(to be completed in the morning)
The rotation from Friday is complete in that the remaining two positions that did not close were closed today. Net for the two trades closed was +.68R.
Seven trades were framed today with entries on five receiving fills. Current holdings show +.6R and are as follows:
Long: AEM, CVX, INTC, OKTA, WYNN.
Short: none.
One of the the frequently recommended paths to success is to have a SMART goal. To be a SMART goal, it must be Specific, Measurable, Achievable, Realistic, and Time-bound. At some point, I may look at the other letters of the acronym, but today I wish to focus on achievable and the path to achieving progress in any area.
The area of focus for our efforts is fundamental to whether any achievement is even possible. The area we choose must be a skill that we can practice and develop. Physical characteristics such as age and height are not skills, and thus are inappropriate targets for goals. The classic example is a short person wishing to play in the NBA, or middle-aged person attempting to join any of the professional sports teams, even golf. At a certain point, our bodies stop getting taller, and at least at this point, our medical knowledge cannot return to us the youth and vigor of our younger selves. Physical limits pose restrictions on our possible goals.
Trading, however, is a skill. There are no physical requirements to open a trading account beyond signing your name (or typing it) on a few documents. There may be limits to what realistic returns are, but progress is possible in the area of trading because it is a skill. The difficulty arises because trading is not just one skill, but a set of skills, and the deeper you dive into trading, the wider the skill set seems to expand.
Any area has fundamental disciplines to study before one can be considered a master. I believe the most important skill anyone need to master for any area is that of learning. In his book, Principles: Life and Work, Ray Dalio provides several drawings similar to this one:
I’ve added my own labels, which are my reflections on the multiple presentations of the graph he makes in the book.
Improvement is generally shown as a line moving up and to the right. Time goes forward along the x-axis, and our progress up and down is plotted on the y-axis. An ideal equity curve just keeps moving up and to the right with no draw downs along the way. What I like about Dalio’s drawing is instead of a dip, there is a loop that occurs before progress can continue. This breaks the time axis metaphor, but I think it is more accurate for what we need to do to get out of those dips.
The first stumbling block on our road to success we will generically call a problem. Problems take many different shapes and forms, and will continue to accompany our journey throughout life. If we don’t find solutions, then we will simply spiral downward:
While problems seem like they take us off our path to achievement, I will assert that they are what enables us to achieve. Problems highlight areas that we have not mastered yet. They help us refine our knowledge and encourage us to acquire new skills that will take us to the next level.
How can you measure progress if you never hit any obstacles? Even most funds have some sort of benchmark to compare their performance against. (That’s the point of the Specific and Measurable part of SMART goals.) I am smart, and many things have come easily to me, but in the end, even that is a problem because I don’t know what (if anything) I’ve managed to achieve if I have nothing to compare my skills against. If no one else posted trade results or investment returns, I can only measure myself against my own yardstick (which may or may not be one yard long).
To grow, we must encounter problems. Our success is contingent upon finding the correct diagnosis and implementing a solution.
Before we get to a solution, we have to identify what the problem is. Changing a light bulb when the power went out won’t get us any light back in the room. Problems arise because we have encountered an unknown. Identifying that unknown is the key to finding a solution. Sometimes the unknowns are outside of our control (for example: the death or resignation of a CEO, a product recall, or a power or internet outage). The best we can do is to make sure we have a plan that gives us a path forward and enables us to live to trade another day.
Sometimes, the problems are interior. Our beliefs may be staging their own battle. Which is more important, honoring our stop or cashing a winner? Entering a new trade or not losing money? External problems are usually easy to diagnose. Internal problems may be more difficult to correctly solve. Because we are facing the unknown, we may need to try several different solutions before we find the best one for the problem. There may also be side effects caused by the solution that provoke other problems. As a concrete external example: moving a table so that we don’t bump into it while walking through the living room might seem like a good idea until we sit down in our favorite chair and no longer have a place to put our coffee.
Diagnosis is also an area where it can be helpful to have other people involved. Teachers and mentors can point towards possible solutions or give us information that we need in order to move on to the next level. Most often, our problems are not unique. Other people have been there and done that. Colleagues and friends can share their answers or the information that they have found helpful in solving problems. Even if the problem is an internal one, it’s quite useful to seek out others to help in the diagnosis and solution stages.
