Alex P. - Freshman Trader

We here at TFG Investments never accept mediocrity and we never rest on our laurels. After booking my first green month (in March) I would like to take a moment to reassess my current status in the month of April and make a few pledges for the steps I want to take to keep moving forward on my path as a trader. To this end and in conjunction with my mentor Mark Moskowitz and the Lumberjack I believe I have some solid clarity on where to go next.

Step 1) Lock down my bread and butter. The low-risk, high-reward, low-probability trades were what made me successful last month. I need to lock this down by continuing to push forward with it and make my 40-70 dollars/day with this technique.

Step 2) Trade in the afternoon. One of the techniques I need to work on and improve is to trade the afternoon, small at first. It is important for me to get comfortable getting back in the pool and being able to balance my risk with my reward and push forward in a position of strength. I do believe that I am a solid afternoon trader and that I can exploit that by moving forward by beginning to trade in the afternoon and pad my P&L.

Step 3) Improve on my scalp trading. Moskowitz believes, and I feel he is right, that it would be helpful to all of the freshman traders if they traded more frequently in and out of positions, learning how to scalp trades. By testing other trading styles I will be able to build up my arsenal and have multiple ways to make money. Just as a big league pitcher has multiple pitches to keep his opponents off balance, being skilled in multiple trading styles will make me stronger and allow me to succeed in a variety of markets.

Step 4) Continue to attempt and improve on my pairs trades. I spent one day making 2 pairs trades that were both successful and then ceased to making any more. I want to push forward making these pairs trades to once again add to my arsenal and learn more about how to be successful in a number of different times and forms. I will trade the larger of the stocks with 150 shares and the smaller one with the proper ratio so that the nominal values are the same (with the caveat that the smaller sized stock will not exceed a share size of 300 shares.)

Step 5) By Monday I intend to tie up all of my lose ends on projects that I have yet to complete. By dealing with these duties, which are hanging over my head, I will clear myself so as to continue to push forward on a new set of tasks, ramping up the speed of completion and turn my focus toward ramping up my trading.

I am my own harshest critic. So when I started off the last day of the previous quarter shorting GNW as it was sitting on R4 (on an R3 sell signal) I was frustrated to find myself quickly down 67 dollars. Why? Not because of the P&L but rather because I lost my focus. I have prided myself of recent for the patience that I have exhibited while both trading and sitting on the sidelines looking for trades, for a growing ability to cut my losses as they move against me, and a continued growth in the ongoing battle of letting my winners run. Yesterday I suffered because I let these rules slip.

The first problem was that I did not obey my thesis, which has allowed me to be successful in the last few weeks. That is, playing stocks on the side of momentum they are on, as oppose to looking for trend reversals by getting long into weak names and short into strong names. This is one major factor that I attribute to my success of recent. Secondly, I failed to quantify my loss, which is something I have done religiously while on the good run that I have been on. Thirdly, I got out of the trade and then got right back in, more on an issue related to ego than to a change in the setup of the trade. In short, I lost my discipline and broke the rules which I have put in place to govern my success. For that I was both embarrassed and ashamed.

They say that acceptance is the first step toward redemption. So I accept and admit a total failure in my GNW trade and I vow to return today to trading with discipline and intention. But by 10 AM yesterday I was annoyed (to say the least) with this loss of structure.

A wise man (Mark Moskowitz) has said often that there are a few essential factors to being a successful trader on Wall Street. The two relevant factors in this equation are available capital and a mentor to help guide and instruct. At TFG we have the esteemed honor of having both. To this end, I must first thank Jeremy Klein for calling me out immediately on my trade and delving into what I believe he smelled as a lack of discipline I had exhibited. Although, I did not respond properly at the time, given a little vantage I see the true merit in this follow up. So thanks.

Secondly, I must thank Mark Moskowitz. We have been working together long enough that he could see me retreat based on my own frustrations and he refused to let me go there. He began by asking me what I was seeing in the market. He then asked me if I could trade some HGSI on my pad for him. We did this with some success going through each aspect of the trade and discussing proper entries and exits, where to get stopped out (which we initially did) and where to get back in. The trade worked well and it allowed me to get my head back in the game and begin to reset my day after my initial loss of focus.

