In the past few years on social media I have met some great traders, professionals, and trading teachers. I have had the privilege of interacting with many of my favorite authors, traders, and money managers. This has been amazing to me and I have learned a lot. I am troubled though of the flood of strange characters that show up on social media in the trading world that come in throwing out advice and selling services that I have never heard of. They do not seem real and I do not know if they are harmless or dangerous so I created 10 warning signs that can help any new traders just getting starting in the vast social media trading universe. Be careful out there and please always do your due diligence before following a character that meets these criteria:

1. Traders that are not real hide behind avatars and do not show their real faces, ever. I find it hard to take a trader serious who uses a bull or bear as their avatar. This alone is not a big deal until you add a few more tell tale signs.

2. Fake traders use name handles instead of real names. It is one thing to be ‘John Smith @TraderNewYork’, but when you are ‘Trader New York @TraderNewYork’, who are you?

3. Facebook is meant  as a way to connect with real people you know by entering your information and finding high school and college friends among other things it is against their terms of agreement to create a fake account that is not really you. Facebook closes accounts that are not of real people.

4. Bad news, real millionaire traders are not spending their time soliciting newsletter subscribers and selling their services by spamming social media. The very few, real newsletter writers that are good and worth their money have their own social media networks where they share. They do not intrude into personal groups.

5. Fake traders almost never admit to any losing traders, going so far as to delete posts. Real traders have win rates between 60%-80% depending on their time frame and market environment. If someone never lost on their trading they would own the world not be on social media.

6. Fake traders blast out their wins from the roof tops but never mention their losses or how they managed them.

7. Usually fake traders are concerned more with selling you something than trading. They claim to have all the answers if you just buy something. They are salesman not traders.

8. A big red flag of a fake is that they try to impress you with some lavish lifestyle that they live. I am facebook friends with many millionaire traders and none of them have ever made any attempt to show me cars or houses. Why would they?

9. If someone is claiming to trade absurdly large position sizes on social media the odds are almost 100% that they are not being truthful. The guys that do trade the big money don’t discuss it publicly.

10. Fake traders are all about ego gratification, they participate in social media to get the rush of feeling superior and having followers.  Many times they act condescending and attack people due to their superiority complex.

The good news for bulls is that the world’s most obvious 50 day bounce happened that triggered the re-entry of traders to the long side and the short covering from bears once their target was reached and reversed. The SPY also overcame the pesky 10 day sma that had acted as resistance for 9 out of the past ten days. The bullish bad news is that the SPY struggled for most the day Friday to overcome the 10 day sma and then was stopped in its tracks at the 20 day/$165 level which is the new short term resistance.

If the $SPY stays above the 10 day sma and breaks the 20 day Monday into the close it is all systems go for a possible return to all time highs, if we fail to stay over the 20 day then it may be the market settling into a range and consolidating this years gains in the short term, which is long over due. This will give the 200 day to catch up a bit with this over extended market. If the 10 day is lost be aware that we could revisit the 50 day next week.

My possible  trading plan triggers could be a short below the 10 day sma or a  long play above the 20 day, with a wait for end of day triggers in the last 30 minutes.

 

GOOG looks like a text book reversal candlestick from the 50 day and break above the 10 day with resistance at the 20 day. Getting long would be safer near the 10 day sma at $870 than trying to chase this one. great chance we return to the all time highs if we get over the 20 day. This is a great stock for money managers to just buy and let ride now that the 50 day correction has taken place.

 

AAPL is still in a long term down trend that is slowly converting into a range bound chart with the 50 day as support and the 10 day sma as the first level of resistance then the $460 level as longer term resistance. This is sadly not a trend trading stock any longer it is for swing trading. I know it breaks my heart as well. The AAPL  chart appears to say it is now be a big cap tech, value stock, dividend payer to a momentum growth stock.

 

Trading is not all about just stock picking, it is not just about a winning system. Yes, first you have to understand how to trade and put the odds in your favor of winning, but that is not enough. You must also add in risk management so when you lose several times in a row your trading career and account does not end there. You also must have  faith in your system and method to be able to keep trading it even when you are losing, and you will have losing months, maybe even a losing year, can you keep trading through the tough times and stay around for the big wins?