After encountering a problem, correctly diagnosing it, it’s time to implement the solution. If the solution is not a one-time-fix-it-and-it’s-done solution, then an accountability partner might be useful. A teacher or mentor might also guide in the implementation of the solution. The first solution also may not solve the problem. It’s entirely possible to spin around the loop several times before progress up and to the right resumes. Like a roller coaster, the downward drop can give us energy to move back up. When we find the right solution, we often have more enthusiasm and drive to continue our journey. Having conquered a problem, we have new confidence to move up to the next level. This is the real joy of solutions.
Growth in any area requires that we master the loop of problem-diagnosis-solution. Whether the skill we wish to master is trading, playing piano, or a new language. We take steps forward until we encounter a problem, some task or situation that we have have not encountered before. We must then identify the roadblock and find a way around it before we can continue on the path to achievement and mastery. If the solution we choose is not adequate, we may encounter the problem again, but this only means that a new and better solution is waiting to be found.
There are many different skills required to master trading. At the foundation though, I believe is the ability and willingness to move through the cycle outlined above. Only by looking for progress, identifying the areas for growth and implementing new information can a skill be mastered. This is the record of my journey as a trader, my reflections, observations, and an account of my actions as I walk the path to becoming the best trader I can.
I’m deciding to make a little change in how I write these daily trade reports. The nuts and bolts of what happened will still be reported, but I’m moving those down to the bottom of the post. The journey to becoming a better trade is not a reflection of the trades I take, but what I notice and how I think about the trades I do (or do not) take. If the reflections are the important part, then they should come first.
As you’ll see below, perhaps because I framed no trades this week, the portfolio is down to only two open positions, and one of those barely survived its stop loss on Friday. For that reason, I feel like I will be starting fresh on Monday morning.
The systems I presently trade buy pullbacks in markets trending upwards. Looking at the daily or weekly charts for my favorite targets, very few show strong upward trends at the moment. For the past several weeks, perhaps even 2-3 months, they have been trading in the same range. If there isn’t a 2:1 reward:risk ration available for the trade, I’ll pass on it. Since I started using 2ATR as my position size, that means I need 4ATR of possible movement to the upside before I will enter the trade. In this quieter more sideways movement of the market, that is leaving me with fewer trades to take. My reflections for this weekend leave me wondering if I should go back to a smaller risk amount to frame my trades, or if I just sit on my hands until the market provides me with the opportunities I know.
No trades were framed for Friday, 8 June 2018. Six positions were closed: KR, XME, AXP, DWDP, JPM, EWW. Total return for the 6 trades: +3.85R.
Only 2 positionsin the portfolio showing +1.09R.
Long: GILD.
Short: AA.
No swing trades were opened or closed for 6 June 2018, so there was no trade report yesterday. No trades were opened today, but 8 trades were closed: MSFT, CSCO(2), CRM, RIO, TWTR, IPG, and XES. Total return for the 8 positions: +5.16R
This leaves the portfolio reduced to 8 positions, currently showing +5.38R
Long: AXP, DWDP, GILD, JPM, KR, XME.
Short: AA, EWW.
While the market indexes are showing strength, I feel like it is not broad strength. Select companies are doing well, and others seem to simply be hanging on. Either I’m looking at more stocks that are under-performing, or I need to broaden my watch list.
I’m still working on some other extended posts with reflections on my insights and thoughts from this week. Somethings have gone well. Others not so well. The saying goes that if you ask better questions, you get better answers. I also believe if you ask frequent questions, even if it’s the same question, you may get different answers. Reporting my results here forces me to ask the same questions over and over again, and by doing this, I feel like I’m coming up with better answers, or at least a better sense of what I am doing in the market. Most importantly, I’m starting to see some of the ways that my personality and beliefs trigger my behaviors in the market.
There is a confidence that comes from positive trade results, but there is also confidence that comes from doing the same tasks every day. Trading is a complicated system, just like an automobile. I’m looking to get my trading to the point where it works just as reliably to generate income as the car works to get me from place to place. While you can certainly purchase trading systems like you buy a car, the market continues to change, so with a trading system you bought, you will never know when it needs maintenance or is broken beyond repair.
Think of how much knowledge has to go into building a car. Even a gifted auto mechanic is unlikely to know how to actually make the glass for the windshield or the steel for the engine. I will likely never know all the intricacies of how an order I place to buy or sell stock gets from my computer to the exchange for execution, but I need that process to be just as reliable as my car. If it breaks, I either need to know how to fix it, or how to have the problem fixed for me.
