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Alex P. - Freshman Trader

A Few Good Signs

Waiting for the bus, which is now by my calculations running 23 minutes and 36 seconds late, I have ample opportunity to review my trade in WDC today, which I am very pleased with for 3 reasons.

The first reason is that I made money on both sides of the trade. My original entry into the stock was based on empirical data I have collected by watching WDC trade daily. To this end, I have seen the stock make a signal, rally through the adjacent pivot, by 10-15 cents, and then reverse direction. In the case today, the stock rallied making an R4 buy signal before moving down through R3 by 10 cents. I purchased 100 shares and then added to the position when it began to move in my favor. I took profits on the shares 10 cents in the money, as the stock seemed heavy. As I continued to watch the stock trade from the sidelines I became determined to short WDC if and when it broke to new daily lows.

My ability to recognize the very nature of the stock and switch the plan based on this new information, which I culled from observation, is a wonderful trait to have as a trader. It makes me excited that I demonstrated the ability to be objective by removing myself from the equation and by following the signs the stock was communicating.

The second aspect of my WDC trade that I am pleased with is my ability to trade around the position, managing my risk by getting in and out and then back in, without it shaking my thesis. And then once the move was made, being able to load into the position with my maximum position size so as to have the proper amount to scale out of the trade. This ability to take off the position when it was jeopardizing my day but in a moments notice be back in with my full size is an ability I have seen practiced in our firm by the better traders on the desk.

Finally, my ability to stretch the trade out and maximize my profits by letting my winners run is a crucial next step in my path here at TFG Investments.

All 3 of these aspects of the trade demonstrate my growth as a trader, my ability to manage risk, my ability to be positioned for the move when it occurs and the ability to stretch out my winners while cutting my losers. They all make me proud of how far I have come and optimistic how much farther I can go… I just need my bus to show up first.


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.

A New Experience

This morning Zach and I had the pleasure of watching Klein trade off of the Non-Farm Payroll numbers. Klein had formulated a thesis based on varying scenarios of what the number could potentially be and how the market would react in accordance with the news. Last month’s number was -36K but the expectations were much better with estimates around 185k, which would be the largest seasonally adjusted increase in 3 years and just the third positive employment change in 27 months. Comments made in the last couple of days by Secretary Geithner and other treasury officials had indicated that the number was going to be positive.

Klein explained that a positive number above 150k would potentially rally the markets especially after the ADP estimates were so negative. He was hoping for a pull back in the Emini contract giving us an opportunity to get long. He was looking to be a buyer of 10 contracts at 1171 and then if the market moved up to increase the size of the position by 5 more contracts. We discussed the risks involved in trading Eminis because of the possible volatility, which could move the market as much as 10 handles. For this reason we did not put in a stop so as not to get whipped out of a trade on a quick move down before buyers came in and goosed the market right back up. It was also important to focus on the revisions of last month’s numbers, which although less important, could still have an effect on the way the overall market trended.

Klein then determines how the markets will react to the varying scenarios that will come into play and what he would do in each scenario, would he get short if the market ripped up at the much discussed resistance level of 1177? Once all of these plans are in place, Klein gets his execution cued up and then the second that the number is revealed he reacts. Once in the trade he again stalks the market ready to cut in and out at any second based on its movements.

Klein’s thesis today was sound. The number came in at 162k and the market sold off 3 handles based on algorithmic trading. At 8:30.03 Klein purchased 15 contracts just off the low of the move. As the market moved up a handle, we scaled out of the position. The trade lasted less than 30 seconds and profited us roughly $1350.

I have never had the pleasure of watching a futures trader execute orders before I began at TFG and today was a thrill to watch Klein formulate a perfect thesis and then execute his plan. What I like about his style is the rigor with which Klein trades. As a trader I desire to be more and more disciplined. It is something that we preach on the desk because of how integral it is to success on the Street. Klein is the most rigorous trader I have come across. He has a well defined game plan that takes into account the grand picture of the relevant economic number and its place in a historic context.

Klein has kept a notebook since his fifteenth day working on Wall Street. He has recorded now for the last 9 years a brief summation of the economic indicator on that day and how it affected the market. The value of this book is great. Everything in the market happens in a pattern and these patterns repeat over and over again. Having the rigor to record those patterns so as to have the ability to rehash them is nothing short of phenomenal. The discipline of keeping this book day in and day out is a tribute to Klein’s tireless effort and discipline. And I vow to become as such. What is so interesting is that there is a commonality amongst all of the Principals that sit on this desk. Despite their varying styles and instruments of trading they all possess intense amounts of discipline, focus, and confidence. And we as freshman of the TFG training program have the pleasure to have them as mentors.

A Tribute

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.