One dimensional traders just pick stocks, if they are right they win for awhile, but eventually they do not stop out when they are wrong because they value their opinions over the stop loss and blow up their account. They also eventually get emotionally frustrated from wild equity swings  and they eventually quit and blame the market.

Two dimensional traders have a good system and cut their losses but have trouble with self confidence and belief in their system. They tend to blame themselves when their accounts draw down 10% to 20% and have trouble understanding that it is just part of the game. The market environment is determining wins and losses not the trader, they don’t  understand this. All they can do is take their entries and exits as they come and let the market do what it does. They have not separated themselves from their trading. Generally the two dimensional traders end up giving up due to not being able to handle the psychological ups and downs of trading real money during losing streaks.

The three dimensional trader takes entries and exits based on his methodology that he believes in, he manages risk per trade carefully and never loses more than 1% t0 2% of his capital on any one trade. The 3D trader’s self worth and confidence is not tied up in any one trade, or monthly performance he understands this is a long term process with ups and downs. Wins and losses do not change his mindset. It is just a business, stocks are just inventory, the market gives and the market takes away, and he just takes what it is giving.

“Successful trading depends on the 3M`s – Mind, Method and Money. Beginners focus on analysis, but professionals operate in a three dimensional space. They are aware of trading psychology, their own feelings, and the mass psychology of the markets. Each trader needs to have a method for choosing specific stocks, options or futures as well as firm rules for pulling the trigger – deciding when to buy and sell. Money refers to how you manage your trading capital.” – Alexander Elder

These is one of the key trading lessons that really helped me understand risk management long ago. This is one of the keys to successful trading, viewing risk as your metric for trading.

This article was originally published on the Van Tharp Institute’s Web Site.

Risk and R-Multiples

Knowing when you’re going to exit a trade is the only way to determine how much you’re really risking in any given trade or investment. If you don’t know when you’re getting out, then in effect you’re risking 100% of your money ~Mel

Van says that risk is the amount of money you are WILLING TO LOSE if you are wrong about the market. So his definition of risk is how much you’ll lose per unit of your investment (i.e., share of stock or number of futures contracts) if you are wrong about the position that you have taken.

This is called the initial Risk or (R) for short.

One of the key principles for both trading and investing success is to always have an exit point when you enter a position.  Trading without a pre-determined exit point is like driving across town and not stopping for red lights—you might get away with it a few times but sooner or later something nasty will happen.

In fact, the exit point that you have when you enter into a position is the whole basis for determining your risk, R, and the R-multiples (i.e., risk /reward ratios) of your profits and losses.

Your exit point can be either a percentage, in points or in dollar terms. For example, William O’Neil says that when you buy a stock, you should get out when it loses 7-8%.  Another trader proposes a philosophy of getting out of a stock when it moves 1-2 points against you.

Tell me more about stops.

A stop is basically a preplanned exit.  Van says that having stops prevents disaster even though this strongly goes against the grain of the long-term buy and hold philosophy.

When the price hits your stop point, you exit the market.  A trailing stop, basically adjusts that stop when the market moves in your favor, thus giving you a profit-taking exit as well.

For example, if you buy a stock at $30, and have a 25% stop, then you would exit the trade if the price drops 25% to $22.50.

In a trailing stop example: You buy the same stock at $30 (with the initial stop at $22.50) but if the stock moves up to $60, your 25% trailing stop would also move up with it and would be placed at 25% of $60, which is $45.

In other words, you would get out of the trade if the stock turned and dropped to $45.00 but because you bought it at $30, you would have locked in half your profit or $15. The trailing stop, in other words, moves the exit point in your favor as the price moves in your favor. BUT you must never move it backwards.  Thus, if your stock moves down from $60 to $50, you would still keep your exit at $45, 25% away from the high of $60.

In Van’s opinion, this kind of stop is a safe form of buy-and-hold.  You could be in a stock for a long time, but if something fundamental changes, it gets you out.

As an example, JDSU went from about $12 in February 1999 to a high of nearly $150 in 2000 (prices are adjusted for a number of share splits).  A 25% stop would have kept you in the entire move.  You would have been stopped out in April of 2000 at a substantial profit.  However, if you had used a buy and hold philosophy, the same stock hit a low of $1.58 in October 2002.  You might never get back to breakeven (an 800% gain from current prices) in your lifetime, but the stop would have totally allowed you to avoid that fall.  In addition, it would have gotten you out of stocks like Enron and WorldCom before any of them became headlines.