Trading requires not just the mastery of an auto mechanic, but also the skills of a professional driver. Great returns demand great skills. While it may not be safe to go slowly on all the roads all the time, it certainly doesn’t require as much driving skill as racing around a test track at 200 mph. I’m looking for market trouncing returns, so I have to keep working on my trading until I am at the same level as the professional race car driver.
I framed no trades for possible entry today. One position hit it’s stop loss: SLB. With the weakness in the oil sector and other trades reaching their stop losses recently, I tightened up the stops on the remaining stocks in the same sector, and SLB closed today because of that. Total return for the double position: -.86R
There are now 16 open trades showing +8.88R:
Long: AXP, CRM, CSCO(2), DWDP, GILD, JPM, KR, MSFT, RIO, TWTR, XME.
Short: AA, EWW, IPG, XES.
The trading signals I have been focused on recently buy pullbacks. When the market moves up strongly, it leaves few candidates for possible trades. While I’m sure there were opportunities in the market these past two days, none caught my eye sufficiently to frame up and trade. Today’s doji in the market (smaller range and close near the open), suggests to me that there are other people generally satisfied with their current portfolio. I could make a case for further strength and for further weakness. Tonight I will prepare a list of targets for trades, but I have no predisposition for which way the market will go tomorrow. I do have time to sit and watch the market, so am preparing to pounce on what decides to move tomorrow.
While I performed my market scans this weekend, I was very busy and framed no trades for possible execution today. Two trades (XLE and XES) hit their stop losses, and one of those (XES), I had decided would be a stop and reverse. Total return for the four positions: -.72R
There are now 18 open trades showing +6.95R:
Long: AXP, CRM, CSCO(2), DWDP, GILD, JPM, KR, MSFT, RIO, SLB(2), TWTR, XME.
Short: AA, EWW, IPG, XES.
Once again, one of the holdings has moved in after-hour trading. INTC did this after announcing earnings on 26 April. Earnings is something we can generally anticipate. Sometimes a stock starts to move before the news becomes public. This is why I generally watch the chart instead of spending my time trying to stay current on all the details about each specific company and its operations. I only make or lose money when the price moves, so the price is the primary piece of information that interests me.
Tonight as I went through the portfolio to update stops, I had moved the stop for TWTR based on the most recent trade price, but when I went to look at the chart, I noticed the official close was below where I just put my stop! A quick search of on-line news sources showed that TWTR is scheduled to join the S&P 500 this Thursday as Monsanto (MON) completes the merger with Bayer AG. I had noticed that TWTR showed strength during recent market weakness, which is one of the reasons that led me to add it to the portfolio. I’ll be very interested to see how it reacts over the next few days as the change in the index is implemented.
I’ll be drafting a few more trading belief posts later this week as I’ve identified a couple of key points that must be mastered to succeed in virtually any endeavor.
Following my observations yesterday about not framing trades for the short side, I framed 6 trades for possible entry and most of them were for possible short entries. The three that were willed were all shorts: EWW, AA, and IPG. WYNN opened below the stop, so both positions were closed out, netting +.32R total for the two trades.
There are now 21 open trades showing +5.07R:
Long: AXP, CRM, CSCO(2), DWDP, GILD, JPM, KR, MSFT, RIO, SLB(2), TWTR, XES(2), XLE(2), XME.
Short: AA, EWW, IPG.
The month of May provided 54 trades which netted a paltry +.35R. Graphs of the trade results are included below.
The largest win was +2.34R. There were six trades generating losses greater than 1R. Three of those six were just a penny or two away, so can be ascribed to slippage on stop order fills. Two were opening gaps below the stop. Only one of the six can be ascribed to improper stop placement. I had two positions on in one stock and the second fill was higher than the first, but the stop was left at the price based on the first entry.
The month started in a sideways normal condition and moved more bullish, but also became more quiet. Thirty-six of the trades were channel trades. All six of the losses greater than 1R were channel trades. Clearly this is the easiest system for me digest for entry points. Many of the positions moved in my favor after entry, but the back and forth sideways and drop in volatility led me to close out many of these positions as losses, even when they had been winners at different times. Here’s the plot sequence for just the channel trades in May:
The above is based upon date closed. Here’s the same chart based on date opened:
While I was starting to feel like I might have been improving as the month progressed, when you see the graph by open date, that improvement is minimal. It should also be noted that these are all trades closed in May. Some were opened in April and held into May. Any positions opened in May but not yet closed, are not reflected in either of these graphs.
