Archive for August, 2008

This week we are going to dive deeper into what makes a good trading plan. But before we begin I’d like to share a little anecdote from my earlier years. As a football coach at the high school and college level, preparation was the difference between winning and losing. Preparation was critical for success not only physically but mentally and emotionally. Our playbook was our “Bible”. In a football game, eleven moving parts must coordinate at all times. A breakdown in any one of the parts would generally lead to failure. Similarly in the trading business, preparation and planning are essential elements that lead to success. A key ingredient that leads to success involves setting REALISTIC EXPECTATIONS on what can be accomplished. We all have varying capacities to execute successfully in the markets based upon:

· Knowledge base

· Experience

· Ability to tolerate risk

· Time commitment

· Ability to analyze data

· Ability to adapt

· Ability to make decisions

This is not dissimilar to what I faced as a football coach. I had to evaluate

1) Personnel match ups

2) System match ups in order to try to exploit weaknesses in the opponents’ offensive and defensive schemes.

3) Tendency analysis based upon down, distance, hash mark, zones, personnel and quarter of the game.

Compounding all of that, each week we faced a different opponent with a whole new set of variables. I share this with you because the stock market is not necessarily your friend. There are people out there who want to take your money and if you enter into this game unprepared, you will most likely be crushed! You have got to scout your market and have a game plan that enables you to best trade the market at hand.

It is crucial that you begin with “Realistic Expectations”. Do not expect exorbitant returns when you begin trading. When I began trading, I didn’t have a clue about what I could expect. I was brainwashed by the hype in the industry that I could achieve triple digit annual returns on capital invested and if I didn’t, I was doing something wrong. Can you achieve 100% plus gains in the market annually? Absolutely, however, those types of gains rarely happen without assuming a commensurately high levels of risk. Some strategies and markets lend themselves more readily to out sized gains. Long options in the futures and forex markets can result in tremendous account appreciation, but you can lose the farm there too if you don’t know what you are doing! You can also achieve large gains in the stock market with long options on high beta stocks.

So, when I began trading, I felt the need to achieve the BIG returns until I took some BIG losses. Then I realized that there were (for me) some more conservative and responsible ways to trade. Please don’t misunderstand me, that type of trading wasn’t for me and it was irresponsible for me to engage in it. It may be perfectly fine for you. It gets back to including expectations into your trading plan. I realized the magic of compounding returns on lower risk strategies that consistently worked. My plan was more like the old “3 yards and a cloud of dust” offense in football as opposed to the long bomb passing game.

The bottom line is that I suggest you align your expectations with your risk tolerance and time commitment to follow the markets. I also discovered that I didn’t want to sit in front of a computer all day afraid to take a bathroom break for fear of the market reversing on me. I didn’t need to get an adrenaline rush from my trading activity. I adjusted my plan to fit me and it started with mapping out REALISTIC EXPECTATIONS.

Well, the “Merry Band of Traders” were expecting me back to Sherwood about an hour ago and I’m late. Poor planning can you get you in trouble! Until next week. Robin

Monday began with better than expected numbers on existing home sales but was tempered by the fact that the average sales price of those homes fell. Supply is up to double what home inventories should be in a balanced market. Continuing concerns in the financial sector drove stocks to a 247 point loss in the Dow. Tuesday, the market posted a small gain on better than expected consumer confidence to close up 26 on the Dow. Wednesday, the story of the day was the much better than projected Durable Goods Orders which pushed the Dow up 90 points. Tropical storm Gustav was beginning to rattle some roofs in the Caribbean. Thursday was a 200 plus day in the Dow primarily due to an unexpectedly strong GDP number and fewer initial job claims. The week finished with some profit taking ahead of the Three day weekend. It looks like tropical storm Gustav could become a CAT 3 Hurricane and will probably test the oil refineries in the Gulf by next Tuesday. The entire week was a low volume affair. Other news; the DNC wrapped up on a strong note on Thursday with Obama delivering a solid acceptance speech in Denver. Friday saw McCain announce Alaska Governor Sarah Palin as his running mate as the GOP moves into their convention next week in Minneapolis/St. Paul. Week over week, the Dow was down 85 points, SPX down 10 and the NDX down 59.

Friday’s session opened slightly below Thursday’s close and right at trend line resistance and traded vigorously down to form a Bearish Harami on low volume.  Price is now just above the 50 day sma.  If the dow breaks this major moving average, the next stop is strong support between 11340-11380.  Volume will be returning to the markets and we have a full economic calendar this week that could move the market.  Hurricane Gustav could have a major impact as well as reaction to McCain’s VP pick and the Republican National Convention.  Look for the Dow to be be bearish this week.

The SPX is in a trading range between 1267 and 1317.  The trend line which was formerly support is now acting as resistance.  We feel that there will be selling pressure driving the index lower this week.  Let’s see how the market reacts to this week’s economic reports as well as Gustav and the RNC.  Watch for breakout from consolidation.  If that happens with gusto (volume)  that will be significant.

The NDX is resting right on the 50 day sma and has exhibited a very bearish picture.  We have a bearish 3 day candlestick pattern and bearish crossovers on the RSI, MACD and the 5/20 EMA.  If the NDX breaches the 50 sma with conviction, the next stop could be 1825.  We’re short here.