There are many reasons for using tighter stops and you will probably need to use them for a variety of different trading styles.  We are simply suggesting 25% stops as a substitute for the “buy and hold” philosophy.

We are not going to get any further into stops at this point because we want to get back to talking about risk. Just remember, you need to know when you are getting out of a position (your exit point or stop) to determine your risk.

Tell me more about Risk or (R).

Risk to most people seems to be an indefinable fear-based term. It is often equated with the probability of losing, or others might think being involved in futures or options is “risky.” Van’s definition is quite different to what many people think.

As far as Van is concerned, risk is definable.

Many people in the investment world are overly optimistic about the trades that they make. They don’t understand their worst case risk or even think about such factors.

Instead, people are seduced by trading terms such as “options” “arbitrage” and “naked puts,” Or, they buy into the academic definitions of risk such as volatility, which make for good theoretical articles by academicians, but they totally ignore two of the most significant factors in success. The golden rules of trading…

Never open a position in the market without knowing exactly where you will exit that position.

And

Cut your losses short and let your profits run.

So let’s look at the first golden rule in much more detail to be sure that you understand it.  That rule is to always have an exit point when you enter a position.  The purpose of that exit point is to help you preserve your trading/investing capital.  And that exit point defines your initial risk (1R) in a trade.

Let’s look at some examples.

Example 1:

You buy a stock at $50 and decide to sell it if it drops to $40.  What’s your initial risk?

The initial risk is $10 per share.  So in this case, 1R is equal to $10.

Example 2:

You buy the same stock at $50, but decide that you are wrong about the trade if it drops to $48.  At $48 you’ll get out.  What’s your initial risk?

In the second example, your initial risk is $2 per share, so 1R is equal to $2.

Example 3:

You want to do a foreign exchange trade, buying the dollar against the euro.

Let’s say that one hundred dollars is equal to 77 euros.  The minimum unit you must invest is $10,000.  You are going to sell if your investment drops down by $1000.

What’s your risk?  What’s 1R?

We made this example sound complex, but it isn’t.  If your minimum investment is $10,000 and you’d sell if it dropped $1000 to $9000, then your initial risk is $1000, and 1R is $1000.

Are you beginning to understand?  R represents your initial risk per unit. R is simply the initial risk per share of stock or per futures contract or per minimum investment unit.

However, it’s not your total risk in the position because you might have multiple units.

What’s my total risk?

Your total risk would be based on your position sizing and how many shares or contracts that you actually buy.

For example, you may buy 100 of the shares in Example 1,  which would be 100 multiplied by the share cost of $50 each. So your total COST would be $5000. But you are only willing to risk $10 per share. So $10 multiplied by 100 shares = $1000 total risk for this position.

In example 2,  you also buy 100 shares at the $50 price for a total COST of $5000. However, in this scenario you are going to get out if it reaches $48. So your risk is $2 per share multiplied by the 100 shares – you are only risking $200 of your $5000 investment.

Understanding R-multiples

The next key point for you to understand is that all of your profits and losses should be related to your initial risk.  You want your losses to be 1R or less.  That means if you say you’ll get out of a stock when it drops $50 to $40, then you actually GET OUT when it drops to $40.  If you get out when it drops to $30, then your loss is much bigger than 1R.

It’s twice what you were planning to lose or a 2R loss.  And you want to avoid that possibility at all costs.

You want your profits to ideally be much bigger than 1R.  For example, you buy a stock at $8 and plan to get out if it drops to $6, so that your initial 1R loss is $2 per share.  You now make a profit of $20 per share.  Since this is 10 times what you were planning to risk we call it a 10R profit.

You try it:

1.  You buy a stock at $40 with a planned exit at $35.  You sell it at $50. What’s your profit as an R-multiple?

2.  You buy a stock at $60 and plan to get out if it drops to $55.  However, when it goes that low, you don’t sell.  Instead, you just stop looking at it and hope it will go back up.  It doesn’t.  It becomes part of the headline business news involving corporate scandal and eventually the stock becomes worthless.  What’s your loss as an R-multiple?

3.  You buy a stock at $50 and plan to sell it if it drops to $49.  However, the stock takes off and jumps $20 in three weeks when you sell it.  What is your profit as an R-multiple?

