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Archive for June, 2009

Profitable ETF Trading Strategies: 5 ways that trading like a gardener will improve your results”

June 29, 2009 1 comment

Gardening is a hobby,  a craft  and an art when practiced at the highest levels. It helps develops habits of mind and healthy attitudes towards your daily work that can be of great benefit in the high stress world of short term trading.

Here are 5 things you can learn from gardening that will help you to become a more effective trader.

1. The importance of design: A good design for gardening and for trading begins with the end in mind. You start with a vision of a successful end-state, and keep that firmly in mind as you proceed with  monthly, weekly and daily plans to achieve your shorter term goals.  By keeping the end in mind, your daily tasks and actions will be aligned with your ultimate purpose, both as a gardener and as a trader. It forces you to consider the longer term view when you feel rushed.

2. How to cultivate patience: Crops grow according to their own nature and in their own time.  They can’t feel your impatience, and you quickly realize how foolish it is to try to force your will upon something that is unmoved by your timetable. The market is like that too, moving according to its own nature and schedule.  Learn to feel the market rhythm and adapt your expectations and behaviors.

3. Appreciate the importance of timing: although  we can’t rush the growing season, there is nevertheless a time for all things.  Plan and prepare when it is time to do those things. Stalk when your targets are getting close,  enter when it is time to act, and exit when your objectives are met or your rules indicate.  Do things ion their own time and according to plan.

4. Know your natural limits: Know what your strengths and weaknesses are. Plan and implement a garden you can live with, and manage, and grow with; one that suits who you are. Your trading plan should be a reflection of your strengths and weaknesses too, so that you can reliably be just who you are.  It’s very diifficult for the leopard to change his spots or the trader to change his ways.  Learn to work within your strengths and offset your weaknesses with a good plan.

5. Know the seasons and your crops: By knowing your markets you will be able to align your objectives with what your preferred markets can be relied upon to provide,. Don’t ask markets and targets to do more than they naturally can or you will be forced into taking improper risks.  Don’t put yourself in the position of arguing with the weather or Mother nature. Know your business and know your markets.

Trade like a gardener to improve your peace of mind and your bottom-line results.

Lessongardening

Profitable ETF Trading Strategies: trade like an autobahn driver

June 28, 2009 Leave a comment

Support and resistance levels create congestion zones around certain price levels. In congestion zones, there is no clear indication if the follow-on trend will be either up or down, as bulls and bears are wrestling with each other for control of price.

A congestion zone on a chart occurs when price is moving sideways, and there is no clear trend up or down.  It is not unusual to see days and days of sideways movements on daily charts.

There are times when price has cleared a congestion zone by either breaking out to make new highs or by failing and falling quickly back towards lower price levels.

Adapting your trading strategy to these different conditions can be improved by having a useful trading metaphor or organize your thoughts and remind you of how to interpret price action.

A good trading metaphor should be aligned with your primary learning mode: visual, auditory or kinesthetic.  The best metaphors find a way to incorporate all 3 modes, to reinforce the power of the story and the underlying organizing principle.

One of my favorite metaphors does just that:  Drive like an Autobahn driver.  Here is how it works:

The autobahn in Germany is a marvel of engineering and freedom. For vast stretches of expressways between major cities, you can drive at unlimited speeds.  There are multiple lanes, traffic is spread out, and you can see clear road ahead for miles.   Driving here is like trading a breakout where you get onboard early and are swept along by the unconstrained power of buyers everywhere, all pushing price ahead at great speed.  Enjoy the ride for as long as it lasts, but be conscious of traffic ahead and the inevitably city ahead which will add to traffic and necessarily slow you down.

The autobahns around cities can be very dangerous, and conditions can change swiftly, especially in times of bad weather.  Traffic increases, road surfaces get slippery, there are many more exit and entry ramps with both local and long haul drivers each seeking to accomplish their purpose on the road.  Not everyone is there for the long haul.  People change lanes rapidly trying to gain a momentary advantage which leads to choppy traffic patterns which are unpredictable.  This is like trying to trade in congestion areas.

You cannot expect to apply a single set of simple rules to both kind sof road conditions or both kinds of price areas.  To be safe and productive, you must adapt your rules to the conditions of the road or the trade.  Drive and trade the wide open spaces in one way, to maximize your profits and save time when the conditions warrant such technique.

Drive and trade carefully and in a risk managed way in congestion areas if you must drivce or trade at all.  Don’t be hesitant to pull over and let traffic clear before you re-engage. We have the freedom to trade when and how we will and we will be rewarded by waiting for our most favorable conditions to try our hand.

Know what the road ahead is going to be like! Read the maps!  Listen to traffic and weather  reports and pay attention to the traffic around you to guide you safely and profitably.

Profitable ETF Trading Strategies: Color code price zones to improve decision-making

June 28, 2009 Leave a comment

Intraday trading brings together perspectives from any different time frames into a single arena.  Sometimes it is hard to make sense of why buyers and sellers react so strongly at certain price levels and not at others. How can you quickly and easily organize the information from different time frames to shape your trading decisions?