ECONOMIC REPORTS

MONDAY 9/1

None

TUESDAY 9/2

Auto and Truck Sales, Construction Spending, ISM Index

WEDNESDAY 9/3

ADP Employment, Factory Orders, Crude Inventories, Fed Beige Book

THURSDAY 9/4

Initial Claims, Productivity-Rev, ISM Services

FRIDAY 9/5

Average Workweek, Hourly Earnings, Non-Farm Payrolls, Unemployment Rate

EARNINGS OF NOTE

MONDAY 9/1

GES

TUESDAY 9/2

None

WEDNESDAY 9/3

HRB, HOV, ISLE, JOYG, SNDA

THURSDAY 9/4

TOL, SEAC, JTX, CIEN

FRIDAY 9/5

NSM

There has been nothing of significance to take us out of this trading range. After the dust settled, we ended up with no more than double digit changes in the indexes from last week. The volume has been extraordinarily low even for this time of year. We are heading into September which has historically been the worst month of the year for the stock market. Our feeling at RobinHood is that we need to at least test the July lows before we head higher for a meaningful bullish move. There are a couple of seasonal trends that we are keeping in mind as we move into the end of the 3^rd quarter and beginning of the 4^th quarter. The election year cycle and the traditional end of the year holiday retail rally which are both historically bullish. It would be nice to shake off the cobwebs in September and bounce into the remainder of the year with a little run to the upside. However, until we clear up the housing crisis, for the longer term I see a bit of a struggle to maintain any bullish sentiment. By the way, who is Sarah Palin?? John McCain must know something the rest of us don’t know. She seems like a free spirit and an independent thinker, which I like, but where is the experience. McCain has had some health issues and the Vice Presidency is a heartbeat away from the highest office in the land. That’s a little scary! I bet we don’t see a lot more GOP ads about Obama’s lack of experience. You don’t suppose that McCain is trying to capture some of Hillary’s people. Oh well, I only need to worry about the “Merry Band of Traders” and Sherwood Forest. BTW, let’s keep Sherwood Green and work on Alternative Fuels. That’s enough! I’m gone. Robin

Would you start a business without first formulating a business plan!? Unbelievably many do just that and, for the most part, their businesses end up in the recycle bin. Your trading activity is a business and you need to treat it as such. So, this week we are going to talk about the importance of a trading plan as well as some of the elements that should be included in that plan.

We will start with a series of questions which we encourage you to seriously contemplate. In order to create a plan, you must formulate solid and well thought out answers to each question. Each of you may answer the following questions differently and that’s okay. But each of you should answer each question! It only takes a few minutes and could be very rewarding long-term so as Nike says “Just Do It”!!

1- What do you expect to achieve in your trading?
2- How much money do you have in your account?
3- What is your time horizon?
4- What markets do you intend to trade?
5- Do you have a trading system?
6- Does that system include disciplined money management?
7- Do you have the knowledge base in order to trade your chosen market?
8- What amount of time can you realistically devote to trading?
9- Have you considered prudent position sizing and asset allocation?
10- Do you have REASONABLE expectations?
11- Does your trading plan incorporate strategies that are consistent with your risk tolerance?

Your plan needs to align with the answers you gave (you alone and nobody else!). Don’t get pulled into trades that do not fit in to your trading plan just because you get a ‘Hot Tip”. Be true to your plan and do not deviate. The amount of money in your account will dictate to a large degree, the strategies and allocation percentages that you can implement. Just because you may be fortunate enough to have a larger account size does not mean that you should assume greater percentage risks. On the contrary, the larger your account the more prudent you should be regarding the size of each trade. If you have a smaller account, you may not have the luxury of holding a lot of stock positions. You must think in terms of percent Return on Investment (ROI) as opposed to absolute dollar gains. Remind yourself of the rule of 72. The percentage return divided into 72 will reveal the “periods” it will take in order for your investment to double. For instance, if you were able to consistently achieve a 3% monthly return, then you could double your money in 24 months. (72/3=24)

Suffice it to say, it all starts with a plan. Do not gloss over this part of your business. If you don’t do your due diligence with your plan now, you will most likely fail in the long run. It’s only a matter of time. Well my friends, it’s time to head back to Sherwood. I have a planning meeting with the “Merry Band of Traders”. We have a plan and that’s why it works for us and if you allow us the opportunity, we have a plan that will work for you as well. Stop by and see us at www.MarketTamer.com. Until next week, Robin

The week began with negative press regarding the financials and the Dow tanked 180 points. Tuesday saw unimpressive PPI numbers and a decrease in housing starts sending the Dow 130 points lower. Wednesday, the markets were marginally up on indecisive trading. Thursday, Jobless Claims came in better than expected, however, that was tempered by negativity surrounding the financials along with a spike in oil prices. However, the markets came off their lows to eek out a small gain for the day. The week ended with some positive comments from Ben Bernanke regarding a perceived easing of inflation due to the strengthening of the dollar and slower growth. Friday ended with a robust triple digit gain. All in all the week was flat with the Dow ending down 31, the SPX down 6 and the NDX down 26.