I am extremely grateful to have Moskowitz as a mentor, not just because of this incident but because of everything he does for us freshmen traders. It is only because of his love for this business and his drive to make us all better that we continue to improve. His tireless devotion to the firm and to making us better people and traders is the heart of TFG and is a rare occurrence in this day and age. His willingness to spend as much time as is necessary to help raise us up, to help us fix our problems, to just discuss what is on our mind at the sacrifice of his own time is of a value to us that cannot be quantified. Whenever my time comes to an end at TFG (hopefully years and years from now) I will be forever grateful for what I have learned from Moskowitz and what I will continue to learn in the future.

In Thus Spoke Zarathustra, Nietzsche writes, “the master loves the dog he beats the most.” This is a phrase I often return to after a day like Friday. I have for a while now believed that I get it the worst on the desk. That my errors are met immediately with harsh repercussions, while other’s mistakes, are chalked-off with less severity. And I often have to ask myself, why is this the case? Why are my missteps so amplified? In my saner moments I believe it is because Jeremy expects only the best from me, he expects me not to miss a move like the one on Friday without making it known to all of the Principals. He expects me to be on top of my game in a way he does not require from the other traders.

On Friday I was chastised for not being more vocal on GENZ’s sell off the day before. Jeremy was right. He had laid out a thesis that the stock was unfairly downgraded on news that would have no effect on the company’s bottom line. The stock was taking it on the chin on Thursday, down 7% on the day closing on its lows. The next day the stock rebounded a quick 3%. It was a great trade and my failure to provide color on its sell off cost the firm a few thousand dollars. My punishment, I was barred from trading for the day. Yes it was frustrating. Yes my stomach was burning like a star. The reason, I have been green everyday this week as well as 11 out of my last 14 days have been positives ones.

But now that I have had some time to reflect on it, as is often the case with these situations, I am happy that I get driven the hardest at TFG. The reason, it is working. I feel myself getting better, getting faster, getting stronger, shedding the veil of emotion. I am more machine-like, I am more disciplined, I have lost 20 pounds, I am running 5-6 miles a day because I have applied that discipline to the whole of my life, and I am focused in a way I have never been before. In fact I feel badly for the other freshman traders because I feel like I am accelerating under the pressure and its absence in their lives is slowing them down. Let us not forget, I was the first one to notice GE’s abnormal behavior on the desk, the only one to call out AAPL’s 52-week highs, the only one who even remembered Jeremy’s thesis on Genzyme. I gave Dean a write-up on why he should buy IMAX a month before it was even mentioned on the desk, when the stock was trading between 12-13 dollars. So keep it up. Keep pushing me harder, make me stronger, fashion me in your image. And one day, you will have trouble keeping up with me.

Over the last week I have felt as though my entries have been much better than in the past. I believe that this has helped contribute to an increase in green days and a decrease in red ones. Value entries as Mark Moskowitz has titled them, (glossary term Sam) are entries that often require the use of limit orders because they are placed in such advantageous spots that they will get executed on quick moves down or up. The prints of a value entry can often be seen on the shadow of a candle as it moved into your price and then quickly began working for you. These trades are often the easiest trades to manage as they give you such an excellent starting point it is difficult to jeopardize your dominant position. Entries such as these never put the trader in a position where they may feel weak or concerned of being stopped out.

Although it can be difficult to get a low or high tick on any stock, the best possible way to get a value entry is to first find an advantageous level near a pivot point. Then ask yourself is this stock strong or weak? How has it behaved over the past week or month or year? Further, look for SMA’s as support or resistance to help assist the trade. Also we must consider the outside factors. Is the market weak or strong? When all of these concepts line up it is possible to find incredible value entries. A good example is a strong stock that has been on an R4 buy signal for the majority of the day and has pulled back into R4 with support from say the 200 simple moving average, in a strong market. These are the types of trades that tend to work out with a substantial amount of success. Put the pieces together, put the order out, most importantly be patient. Patience to not chase is your greatest ally in getting a value entry on one of your names. Then put in your stock and move on to a new name. After you have quantified your profit and loss, set it and forget it. There is nothing more you can do but get in your own way, selling too soon or getting chopped out because it is consuming your thoughts.