A Derivative Play Part B

The chart above is a brief technical look and a follow up to my blog titled “A Derivative Play” from 03-25-10, in which I put forward the thesis that while buying the healthy living stocks, there is value in shorting the fast food chains. As we can see above, the 2 companies discussed in the blog as healthy living plays, which we have purchased in the portfolio, LULU (purple) and GAIA (pink), have over the last year significantly outperformed the SPY. Conversely, the fast food chains mentioned in my blog: YUM (dark blue), JACK (red), MCD (dark green), WEN (yellow), CKR (light green), SONC (teal), have all underperformed the SPY (light blue) with WEN the laggard, having lost value since the March market lows and JACK essentially unchanged. I believe, as previously stated, this trend continues with shrinking check sizes and a decrease in sales over the upcoming year.

A Call for Thanks

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.

A Derivative Play

We have had a thesis on this desk for quite some time that one of the industries over the next decade that has tremendous growth potential involves lifestyle and healthy living plays. To this end we have researched and traded names that we believe are well positioned to move forward and profit from an increasing interest in this trend. The thesis is that generations now more than ever are adopting the concepts of healthy living as an extension of who they are as people. They are therefore incorporating healthy living in all aspects of their lives. We have profited from such companies as LuLulemon Athletica Inc. and Gaiam (see Dean Machado, Senior Portfolio Manager’s March 8th blog GAIA Going Highya?) a lifestyle media company. GAIA is a maker of products that “focus on personal development, wellness, ecological lifestyles, and responsible media.”

Yesterday I came across an interesting article in the Wall Street Journal that presented a potential derivative play based on the thesis that interest in the personal wellness industry will continue to grow. Short the fast food chains. In the article Ahead of the Tape: For Fast Food Chains, Battle Is Joined Anew, on page C1 of the March 24thpaper, the recent struggles of fast food chains becomes apparent.

Although fast food chains weathered the recession better than other industries, they have of recent been struggling. One major problem with the business model of these fast food chains and one of the reasons that they tend to profit in times of recession is that people are more apt to purchase lower-priced offerings. To create these types of options many companies have extended the selections in their dollar menus to compete. Although this has boosted traffic for companies like Burger King Holdings Inc. they have as a side effect seen a significant decrease in their average checks, which has cut into margins. “The question is whether they can attract customers on the strength of their offerings while avoiding the discount battle.”

Secondly, these chains have been seeing significant decreases in sales from the previous year. “Jack in the Box Inc. saw ‘a lower average guest check for the first time since 2002,’ during its quarter ended mid-January.” Sales are down across the board, with companies like Carl’s Jr. down 2.6% from the year earlier, Hardee’s down 6.2%, and Sonic Corp. with a 13.2% sales decrease.

I for one do not eat fast food nor do most of my friends. Although I do not necessarily believe that I am a proper representation of our country I do believe that with a further push toward healthy consciousness these companies in the fast food space will continue to struggle and be forced to close stores. I believe that long term shorting these types of companies just like shorting cigarette companies will be beneficial.

The Value of an Entry

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.

Zen Investments

“It’s a balancing act.” That is how the President of TFG was describing our weekly Yoga session. We were all a little winded from the affair, but felt good at the core. My arms were feeling weak, like all of the muscles in them had been worked in a way they had never been worked before. They had reached that point of exhaustion. But there was a peace that resided over us after we had completed the session. You felt that real sense of accomplishment you get from tackling a difficult task, which is rare in our sedentary lives. There is valor in struggle, in the getting through it. Facing yoga was a challenge that was foreign and success was doing your best to stay on top of it. And if you could not only stay on top of it but grow a little bit better each time, well that was real success. It was so relatable to our jobs. That is what we all wanted in our work lives. Slow and steady improvement. Stay on top, learn from our mistakes, and strengthen the muscles in our brains so that the setups in our trades start to reveal possibility.

The financial industry was, as we had been told many times, a dichotomy, a balancing act. You had to balance your emotions first and foremost. This had been a more difficult task for me than some of the other guys on the desk. I come from a Jewish/Italian family, which is a lot of emotion to overcome. But kidding aside, I had learned, slowly, to relax and take each trade in stride. To quantify loss and profit so that I had removed myself entirely from the trade by the time I stepped foot into it. It created a balanced approach to trading, Zen investing I liked to think of it.

You also had the balancing act of being aggressive at the rights time and passive when it was appropriate. Each in their proper space. You needed to go after a trade that looked good but you also needed to stay away from one that was more tantalizing than substantive.

There was balance in our jobs as well. Take time to trade and master the craft. Take time to read and study, culling data so as to come up with derivative ideas. Take time to watch the movement of your stocks from the sidelines. Take time to perform the daily tasks that keep TFG running smoothly. Time to blog and time to journal. Time to read over our notes and time to read the Journal. All of it had a place and the person who was going to be here in a week, in a month, in five years, was going to be the person who learns to take care of each task with the proper time and effort, who balances all of our responsibilities with the ease a Yogi does a crow pose. And the one who improves each day a little more.

Two of A Kind

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.