One way to to frame your trading environment is to look at multiple time frames and find patterns and price levels that indicate support and resistance levels in the past. We cannot know with any certainty why a price level became support or resistance. The good news is that we don’t need to know why, only that it DID!.

The reasons why support and resistance occurred fade pretty quickly in time. All that remains, like footsteps in the snow, is the price record maintained on charts for all to see.  The places where price turned and reversed will begin to take on a power in the minds of all chart readers and will begin to influence their decisions to buy and sell, to preserve profits or anticipate  reversals.

This is why congestion areas begin to form around certain price levels.

In the same way that we should not be supposed to see traffic forming around major cities, we should expect choppy price behavior around previous support and resistance levels, and near the 50 day and 200 day moving averages, the two most popular moving averages.

Once you have identified the obvious support and resistance levels, treat prices greater than the congestion area as “Green zones” where you would not be surprised to see price move swiftly up.

Identify the congestion areas as “Yellow zones” where choppy behavior is the norm and where you do not have a particular edge unless you are a master tape reader.

Red zones are open price areas below congestion, where price can be expected to fall quickly once it breaks out of congestion.

In the Red and Green zones, which are really mirror images of each other, you want to be positioned to go with the path of least resistance.  There’s not a lot of time to wonder what to do when price is here.  Don’t chase price, but certainly take advantage of limit orders to pull you into good positions.

In the Yellow zone you should never chase, and always require a visible 2:1 reward to risk ratio inside the yellow zone to justify your entry.  Don’t expect price to break out either, since congestion zones we expect price to be choppy and for breakouts to be false.

Framing your trading decisions in terms of these 3 color codes can definitely help you make proper decisions in the heat of the moment.

colorcodes

Profitable ETF Trading Strategies: developing the daily trading plan

June 17, 2009 Leave a comment

Trading the markets on a daily basis with short term strategies places a premium on efficiently and effectively developing a comprehensive daily trading plan.

Short term trading can be a very rewarding  part of an overall trading and investment strategy.  Without a sound and comprehensive plan, though, there are just too many ways to go astray for the novice trader.

Each trader should develop their own methods for daily preparation, suited to their style and personality. It can be a challenge though for the novice trader to get started with this daunting but essential task.

Here is a simple way that a trader might go about developing a daily trading plan, proceeding from the top down.

Prepare your notes in 3 sections: market, intermediate, tactical (short term) and go through a set of structured questions like these:

What is the market condition, what is it doing, does it give you a bias for tomorrow?

What is the intermediate condition?:  consider using indicators like Williams%R,  portfolio exposure, and ADX condition.

Are there any swing trades that have stories going on that carry over from the previous day?

What is the short term condition/ideas of interest? consider: gap statistics, SPY Pivot Points, any carry over positions from yesterday, any patterns fired? These could include patterns  like overreaction, channelling, triple screen, 5 dyas down and washout.

Are there any maximum pain candidates to be aware of? Are there any  continuation patterns that I am especially interested in?

Once you answer those questions, you should have anywhere from 5 to 15 tradeable ideas as soon as the market opens.

At the open you should consider the gap, then the 5 min Opening Range, examine the price with respect to the pivot point numbers.

After about 15 minutes into the session, you could look at, in order: indexes, ETF2 positions, and your developed interest list to see where the strength and weaknesses are. This quick scan will suggest more targets.

A simpler alternative is to have a narrowed focus on a stable of reliable targets, and do an abbreviated version of the above scan by considering the market and intermediate conditions but then focus on the state of each of your reliables for trading ideas.

All interest list members should be framed in the usual way,  so you have a decision support framework in place before the market opens. You will then know where you can buy upon evidence of tactical momentum fearlessly.

You will also have a playbook of situational trades, just waiting for the market to show you what it is doing.

If you need some guidance on how to  develop your daily short term trading plan,  these ideas may help to  get you started.

Profitable ETF Trading Strategies: Trade like a fisherman

June 17, 2009 Leave a comment

Trading the stock markets in short time frames can be both an exciting and a dangerous endeavor.

High speed internet connections, an overabundance of information, often contradictory and always open to subtle interpretation, and the ready availability of systems and gurus to help you make sense of it all conspire to offer the new trader so many ways to go wrong. Making consistent, disciplined and effective meaning out of the flood of information will lead a trader to the land of consistent, disciplined and effective profits.

Failure to solve the problem of information overload will inevitably lead to disaster. Trading without a plan will eventually and certainly lead to disappointment.

Cognitive scientists and psychologist have identified the ability to reason through the use of metaphor and analogies as one of the most powerful tools in our mental kitbag. A powerful, compelling metaphor can help a trader adopt and adapt a set of profitable behaviors that can lead to survival and then profit in all market conditions.