Answers

1.   A 1R loss is $5.  Your profit per share is $10, so you have a 2R profit.

2.   A 1R loss is $5.  Your loss per share is $60, so you have a 12R loss.  Hopefully, you can understand why you never want to let this happen.

3.   A 1R loss is $1.  You profit per share is $20, so you have a 20R profit.  And hopefully, you understand why you want this to happen all the time.

What’s really interesting is that once you understand risk and portfolio management, you can design a trading system with almost any level of performance. For example, you can design a system to trade for clients that would make about 30% per year with only 10% draw downs.

On the other hand, if you want to trade your own account and be a little more risky, you can design a system that will produce a triple digit rate of return as long as you have enough money to do so and are willing to tolerate tremendous drawdowns.

It’s a whole new way of thinking for some, but most successful traders think in terms of risk/reward, which, of course, gives them an edge out there in the markets. Learning to trade and invest in this way will keep you in the game longer and enable you to run with your profits and cut your losses short. And what could be better than that?

Traders repent of your sins. At least that’s the message that Ruth Barrons Roosevelt preaches in her book “Overcoming 7 Deadly Sins of Trading“.

If you want to be successful in trading you must overcome the desires of the ego and the quest to be right. You must give up your own endless pursuit to prove you are a trading god and submit to the powers that are price and volume.

Here are some of the more common “sins” that will cost you money in the market until you learn to overcome them.

Perfectionism: There is no perfection in trading as far as making money on every trade or having a perfect system. All you can hope to be perfect at, is following your system, rules, and trading plan. A winning trade should be measured as one in which you followed all your preset guidelines. Even the best traders only average about a 50%-60% win rate at best over long periods of time. The key is having bigger winners than losers, not being perfect. Like in baseball where a .300 hitter can get into the hall of fame. A .500 trader in the market can become wealthy if his wins are much bigger than his losses.

Fear:  Faith in your system is the only way to overcome your fear of trading. You must complete enough back testing on your system until you know that you have a valid edge over the market in the long term. You must see opportunity in trading and just accept that there will be possible losses. You must take your systems trade signals each time and if you can’t overcome your fear of loss and failure then perhaps trading is just not for you. Traders are entrepreneurs not employes they get paid only when successful there is no guaranteed paycheck.

Pride:  We are not our trading account and staring at our profit and loss too much is a major detriment in one’s trading. Traders must cut losses at their predetermined stop, not pridefully hang on trying to prove they are right. We must separate ourselves from the trading. A person’s value is not tied to a trade or performance record. If we followed our system then we can’t view that as a personal loss. The market was just not conducive to our system that we followed with discipline.

Impatience: Wait, take your entry signal when it is time and not a tick before your system triggers the trade. It’s important to let our profits run as far as they will go and not prematurely take them until the trend has run it’s course. We need to give our trades room to breathe and not cut our loss until the system confirms we are wrong and it is time.

Greed: Traders should not chase a trade when it is to late. We must take our profits off the table when it is time and we should never allow a winner to turn into a loser. If this happens you have nobody else to blame but your greed. Over trading and trying to make more money when our system does not say it is time is born of greed and usually ends with a negative p&l statement.

Anger: Do not get mad at yourself.  Learn from your mistakes and move on. Every mistake gets you closer to learning what you need to do to become consistently profitable. Do not get mad at the “market” it is a voting machine and not an entity. Accept your losses and begin again.

Recklessness: Trading too big of a position size is risky,  reckless, and completely unnecessary. Only enter appropriate sized trades with preplanned stop losses and then trailing stops to lock in profits while they are there. Follow your system and rules and if you find yourself hoping and wishing the market would stop moving against you instead of making decisions based on facts, you should exit that trade immediately.

We need to first realize what trading “sins” we are guilty of, then we can decide to repent and no longer commit them.

The good trader will realize that any single trade is only one in a long string of other trades and will move on to the next trade knowing that his system will outperform in the long term. He will have complete faith in his trading methodology and risk management. He walks by faith in his systems edge not by the last trade that lost, but by the knowing that he’s back tested his system enough to know the long term outcome.

The good trader is humble and knows that he can not out smart the whole market and that trying to do so is futile. His system simply gives him one small advantage that he can exploit time and time again if he’s patient and waits for the right entry signal. He is happy with the profits he earns and has no desire to put on a huge trade and swing for the fences. He does not get angry because he has no one to get angry at. He is very careful in his trading and follows his trading plan 100%. The stock market giveth and the stock market taketh away, he loves every minute he gets to participate in the financial system that is the stock market.

