Traders R.I.P. Weekly Desk Notes
Josh Stein
Notes for the week ending 2/05/10
Dean-
- Dell has good downside protection, as it’s trading so low and had good earnings report
MM-
- Make sure the market is telling you that you are correct before you get in with your biggest position.
- It’s important that if you make a mistake that it doesn’t kill your capital. If you are going to make a mistake you should make it so that it doesn’t ruin your PnL you have made over the past month and your overall capital.
- Having good risk parameters allows us to take some of the thought out of trading. When you get to a certain level, if you are close to your stop out then you need to trade more lightly with smaller positions. If you are up on the day then know how much you are willing to give back and that is how you should position yourself the rest of the day.
JK-
- The first week of the month, Tuesday is usually a quiet day in terms of economic news.
- The pending home sales number usually comes out with other news at the beginning of the month. It is coming out by itself this month and has a good chance of moving the market.
- Future numbers are generally more important to focus on then past numbers, as the market likes to look ahead.
- One way to increase your edge is to track how these economic numbers affect your names. Understand the numbers and how it relates not just to your names but the market and other financial information.
- Volcker has a choice when there was stagflation in the 70’s, and he decided to ratchet up interest rates. So 30 year bonds were getting 20% every year, risk free. He laid a blue print on how to deal with stagflation for the future.
DM-
- Lexmark came out with earnings today and crushed the numbers. The thesis was that the tech recovery would show up later in the peripheral business. Dean covered his whole position and will look into it down the road.
- A lot of alternate energy names are up recently based on the new funding given to the sector.
JF-
- Jeremy believes that the capital market cycles. Which leads to his thesis about the home builders, which had previously gotten the market moving and again can get the market moving.
- Beazer is just trying to survive until a rich acquirer comes to them.
- There are certain names that the firm has thesis on and our trading of those names gives them insight into these names. The world is changing, for instance movie theaters haven’t changed in many years, all the sudden we have movies like avatar that become a breakthrough and just changes the way movie theaters operate.
- One way that Jeremy has been successful has been taking an abstract view to life and not dismissing change.
- Plantronics was the first name Jeremy ever made money in. It was what opened up the older guys eyes to Jeremy because of his insight.
- A trader needs to manage his PnL without letting one name take you out of your day. No one trade should outweigh your other trades by such a large margin.
MM-
- You should never have to think during the morning trading, all your thinking and work should be done before the market opens. Are you going to be the 90% of traders that are dragged around by ego or the 10% that is in control. None of us are smarter than the market, you can’t outthink the market. What Mark is giving us is a set of principles that we can use as a guide that should help us navigate the market.
JK-
- ADP Employment change- almost every company uses ADP so they can give real data on Non-Farm payroll
- ADP used to be a real market mover but has recently slowed down as their numbers have been all over the map
MM-
- Preparation:
- Have a solid list of names
- Look at your names and look how you would enter and exit the trade at all 4 pivots. How much you will enter with and how much risk you will take etc.
- Don’t be afraid to scale into bigger size, figure out what works for you in how you scale in.
- Try to be “smartly aggressive,” get in at optimal levels and then scale in.
JK-
- Typically Mondays are lighter than Wednesday, the fact that today (Wednesday) is lighter then this past Monday shows that it is a very low volume day.
MM-
- When you are having a down day, the first thing you should do is look for higher quality trades.
- Mark is looking for S3 buys this morning. Just have the right size when the time is right.
- How do I know when I am right and when I am wrong?
- You have to look at the stock and as long as you haven’t crossed above levels that change the trend, then you are right. Which is why you are adding in up until your line in the sand, because you are right until it changes.
Klein has 3 types of trades:
- Event driven: looking for something to happen through the day
- Thesis trade:
- Chop trade: in and out fairly quickly, he knows if he is right or wrong pretty quickly
- Jobless claims: we’ve had 2 bad ones in a row, if we get another one it will probably move the futures down.
- If we get good productivity, which comes out quarterly, that is a sign we are coming out of recession. It means we are producing more with less. It happened in 2003 and it was the indicator that we were coming out of a recession then and it could be the outcome now.
- Jobless claims missed for the 3rd straight time, which is not a good signal at all, futures just moved down 3 handles. Some people say that if they could only get one number it would be jobless claims, so people do put some level of importance on it.