I believe all these trades were placed with the 2ATR initial position sizing stop loss. For my next step, I’d like to analyze the maximum negative excursion for each position in terms of ATR to determine if there is some earlier point when I can cut the losses to either keep them from running to -1R and/or change my position sizing so that with a tighter stop loss, my gains are multiples of my losses.
General conclusion for today: there is always more to consider about the log of trade results, and your viewpoint can influence the conclusions you might be tempted to draw.
I framed two trades for possible execution today, but neither was filled. One trade hit its stop loss: EWW.
There are now 20 open trades showing +1.47R:
Long: AXP, CRM, CSCO(2), DWDP, GILD, JPM, KR, MSFT, RIO, SLB(2), TWTR, WYNN(2), XES(2), XLE(2), XME.
Short: none.
With the recent sell-off in the market, I realized that I am making my life more difficult by not framing and taking any short-side trades at the moment. In April when I change my position sizing plans, I also basically stopped framing shorts. I have no idea what sort of return I may have missed by neglecting the short side, positive or negative. I have been more consistent in taking channel trades, but have not paid as much attention to some of the other screens I do as they require tighter stops. As noted yesterday, tighter stops are one of the fastest ways to boost returns. One of the drawbacks of using tighter stops however, can also be a lower win percentage, i.e. more losing trades. The tricky part is finding the balance between stops that maximize the reward to risk ratio without encountering too many losses that reduce that return back (or below) to what I get with the wide stops.
Trading requires keeping multiple moving parts in highly functional states. When I changed my position sizing, I inadvertently changed what I scanned for in the market. In trying to fix one item, I broke another. Maybe that’s too strong. I disconnected another part of the system without realizing I had unplugged it. Now, I get to plug it back in and see how well I can keep the whole working together again.
With the Memorial Day holiday and a busy schedule, I have not been consistent at monitoring the market or framing trades. I quickly framed three channel trades as the market was opening last Friday, 25 May 2018. They would have triggered second positions on Tuesday, but I did not frame any trades during the holiday weekend. I was able to frame 9 trades for execution today and received fills on all of them. Three trades were closed on Tuesday as the market opened lower. PFE opened below the stop, so even though it moved up while almost everything else moved down, I was out at the open. HD also hit its stop loss.
Net return on the closed positions: -1.09R
With the 9 positions opened today, there are now 21 open trades showing +3.54R:
Long: AXP, CRM, CSCO(2), DWDP, EWW, GILD, JPM, KR, MSFT, RIO, SLB(2), TWTR, WYNN(2), XES(2), XLE(2), XME.
Short: none.
From my market screens, I recognized a general oversold condition last evening. While I expected today to be an up day, I also knew that there could be a gap up, so I placed a trade in the futures overnight. There was a gap up, so I closed out the trade without waiting to see what the market actually did today. Given my inconsistency for the past week, I am delighted to have captured what I did. This week is a chance to get back into the routine.
April contained a large drawdown in my return. (There was also a decent recovery.) May has been more stable and generally upward, though I haven’t collected the larger returns from the beginning of the year. I also adjusted my position sizing after the drawdown in April, so in this calmer market, with wider stops, it simply isn’t possible to generate as many R. I need to find out what my maximum negative excursion is on each of these trades to see what insights I can gain on using tighter stops. If I can cut the distance to my stop in half, then for the same dollar price move in the stock, I would collect twice as much return. When I started this year, I know I was using much tighter stops than the 2ATR that I am presently using for almost everything. Using a .25ATR stop in a market with increasing volatility led to some stellar trades that simply will not happen in this quieter, less volatile market.
Part of trading is knowing when to press your advantage and when to hold back or stay out of the market. Last night I recognized one of my edges and pushed the pedal down. I may have let up too soon, but at least this time, I put my foot on the gas. Knowing how tight to place my stops will give me better control of the gas pedal. Large stops for cautious times, and tighter stops when it’s time to put the foot down and go.
Catching up on my trade reporting, two trades were framed for possible execution on 23 May. Both were filled. Seven trades hit their stop losses and were closed for net -2.58R.
This leaves the swing portfolio with 12 open positions:
Long: CRM, CSCO, EWW, GILD, HD, KR, MSFT, PFE(2), WYNN(2), XME.
Short: none.