The books Kindle edition: Overcoming the 7 Deadly Sins of Trading

 

Here we go coming up on the test of the 50 day simply moving average in the market measuring SPY ETF. Bottom fishers and swing traders are waiting to buy at this level that has held up well for the whole year. Many long term trend followers are waiting to sell with a confirmation of a close at some percentage under this line. The strong uptrend will be tested tomorrow. I expect a nice pop upwards at this line on the first attempt to break it as buyers rush in. A close above will be the first sign that the up trend resumes, a close below will be the first sign that we could accelerate the rollover. The bulls and bears will slug it out over this line in the sand of $160.48.We have a long term up trend coming to war against the short term down trend and the price action at the 50 day will choose the winner. 

I am already long with SPY calls today with a stop loss at a close below the 50 day SMA. I went long due to the extension of price so far below the 5 day and 10 day moving averages and the fact that the 5 month support held so far in the longer term up trend. A true reversal would likely have a long shadow on the candlestick as it reverses. The 5 day ema is the first line of resistance the 10 day the 2nd line of resistance with the 50 day as the long term support.

Let the games begin, it is now all about these key levels and what happens next. It is possible to ride a trend for a month if our entry is good enough at this turning point, it is possible that QE infinity brings us back to all time highs in a new secular bull market or the fundamentals take us to the 200 day. Our job is to ride the trend where ever it takes us.

 

                                                                                                                                                                                                                                                                                                   Ed Seykota is a legend in the trading world for his consistent returns for decades and how he has been able to grow his clients accounts to amazing levels.

But, who inspired this Market Wizard? Who gave him the ideas for his trading methods? Richard Donchian? Who is he?

Richard Donchian didn’t begin trading his successful trend following system until the age of 65. He started making large returns after that and continued to trade until he was into his 90s. While he operated mostly in the field of commodities his technical analysis is applicable to any market.

His 4 week trading rule system has been at the heart of many successful trading systems and is one of the simplest, easiest and most profitable ways to trade trending markets.  People tend to think complicated is better but the 4 week rule is simplistic but it will get you on the right side of every profitable trend and help you make money. (This system was also Richard Dennis’s inspiration for his trading methods and Donchian principles were taught to the legendary ‘turtle’ traders).

Apart from the 4 week rule he did a lot of work with a five and twenty day moving average crossover signal system and used buy and sell rules using a weekly time period.

During Ed Seykota’s interview in the book Market Wizards by Jack Schwager, Ed describes the influences on the first trading system he ever used to make money in the market. Ed Seykota was initially influenced by Richard Donchian who was a pioneer of trend following systems and was considered the father of trend following trading. While Richard Donchian used a five and twenty day moving average cross over system, Ed used exponential moving averages (where more weight is given to the more recent data to calculate the moving average) as some of the first trading systems he started back testing for past performance. Of course, this was back in the early 1970s – when computers were very new and not even one thousandth of the speed we have today.  For example, Ed tested around one hundred variations of four simple trend following systems on a computer that took up an entire air conditioned  room, and the tests took him half a year to do.

Anyone who inspired one of the world’s top traders is someone who deserves our attention and study!

Here are Richard Donchian’s original trading guidelines:

Donchian’s 20 Trading Guides (First publication: 1934) General Guides:

1. Beware of acting immediately on a widespread public opinion. Even if correct, it will usually delay the move.

2. From a period of dullness and inactivity, watch for and prepare to follow a move in the direction in which volume increases.

3. Limit losses and ride profits, irrespective of all other rules.

4. Light commitments are advisable when market position is not certain. Clearly defined moves are signaled frequently enough to make life interesting and concentration on these moves will prevent unprofitable whip-sawing.

5. Seldom take a position in the direction of an immediately preceding three-day move. Wait for a one-day reversal.

6. Judicious use of stop orders is a valuable aid to profitable trading. Stops may be used to protect profits, to limit losses, and from certain formations such as triangular foci to take positions. Stop orders are apt to be more valuable and less treacherous if used in proper relation to the chart formation.

