we all know when we open a brokerage account we have the option to have a margin account. That means that when we buy stocks, the brokerage house will match our funded account which enables us to buy stocks at a discount. I myself do not use margin since we need to pay the interest and in the event the stock drops in price we will get a margin call.

However this is a very common practice among many investors and the consequences of a dropping market, propped up by lots of margin can lead to very adverse stock market price drops.

I did a Google search for “NYSE margin debt” and was able to share with you how once margin debt exceed previous margin debt with a rallying market the market has gone into an amazing slide.

Of course this does not happen the very next day. We were able to see that there is approximately a six month window of time.

When this market drop begins realize that the potential for amazing profits (unprecedented profits for some) will be more than welcome!

Following is a graph from the Google site that shows margin debt reached all-time highs March 2000 and July 2007 which coincided with the markets reaching their highest levels (for those times).  We are really close to taking out July 2007’s highest margin debt.

warning

Source: http://www.businessinsider.com/nyse-margin-debt-2013-12

Again generally the markets have a tendency to rally into the New Year so we shall trade what is happening and not what we think will happen!

 

 

 

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The Right Trading Style

thumbsupJust as I began to put together this article I received an email from a company that indicated “The Great Crash of 2014.”  Of course it was the same company that began last year with “The Great Crash of 2013.”

We all know how 2013 ended up – making all time high prices across both the Dow 30 and S&P 500 (the Nasdaq is almost 200 points from its 1 March 2000 highest price).

However we do know that markets do not go straight up in prices for years on end. There is, on the average, a 4-5 year cycle to the market that is being reached now in 2014.

How do we know what action to take at any given time?

Will we get warning signs without having to listen to market forecasters who have proven to not have our best interest at heart?

The $VXO

The $VXO has always been a really reliable measure of what is happening in the market place. That is like measuring “fear” in the market.

If the VXO is low, fear is low and the market is rising, if the VXO is going higher then fear is rising (investors are concerned about the potential to lose money being in bullish positions) since the market is now dropping in price.

The VXO comes in the form of a percent and I like to use the target prices below to enable me to know what is happening in the market.

vxo

When the VXO is low we can participate in the Investing style of trading (however the Implied Volatility (IV) on stocks should be above 27% otherwise the stock may not move very much in the timeframe that we are in it).

We can also participate in any other short term style of trading however our target will be 3% with a 3-4 day exit.

Investing After Earnings method is ideal however we must purchase both the Call and the Put option at the same strike price (also known as a Straddle).

Once the VXO begins to rise and goes into the high volatility price a Straddle may not be effective with this style of trading. It would be best to Strangle the trade. With a high VXO our short term trades can now target 5% with the same 3-4 day exit.

With the VXO at extremes we cannot place a stop loss. However we have something better then what we had the last time the market dropped like a rock (2007-2008) and that is weekly options!  Now we can use these to protect our position where we will be in for 3-4 days anyway.

 

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Pre-Market Activities (Part 2)

premarket2

If you have missed part 1, read here.

What this means is that the market is getting ready to open for trading at a price that is lower than it opened.  This is known as a gap (a space between the previous day’s closing price and the next day’s opening price).

On average 70% of all gaps will be “faded” or closed in the same day and the highest probability is that it will occur between 10:30AM EST and 11:30AM ET.  Remember that I said 70% which means that not all stocks and/or indices will close their gaps the same day.

If I am in a bullish position and it is time to exit the trade and I see that the market is getting ready to open almost 200-points to the downside do not panic.

You can actually wait until 10:30AM EST (no later than 11:30AM EST) to see if the stock can close its gap (unless of course the Stop Loss was triggered at the open).

The Trading Session

As you can see on the following chart the SPY opened lower (as we knew they would) however you can see something pretty amazing!  That by 10:30AM EST to 11:30AM EST it was trading positively from where it had closed the previous day (gap was closed).  That is the opportunity to close out the bullish position.

The S&P future were negative 26-points so that would mean that at some point during the trading session the SPY would trade down 2.60.  It had closed at almost 165.80 so a 2.60 move down would be 163.20 and it took the whole day to get there.

spy

That is why people can’t believe that the market can be so positive one minute and then be so negative by the end of the day – they don’t understand the correlation between the market and the futures.  Obviously when the futures are positive or negative by very small amounts this can happen at the open very quickly and it is almost unnoticeable.

The New Media

I talked extensively about the role of the news media and now you know what to expect.  I think that this was a hard one for me to conquer however once I began to see the news media for what it was I felt completely liberated and free to make up my own mind as to how price and time are the only true indicators of what is happening in any market.

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Pre-Market Activities (Part 1)

pre

Today we will discuss about pre-market activities and how to know how the market will open, the potential direction for the day and how to manage a position.

Pre-Market Open

The stock market closes for trading at 4:00PM EST although trades can still be settled after it closes.  There are orders which are designed to trigger when the market closes (Market on Close orders).  There are also options (e.g., QQQ which may be traded up to 4:15PM (when the futures market closes for the US trading session).

The futures market then opens for trading at 4:30PM EST on the Globex (or Global Exchange).  Depending on how that market is traded around the world during the US evening hours depends on how the futures will open for trading the next day.

A positive futures market (considering fair value) will mean a positive open and a negative futures market (again considering fair value) will mean a negative open for the market.  We now have a glimpse of how the market will open for trading that day.

If I am already in a shorter style of trading for a few days, I can use this information to enable me to time my exit.

Pre-Market Activity 31 May 2013

I took a snapshot of the premarket activity for 31 May 2013:

premarket

As you can see we were in for a very rough market open!  The $INDU futures were negative by almost 200-points.  It traded very negatively overnight and we now know that at some point during the next trading session that the cash index (which opens at 9:30AM EST) would be trading at that price.

What this means is that the market is getting ready to open for trading at a price that is lower than it opened.  This is known as a gap (a space between the previous day’s closing price and the next day’s opening price).

To be continued…

 

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