- Commodities are traded in dollar denominators.
- Smart money has been short, short money is starting to get confident and it’s going to take a lot for them to be scared.
DS-
- Shine looks for names that are in play, names that are volatile. So his brain is always working, looking for new names all the time.
JF-
- When a senior trader is speaking, we need to write down everything they say. If they are watching a specific name we need to write it down and keep him updated.
DS-
- There is a difference between holding a name all the way to your stop instead of getting out earlier and getting in at a better price.
- Take very small losses and try to make let your winner runs. You won’t go out of business if you take small losses.
- Shine thinks it’s a good idea to check different sectors and if you are trading a name check out the other names in that sector. Know the relatively strong and weak names within that sector. Look for correlated names and when one breaks out you can break out as well.
- Keep working a trade until it stops working, and even if it does stop working one time that doesn’t mean you don’t try it again, but don’t get into it to try to prove that you are right, do it because it’s a good trade.
Josh Stein
Notes for the week ending 1/29/10
Controlling your trading day:
- The only reason you should ever have a bad day is because the market made you have a bad day, it should never be because you were ill-prepared, or you rushed into a trade, or didn’t use appropriate risk management.
- There aren’t many things you can control with trading, but what you can control is yourself. You can control your emotions, entries, exits, strategy etc. so control as much as you can because that will give you the best chance at success.
- Be consistent and don’t lose more than you are making on average. We need to be cautious of Friday if you begin to see a pattern of losses on Friday. Traders take in a lot of data the whole week and can be mentally and even physically exhausted and can get sloppy. If you don’t think you have an edge than take a seat, there are many traders who don’t trade on Friday.
- In general we need to keep listening to the chatter on the desk, if Mark or Klein are saying that it’s a bad time to be trading or the market isn’t giving any good opportunities then you need to be able to hear that and process it, and use it in your trading. That doesn’t mean you don’t trade but it might mean position yourself smaller.
- There is a fine line between fear and bravado, don’t just take trades to show you have no fear. Do your best to detach all emotions from your trading.
- When the day ends, look back on the day and see if you broke any of your rules. If you did break your rules then the next day you have to come in and say that you will NOT do that again. If you did break your rules, chances are you are going to have a negative day, if you were positive you still need to check to see if you broke any rules.
Existing home sales:
- talks about houses that are already built, any strength in the housing market is a positive sign. Klein thinks that the S&P can pop 5-6 handles on news. He plans to be flat on the news as he doesn’t have an idea of where he thinks it will be going
Example of how we should be thinking:
- why is the news good but stocks are fading?
Generally speaking the charts will tell you what to do before the news does. There is no such thing as “random” in the stock market. Stocks and the market move to specific levels for specific reasons, it could be to cause pain or be a shakeout or some news that hasn’t come out yet, but whatever the reason you need to know these levels.
A possible reason the market is selling off recently:
- The market loves political gridlock and hates uncertainty.
There are two measures of consumer confidence:
- Conference board puts out a number
- University of Michigan also puts out a number- more correlated to equity market
Look for trends in your trading:
- Mark usually peaks in the 3rd week of the month and gives back some of his PnL during the last week of the month, for whatever reason. This has happened 4 months in a row, so it is definitely something to think of, so Mark is going to split up the month 3 weeks-1 week have a higher avg. goal for the first 3 weeks and a smaller avg. goal for the last week.
Listen to everything the principals and senior traders are saying:
- Repetition is the best way to learn trading. You should never tune it out because you already heard it, it’s how you build a solid foundation and how you can be confident in the face of adversity.
Advice on scaling in and out:
- There is a fine line between being disciplined and exiting a trade too early.
- We have to be comfortable getting into our full share size. We start small at this level and then we get used to it and add to it. Don’t cut the trade too early.
Unless there is something systematically wrong with the market, after a large rally there will usually be a 5-7% pullback lasting for 5-6 days and that is where it turns around.
About “The Edge”:
- Need an edge
- Get an edge
- Trade that edge
There are 3 GDP reports- 2/3 is consumption and investments etc.
- Advanced- This is the most important of the 3 GDP numbers. If it is good then the market generally rallies, if it is low the market will sell off.