One of my favorite jazz albums is Two of a Mind, Paul Desmond and Gerry Mulligan’s 1962 classic, which places these two saxophonists against one another to startling effect. The sounds of the pairing, Desmond’s alto sax described as “luminous and airy” and Mulligan’s baritone often reviewed as “wooly and gruff” combine to form a remarkable combination. It is in the way these two professional studio musicians play off one another that creates the finest outcome.

Early this week I announced plans to push forward my trading by attempting a pairs trade, my first foray into a much larger universe. As we have been noting on the desk, the market has been a difficult one to get any momentum from. The choppiness of the market has made trading tough with little follow through in either direction. The plan was to profit from the relationship between 2 stocks that are highly correlated but have different personalities, in the same way that Mulligan and Desmond profit from their varying styles. Further, this would remove the volatility of the market from the trade.

I made 2 separate pairs trades on Friday with positive outcomes from both. The first of the trades was in Office Depot, ODP and Staple, SPLS. Both are consumer discretionary names in the specialty retail space selling office supplies. There has been discussion on the desk about the long-term health of these types of stores. It appears that Staples is the company best positioned to take advantage of the internet to generate capital versus Office Depot or Office Max, OMX, which are more brick and mortar companies reliant on stores to sell goods. Long term the business model of Staples is cheaper and more sustainable than that of an Office Depot, which requires higher costs to run what are very similar businesses. The stocks have over the past month been behaving in a way that verifies the above hypothesis. Staples has been a strong name in the sector trading in early March just off its 52 week highs while ODP and OMX have been lagging. On Friday, the stocks were behaving similarly, with SPLS up 50 bps and ODP down 150 bps.

My thesis was that although both stocks would sell-off as the market did, SPLS would hold up much better than ODP. To remain dollar neutral, I noted that ODP was trading at 1/3rd of the cost of SPLS. I also chose to keep my size down, as this was the first pairs trade I was making and I wanted to keep my risk to a minimum as I got a better feel for the names. I purchased 50 shares of SPLS and shorted 150 shares of ODP. Giving both positions a value of 1200 dollars. The market sold off, bringing both stocks down, however, I lost 4 dollars in SPLS and made 12 dollars in ODP, a reward to risk ratio of 4:1. Eventually I would like to attempt to leg-out of these positions but after talking it over with the Principals it was decided it would be best at the beginning to take 100% of each position off when I felt the time was right. What was interesting was the removal of the markets movements from the outcome of the trade. As the market sold off, the majority of the desk, which was long, was forced to bail out of their positions.  My position was hedged and therefore did not react to a heightened movement to the downside in the market.

The second pairs trade I made involved 2 steel names, which I watch closely. US Steel, X, and Allegheny Technology, ATI, have been performing at odds recently with ATI being a standout on the strong side and US Steel behaving weakly. A few days ago after a substantial run-up I noted that X made a bearish engulfing pattern on the daily chart by opening above the high of the previous day’s close and then sold off all day, closing below the open of that previous day. This sign is a good indication of a trend reversal and was confirmed the next day when X sold off an additional 4%. On the day of the trade I determined that ATI, which was holding up well, up 2.5% on the day, would not sell off in the face of market weakness in the way that X would, which was down 1.5% on the day. I purchased 115 shares of ATI to remain dollar neutral and shorted 100 shares of X, making the positions value 5000 dollars for each name. This pairing worked out well with ATI moving higher as X sold off. When I closed the position out I was green on both positions, both minimally on the X and substantially on the ATI. I am not exactly sure what conclusions to draw from this. However, I will continue to attempt these types of trade and garner information on the stocks and how they relate. What most pleased me was the fact that I felt as though I was moving my trading forward, attempting to learn a new style that I can add to my arsenal.

In the future I would like to be able to study and learn what the inherent relationship of these stocks are i.e. are the spreads always $1.00 apart, so when they move away from this normal spread I can short the name that has been strong and buy the weak name, playing for a return to relative value.