7. In a market in which upswings are likely to equal or exceed downswings, heavier position should be taken for the upswings for percentage reasons – a decline from 50 to 25 will net only 50% profit, whereas an advance from 25 to 50 will net 100%

8. In taking a position, price orders are allowable.  In closing a position, use market orders.

9. Buy strong-acting, strong-background commodities and sell weak ones, subject to all other rules.

10. Moves in which rails (transportation) lead or participate strongly are usually more worth following than moves in which rails (transportation) lag.

11. A study of the capitalization of a company, the degree of activity of an issue, and whether an issue is a lethargic truck horse or a spirited race horse is fully as important as a study of statistical reports.

Technical Guides:

1. A move followed by a sideways range often precedes another move of almost equal extent in the same direction as the original move.  Generally, when the second move from the sideways range has run its course, a counter move approaching the sideways range may be expected.

2. Reversal or resistance to a move is likely to be encountered 0n reaching levels at which in the past, the commodity has fluctuated for a considerable length of time within a narrow range on approaching highs or lows

3. Watch for good buying or selling opportunities when trend lines are approached, especially on medium or dull volume. Be sure such a line has not been hugged or hit too frequently.

4. Watch for “crawling along” or repeated bumping of minor or major trend lines and prepare to see such trend lines broken.

5. Breaking of minor trend lines counter to the major trend gives most other important position taking signals. Positions can be taken or reversed on stop at such places.

6. Triangles of ether slope may mean either accumulation or distribution depending on other considerations although triangles are usually broken on the flat side.

7. Watch for volume climax, especially after a long move.

8. Don’t count on gaps being closed unless you can distinguish between breakaway gaps, normal gaps and exhaustion gaps.

9. During a move, take or increase positions in the direction of the move at the market the morning following any one-day reversal, however slight the reversal may be, especially if volume declines on the reversal.

Have you ever heard of the legendary Turtle traders? Legendary millionaire trader Richard Dennis set off to find out if traders were just born to trade or if they could be trained to be successful in the markets from scratch. The answer? If they could follow rules they could be successful.

“I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.” -Richard Dennis: Founder of the ‘Turtle Traders’ quoted from the book Market Wizards:

Most of the traders that could follow the rules went on to be millionaires and to manage money professionally.

The Turtle system was a complete trading system.

Markets – What to buy or sell

• The Turtles traded all major futures contracts, metals, currencies, and commodities.

• The turtles traded multiple markets to diversify risk.

Position Sizing – How much to buy or sell

• Turtle position sizing was based on a markets volatility using the 20 day exponential moving average of the true range.

• The Turtles were taught to trade in increments of 1% of total account equity,

Entries – When to buy or sell

• The Turtles traded a Donchian breakout system, System 1 entered a 20 day break out and System 2 entered a 55 day break out.

• Positions were added to in a winning trend. (Pyramiding)

Stops – When to get out of a losing position

• System 1 exited at a 10 day break out in the opposite direction of the entry and System 2 exited at 20 day break out in the opposite direction of the entry.

• No trade could incur more than a 2% equity risk, stop losses were planned accordingly

Tactics – How to buy or sell

• The most important aspects of successful trading is confidence, consistency, and discipline.

• The Turtles believed that successful traders used mechanical trading systems.

• They traded liquid markets only.

Turtle traders bought strength, sold weakness, controlled risk, and followed their rules.

Here is a document containing all the original Turtle Trading rules from an original Turtle>>>> Click Here

Excellent books about the Turtle trading program: The Complete Turtle Trader and The Way of the Turtle.

It was truly a land mark experiment in trend following’s success rates and gives readers a glimpse into the real life strategies of rich traders that made people millionaires.

There are many reason I bought $SPY puts as it broke down Friday. The chart is screaming at me to go short, I had to listen. I entered short as it fell to the $164.60 level with my initial stop at the 10 day sma believing it would lose $164 which it did quickly. Going into tomorrow I am setting my new stop loss with a close above the $164 level. Maybe earlier if something crazy happens like central bank intervention that causes a gap up or reversal, but I am fairly confident that they are out of bullets as the  Japan markets are now showing. I can’t trade what I believe I have to trade the price action in my time frame and the break out to a new low is my first attempt to catch a down trend and I am taking it.

1. $SPY lost the near term $164 support on Friday and this may become the new level of short term resistance, if price pokes back up above this level and then is rejected below it then that will confirm that we go lower. 

