"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
-
Sun Tzu

Wednesday, August 22, 2007

Sample Trade: Jacobs Engineering (JEC)

From time to time, I will discuss some of my trades. I will not write about my investments "postmortem", instead, I will present my rationale after I opened the position and blog again after the close.

Today, I opened a position in JEC, Jacobs Engineering. JEC is a 5 billion dollars engineering service firm, a player in all kinds of markets. So by investing in that company, you basically participate the booming aerospace market and global infrastructure build-up in countries such as India or China. Oil services is also
part of their business. Overall, a diversified player to participate on global economic expansion. A growing player with a PEG ratio of 1.5, which is ok.

Swing Trade Analysis


Let's check the long term chart first. Clearly shows a long term up trend and no reversal pattern on the right side. So we're playing in the right league here:


Next: let's look at what happened recently:

JEC moved from an Uptrend to a sideway consolidation. We have to be careful: if the next top is lower than the last one, a "head and shoulders" reversal pattern could occur. For now, though, we can see that JEC finds support at $60 with some slightly bullish candles. The ATR shows us that some fellows are kinda' nervous, but that's the market these days. We scale down the risk with some intelligent "position sizing".

A bearish sign is actually the negative divergence between price and MACD. A fact, that shows us that the stock has obviously lost momentum, which I contribute rather to market conditions than JEC itself. Compared to the market, JEC proved to be pretty stable. (I always try to compare a stock to what the market is doing. Since JEC shows some strength here, I expect it to be on the sunny side, when the market goes up again.)

Overall, this trade gives us a wonderful risk reward ratio. We opened the position at 61.5, Our stop is slightly under 60 and the price target at 68. So we are talking about a risk/reward ratio of roughly 4:1. If this trade works out, it will give me a 10% gain, which I'm perfectly happy with.

So: let's see how this one will play out.

Happy trading

Michael



Tuesday, August 21, 2007

Lessons learnt: psychological stops

Last week, I learnt an interesting trading lesson: don't trade when you can't follow the market. Here is what happened: I was short in a couple of positions (BSC, CTX, CFC). Unfortunately, I had to go on a business trip on Thursday and Friday. My positions worked out perfectly on the first day, but on Friday morning, I checked the news before my meetings and just saw three words: "Fed rate cut". Since I didn't have much time, I put in "buy to close" orders before the open, because I expected a huge rally. The result of the day was that I got filled pretty much on the high of the day. The market trended down during the day, but still closed up. I turned out in the afternoon, that according to my trading rules, I shouldn't have closed my positions. This mistake basically has cost me 5% of my performance. (the risk reward ratio on the other hand wasn't that bad: without a rate cut, the market probably would have crashed. Japan was down 5% the night before).

Anyways: what did I learn?

1. Never predict how the market will react on news. Follow the price action.
2. If you can't concentrate on trading, don't trade at all (Van Tharp basically calls that "emotional stop")

The example shows again, that your success in trading depends most on your psychology.

Monday, August 13, 2007

Case Study: Trading Journals

Many authors stress the need to write a good trading journal in order to improve performance. So on the weekend, I updated and analyzed my last 30 trades. The results were eye opening!

But first of all, let me summarize, how I actually track my trades. I basically maintain two different journals: one is a Excel sheet with all the numbers, the other is a Word document with charts and thoughts. So for each trade, I have
a) numerical information, such as entry price, risk (ATR, R) and gain
b) chart and comments of the entry
c) chart and comments of the exit
d) chart of what happened after I closed the trade.

One item I track is the "grade" of each entry and exit. For each trade, I assign a value (postmortem) between 1 and 3. 1 means: perfect trade, I followed my rules. 3 means: I basically screwed it up, I didn't trade according to my rules. You might think: why is that necessary, if you have a rule based trading system, there is no room for error. Well, if you read "Way of the Turtle", you probably learnt that what most people don't do is following their own trading rules. Trading is 90% psychology and almost every trader uses all kinds of excuses to "overwrite" the system rules. I wanted to know, how often I overwrite.

Here is the results: of my entry grades, 60% were perfect entries, 15% were just level "3" entries. The shocker was my exits: in just 25% of the trades, I perfectly followed my own rules, whereas in 40% of the exits, I didn't follow my own rules.

Lesson learnt: if I want to improve my trading results, I have to focus on better execution of my exits. Plain and simple. So my goal from now on is NOT to aim for maximum profit, but for minimum "exit grade".