If a trader can adopt a satisfying metaphor, she will have a mental schema that will allow here to trade in a natural way, to receive, process and adapt to information in an effective, routine way, and help guard against being overwhelmed by information.

Here is a simple example to make this point.

Consider trading to be like fishing. On a daily basis a fisherman goes to the lake, baits the hook, casts hook and bait into the water and if she knows her business, she will start pulling in the kinds of fish she is looking for. The fisherman can bait her hook, but can’t really jump into the water and chase the fish onto the hook, or force it into their mouth.

That would be very much like a once-disciplined trader who is frustrated and tries to make the market perform in a certain way. If you are a frustrated band trader, you shouldn’t be tempted, in the moment, to chase breakouts. Remember sometimes the fish just aren’t biting.

Play your odds, don’t fall into the lake, know your fish, bait your hook properly.

Choose your metaphors wisely trader!

Profitable ETF Trading Strategies: The Stepping Stone technique of trading volatile markets

June 9, 2009 Leave a comment

The market never goes up in a straight line, it seems.

Lately, in fact, it has been surging wildly in one direction and then in another, creating whipsaws that have chased many traders away because of their inability to adapt.

It is still possible to trade for trends while managing your risk in such a way that you maintain a constant acceptable level of exposure at any given moment in the trade.

On those days or weeks when the market turns out to follow through in a particular direction, thus creating an observable trend, you will have been able to capture most of that move, while protecting yourself against the volatility of sudden sharp reversals.

It’s impossible to remove all risk from individual trades. If you could, there wouldn’t be a market. You would have replaced the market with a money machine. So, we can accept a measured amount of open risk on tradeable ideas and consider it as the cost of doing business.

If your business is laying sod, then you know you are going to get wet and muddy, because laying sod in the rain is a good idea. If your business is being a carpenter, then you know you are going to get the occasional splinter.

You expect it. You aren’t surprised by it. So we know, as traders, that we expect to take losses as part of routine business.

If psychologically you cannot accept the routine occurences of your chosen profession, then that’s a sign you should seek a different line of work.

Having said that, we can now look at trading like crossing a stream using a series of stepping stones.

You don’t start crossing the stream (ie the market) until you can see a reasonable and realistic way to get to the far side ( profit).

If there is a bridge, then it’s easy and everyone is using it (like dollar cost averaging or buy and hold using low-cost index funds). The problem with bridges is that can get congested, and they atrract both tolls and trolls.

To get across faster, and without the trolls and tolls (get more profit), you must find short cuts that are safe enough for you to use, but which other people cannot. That’s your edge.

If you are able to go across a stream using stepping stones, then you have a tradeable edge.

Think of each stepping stone as a separate trade within a longer term trend. By defining each leg of the journey as a favorable reward:risk ratio, we can plan to move from trade to trade when market conditions and entry conditions are favorable to us.

We can stay in each trade until it’s time to leave.

We never risk more than our next step, so our risk is constantly measured.

In this way, what looks like a daunting journey across an uncertain stream, is simply broken down into a set of measured steps, which allow us a way to retrace our steps if we find the next step is not as easy as it looked from the shore.

Keeping this metaphor in mind can help a trader navigate the uncertain path of the daily trading journey.

Profitable ETF Trading Strategies: Risk management and re-entry

June 9, 2009 Leave a comment

If risk management is the key to long term survival in a volatile stock market, then re-entry is the key to sanity.

Just as there are old mountain climbers and bold mountain climbers, but no old, bold mountain climbers, you can bet that life long traders have mastered the essential first law of trading: don’t explode.  No matter what you calculate as  the odds of an adverse move, you can be sure that you have missed a hidden variable that the market will employ someday to snatch away all of your ventured capital on a particular trade. If that surprise event results in you going broke, then you failed the first test of trading.

A healthy respect for uncertainty and risk may see you making decisions to exit positions before driving off  what may be a cliff right around the next corner. Sometimes though what’s around the bend may be easy driving to the land of milk and honey. Imprudent traders that flew right past you, speed unchecked around the bend will get to the reward sooner than you. If you don’t have a plan for re-entry you may miss your share of the reward altogether.

When that happens, it would be normal for you to experience regret, and if it happens enough times you begin to doubt your self and your rules and you become tempted to change on the fly.  Then your rules become nothing more than your current state of mind which can be influenced by so many other factors that you have essentially relinquished the ability to reason consistently through changing market conditions, and that becomes a functional definition of driving yourself crazy.

So, to offset that urge to speed around the corner for fear of missing out on the rewards that other, bolder traders are eagerly chasing, remind your self that its a long journey, and that there are rest halts along the way for you to do maintenance, and that you will get there, on time, in your own time, and in your own risk managed way. As long as you have a plan for re-entry, you won’t drive yourself crazy worrying about the rewards you may have missed around the corner. You will get there, just don’t be in a hurry.

Taking care when going around corners will let you listen for the sound of a crash when the bold traders get surprised by an infinitely variable market that plays by its own unknowable rules.