2. If $SPY can reverse and close above the $164 level tomorrow then we start a reversal back to the 10 day or just a chop fest with increasing volatility. That will be a mess but I think it is unlikely. 

3. Depending on the chart’s time frame traders are looking at and where they draw their trend lines we broke out of the bottom of a symmetrical triangle or a pennant Friday, but regardless this was  a fresh 13 day low. 

4. We have been making lower highs for seven straight days, that is a short term down trend.

5. Seven days ago we had a reversal candlestick.

6. Four days ago we had an island top reversal. 

7. Be aware that long term trend followers signals to sell is likely a confirmation below the 50 day, if we can close below that level in the following days or weeks it could take a nice plunge lower from even there.

8. Before we get to the longer term trend followers cashing out with their big profits we have eager bulls just dying to get in at the 50 day so that level should provide an initial bounce, which is where I want to sell my puts initially then key off the 50 day for what to do next if we get there . 

9. The 50 day is the next line in the sand, if we bounce and reverse from there the longer term up trend stays in place and I will look to go long and trade off that line. That will be a huge bull versus bear battle at that line.

10. The five days of greater volume was on the down days not the up days.

The risk/reward at these price levels is on the side of the bears, the short term chart is on the bear side, the seasonal time of year is on the bear side. With all that said be flexible and trade price, but the bulls are going to have to prove to me that I am wrong on the charts and in my account not with words. Best wishes on great trading next week!

Finally for all those investors and traders trying to implement the CAN SLIM investment methodology by using William O’Neil’s book “How to Make Money in Stocks” along with Investor’s Business Daily, here is your users manual. Matthew Galgani has done an excellent job with this book by both keeping it simple and easy to read but also getting all the vital elements needed to bring all of O’Neil’s teachings together as a cohesive whole for implementation as an actionable strategy you will understand how to use in real time.

This is the very first kindle version of a book I have bought and read and I found all the links that were available inside the book that went to the investors web site very useful for video lessons to expand on the authors points without making the book excessively long by trying to incorporate everything in writing.

The kindle edition of the book is filled with pop out historical charts of the biggest winning stock charts in history along with recent ones that I had actually traded in the past few years. The charts are very valuable to actually understand visually what the big winners look like to avoid thinking they are “too high priced” as they play out in real time.

The lessons of this book are many, here are a few:

The keys to winning in the stock market is to only buy stocks during market up trends, focus on the companies with the biggest earnings growth, and buy stocks being accumulated by institutional investors.

How to use the IBD market pulse to determine the markets current trend. I really liked the strategy that the author suggested for trading a stock index using their market trend identification model. He showed how their simple indicators of “market is in an up trend” “market under pressure”  or “market in correction” would have saved buy and holders from the vast majority of the 2008 plunge and got them back in after the 2009 reversal. Very easy to implement trend following method for investors.

The book shows how to find the best potential performing monster stocks based on fundamental criteria that matched the biggest winning stocks of all time by using the tools on the IBD investors website and by using the IBD paper.

The author shows the key high probability times to buy the right stocks as they come out of the best patterns: double bottoms, cups with handles, break outs from bases, etc. Also how to create your own watch list and be ready to buy these stocks by setting buy stops.

The book covers the vital point of risk control and to cut all losses at 7%, 8% or less when the stock fails to trend after a buy point. Also it gives a graph on how many stocks an investor should own based on the size of their capital. The suggestions are for a very concentrated portfolio, which I agree with but it is crucial to split up your stock positions into as many parts as they suggest. I would advise if they say you should own 5 stocks for your size of capital then only use 20% of your capital on any one stock position to limit losing a big percent of your total trading capital on any one trade.

Let winners run up to 20% to 25% profits before selling or farther if they just rocket.

I am glad that Matthew explained that one of the primary keys that make the CAN SLIM method a winning model is the 3/1 risk reward ratio by having
20%/25% gains and only 7%/8% losses. You can win once and lose twice and still make money.

If you have been a student of the book “How to Make Money in Stocks”, the Investors Business Daily Newspaper,and the Investors website they run, this should be the book that brings it all together for you.

Just a great informative, easy to digest, actionable plan for successful growth stock investing and trading.

Order here:

How to Make Money in Stocks Getting Started: A Guide to Putting CAN SLIM Concepts into Action