Archive for July, 2009

ECONOMIC REPORTS

MONDAY 7/13

Treasury Budget

TUESDAY 7/14

Core PPI, PPI, Retail Sales, Retail Sales ex-auto, Business Inventories,

WEDNESDAY 7/15

Core CPI, CPI, Empire Manufacturing, Capacity Utilization, Industrial Production, Business Inventories, Crude Inventories

THURSDAY 7/16

Initial Claims, Net Long-Term TIC Flows, Philadelphia Fed

FRIDAY 7/17

Building Permits, Housing Starts

 

 

EARNINGS OF NOTE

MONDAY 7/13

OZRK, FAST, NVLS

TUESDAY 7/14

GS, INTC, JNJ, YUM

WEDNESDAY 7/15

ABT, CTAS, GCI, KMR

THURSDAY 7/16

CY, GOOG, HOG, IBM, JPM, MAR, NOK, NVS

FRIDAY 7/17

BAC, C, GE, MAT

 

If you use stop losses, make sure that you use them wisely and size your positions so that your amount at risk is constant.  Most traders trade a binary system that yields either winners or losers.  When trading that type of system, it is crucial to have a methodology that produces a slight edge.  That edge should result in more wins than losses.  However, even with a slight edge, the trader can lose overall if he/she has a poor or nonexistent money management system.  The lack of trading success occurs because the losers can lose more than the winners.  On the other hand, the trader can still be an overall winner if he/she has more losers than winners but cuts the losers short and lets the winners run.

The following is a simple position sizing procedure that can bring money management discipline to your trading.  It can yield successful results over time if implemented with a reasonably effective trading system.  Your expected loss should be defined as a net percentage of your portfolio per trade.  Let us assume that you choose to lose no more than 2% of your trading capital in any given trade.  With that information and a well defined stop loss, we can solve for the number of shares that should be traded.

                                                                         EXAMPLE

1.  Trading capital  100K
2. Risk per trade      2% or $2000
3. Stop Loss -  The low of the prior days trading session at $34.80

Entry – $35.54

Stop – $34.80

Stop Margin = $.74

$2000 (max risk per trade) / $.74 = 2702 shares

If the trader feels confident that the stop will execute as planned, it would result in a loss of $.74 per share or $2000 ($.74 x 2702).  After the initial stop is placed and the stock moves in a profitable direction, the trader may want to initiate a trailing stop in order to capture more gains.

However, we must consider that 2702 shares x $35.54 equals $96,029 which represents 96% of the trading account on one trade, which is totally unacceptable.  Diversification of the account would suggest no fewer than five positions in differing Sectors and Industries.  One should also keep an amount in cash in reserve for contingencies. 

A suggested allocation could be five stock positions utilizing 80k of capital with 20k set aside in cash.  That would translate to 16K per stock position.

Recalculation of the risk and stop criteria:

1. $16K – Trading capital per position
2. Risk 2% per trade or $320
3. Stop loss – the low of the prior day’s session – $34.80.
4. Entry at $35.54
5. Stop at $34.80.
6. Stop Margin = $.74

$320 (risk per trade)/ $.74 = 432 shares.  If the trader initiates a position on 432 shares of XYZ  stock and is stopped out for a $.74 loss per share, his/her resulting loss would be $.74 x 432 shares = $319.68, which is 2% of invested capital on XYZ. 

 The amount of planned loss never changes.  Should the stop loss be wider than the aforementioned $.74, it merely reduces the number of shares traded resulting in the same 2% planned loss.

The second scenario is much more acceptable that the first example.  We are now reasonably diversified in five stock positions with a well defined stop and cash in reserve for contingencies.  An effective trailing stop procedure can also allow the winners to run and outpace the small strictly defined losses.  Best, Robin

We remain in a sideways channel between 8200- 8600.  The DOW pulled back this week to challenge my downside target of 8221, finishing at 8281.  The move occurred on anemic volume as one would expect in a holiday shortened trading week.  The market has been quite resilient but needs a catalyst to move out of this range.  If earnings season surprises, then we will push up to retest recent highs at 8900 and 9088.  If 8221 does not hold, then we can expect the index to head to the consolidation level from April 2009 at 7750-8000.

The SPX is also moving in a sideways channel between 875 and 950.  The index stopped at 896 short of testing the 200 sma and above just above my downside target of 889.  Volume has been very light, which shows a lack of conviction on the recent down move.  One must keep in mind that we are in a holiday week and market participation is usually on the low side.  Earnings season should move s out of this channel.  Stay nimble and follow the market.

The COMPQ is moving sideways, consistent with the other major indexes in a channel between 1750 and 1900.  The index remains comfortably above the 50 and 200 sma and pulled back to come within 3 points of my projected downside target for the week.

Week over week, the DOW retraced 157 and the SPX lost 23 as the COMPQ backed up by 41.

 Is it time for you to really start learning to be consistently profitable??  Click here to change your trading life!!

 

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Buy ITM calls and puts 6-8 months out in the same expiration month.  This is a limited risk strategy that can produce profits if the underlying moves significantly.  The spread will always be worth the difference between the long ITM call and put strikes.  The small amount of extrinsic value that exists in the position is exposed to implied volatility and time decay.

It is suggested that the position be given enough time to achieve a substantial move one way or the other which is the reason for buying long dated options.  One may even consider LEAPS.  It is also suggested that one consider selling front month OTM puts and calls against the position in order to reduce the cost basis.

Study the risk graph and you will gain understanding of the risk and reward of the strategy.  Best, Robin