Without a good journal , I probably wouldn't have come to that conclusion.

Happy journal writing

Wednesday, August 8, 2007

How I Trade

A little introduction into my trading strategy. I want to keep it short and just give you the big picture. So first of all: I'm a swing trader. That means, I hold positions between 2 and 3o days. In my trading, I'm trying to combine technical analysis with fundamental and psychological aspects. That's why I would call myself a discretionary trader (in contrast to a mechanical trader, who usually let the computer decide when to buy and sell). I'm basically trading US stocks, from large to small cap. In addition, I'm experimenting with ETF's wherever it makes sense. I'm trading both directions, long and short. I have no problem being 100% short if we should be in a general bear market.
Some statistics: I'm doing between 5 and 15 trades per month. My goals is to be right 60% of the time, have my average loss between 3 and 6 percent and my average gain between 6 and 12%. The numbers depend on the volatility of the stock of course. That's why I rather like to look at R values (read Van Tharp or check out TraderMike's blog if you want to know what that is). So I'm shooting for 2R for the gains and 1 R for the losses. Of course, these are just the goals. My actual performance after 25 trades looks like this:
  • Win/Loss ratio: 58%
  • R (Gain): 1.8
  • R (Loss): 1.4
You can always get my latest performance by checking the little Covestor box on the top of this blog.
I have some ideas on how to improve these numbers, time will tell...

In terms of risk: my risk per position is limited to 1.5%. I'm ok with going into margin, but just for adding positions for diversification.
Taking about diversification: I try spread my positions across industry sectors and long/short side.

My teachers:
30% Alexander Elder
20% Murphy
20% Van Tharp
20% Cramer (don't laugh :-) )
10% Peter Lynch

I'll post some comments about the readings later.

Happy trading

Saturday, August 4, 2007

Next week (week of Aug. 5 2007)

I did some homework this weekend and looked a little bit more into the S&P 500 chart of the last months. Well, it doesn't look that good for next week: we broke the 200 day MA on Friday after some double top formation. Check this out:


Oh, sorry, I posted the wrong chart :-). The chart is actually the S&P from October 1987 (Maybe that wasn't funny). Last bar is the Friday before the crash. Here is what really happened last week (Looks pretty similar, though) :


To conclude the story, here is the October 1987 chart including the following Monday:


Again: let's hope I'm wrong with my implied message here...

Thursday, August 2, 2007

Market Commentary August 2, 2007

I really like how tech moves these days. Apple was a nice opportunity to get in after some bad news (Eminem,iPhone production cut). ALVR is really interesting since I think that WIMAX will be the next big thing after WiFi (image a iPhone with WIMAX chipset, wouldn't that be cool?). In addition, ALVR could be a takeover candidate if a big guy decides to jump into the technology. The more I think about it, the more I would call this my favorite stock pick right now. My portfolio is 50% long on tech now, but what the heck...

Wednesday, August 1, 2007

Market Commentary July 31, 2007

Boy, the market is so bearish. Doesn't move up on good news and sells off big time on bad news.
Doesn't look good for tomorrow. Despite I adjusted my portfolio to market neutral, I think I'll profit from the downturn because financials/housing will fall faster than oil/tec.We'll see.

BTW: I believe in the "cockroach-principle" (-if you detect a single cockroach in your kitchen, you can be sure there is an entire population not far...-). Now apply that to the subprime-mess...

I think we will see a huge sell-off in the next couple of days. Let's hope I'm wrong...

Why another blog about stock trading?

There are many blogs out there, which deal with stock trading ideas,concepts and experiences. So I wasn't really sure if it makes sense to start another blog about this topic. I was actually inspired to do this by the website covestor.com, where traders can post their trades and create sort of a track record of their trading. I was always frustrated by all these "stock market wizards", who write "great posts", but never reveal their trading performance. So I want to change that (at least on my blog). That's why you can always review my trading performance in the little Covestor widget, which is attached to this blog.

Another motivation: I am on a journey to become a (hopefully successful) short term stock trader. So if you read this blog, you can join me on my trip, (maybe) learn from my mistakes and get new trading ideas. Since I always have a thought about the stock market, this blog on the other side will help me to sort my thoughts and act as a high level trading journal (Of course, I also run a journal of my trades, but I will probably write more about that later).

Anyways, happy reading!

Michael