- Preliminary
- Revised
Why do we call it handles and not points?
- It’s the side, like on a cup. There is no reason but that is how it is and it’s important to speak the same way as everyone else for uniformity.
Miscellaneous notes from the week:
- Take a daily chart, start on the right side and start to move back and see if it has touched a number of points and that is a number or a level you want to be aware of.
- Previous settlement (where it went out the previous night) is the most simple and reliable area of the SP futures, especially between 9:30 and 10:00
- When people are making money and their mistakes are covered up there are days like yesterday (1/26/10) that can really hurt you.
- Unless there is something systematically wrong with the market, after a large rally there will usually be a 5-7% pullback lasting for 5-6 days and that is where it turns around.
- The market can change in an instant, yesterday it looked like the world was going to end, Obama became bad and then the market hit a certain level and then everything just changes.
- The line in the sand is a good place to reverse positions, don’t do it with your full position size but scale in and take it from there.
Josh Stein
Notes for the week ending 1/22/10
Long Shadow Reverse:
This will help us with understanding Doji’s better.
4 kinds
- Hammer- small bodies, long downward shadow, small or non-existent upward shadow: Bullish
- Hanging man- small bodies, long downward shadow, small or non-existent upward shadow: Bearish
- Shooting star- small bodies, long upward shadow, small or non-existent downward shadow: Bearish
- Inverted hammer- small bodies, long upward shadow, small or non-existent downward shadow: Bullish
- You may be looking for a Doji to form and then a hammer or hanging man to help you get the whole picture going. You can use this on any chart, 1 minute, 5 minute or daily chart. The bigger the chart the more credence you should put on it. Candles are great for reversal type signals.
- If you see a candle that is counter to your trade you should take off 25-50% of your size, taking into account how the market is trading. A good candlestick trader doesn’t just use one formation but rather many formations.
Entry levels are so important because they help us dictate our exit levels. Enter well and well have a better chance of exiting well, enter poorly and you will most likely exit poorly.
“Thought on size and patience on time.”
What should you expect when volatility starts to pick up:
- When you see volatility picking up in the spooze that is a reliable signal and a slight correction in the market may be in order, although Klein doesn’t seem to think this is a bearish sign. Klein thinks below 8 is not that unusual and creeping up above 12, and if the market is creeping higher it’s a good time to buy dibs. Overall Klein is slightly bullish over the next few weeks he is bearish.
Tape Reading and managing our position while we are trading:
- Tape reading is nothing more than watching print go buy of time of trade printing and seeing a number that can’t be broken. Over the course of time levels become important to traders and it’s like a self fulfilling prophecy. Once you have identified that number you can use it to help you trade around your position. This allows you to trade the name even if there are no other indicators. Sometimes theses numbers are valid for a day and sometimes there valid for a week.
- Jot down some levels during the day that you are seeing, something that is really getting to you.
- Tape reading will help you understand the characteristics of your name. If it’s trading with a ton of volume and refreshing new lows, you know the stock is in a lot of trouble.
- What you actually do:
- Watch what is printing, see if it refreshing new lows
- Are we breaking levels with any velocity or volume
It does take some time to get used to the fast pace movements of tape reading. But if you can identify a level and it fits in with your pivots, that should give you the extra conviction to get in the trade with a large share size
Our desk is a good representation of the market, as we have experts, Jr. Traders and amateurs. So if you listen to us and the desk gets a little quiet chances are the market is getting a little more quiet as well.
Theories by Klein
- Klein believes that AAPL is the most important stock in the entire world.
- Recently when we see a north of 2 million volume day, it’s generally a negative day.
- Dollar strength does not mean equity weakness.
- Initial jobless claims- first time being unemployed. It is a little bit of a lagging indicator because people are late to fire and late to hire. Anything over 400,000 means the country is still a little sluggish. Despite what you see in the headlines, the jobless claims don’t really affect the market more than the first five minutes. If you see claims going up then you can assume the market is going to go down and if the claims go down you can assume it’s going to go down.
How to handle the unexpected:
- Play through the scenarios is your head, if it is doing something you didn’t expect, that is an opportunity. So if stock X is printing up when you think it should be printing down that is an opportunity to short it.
If you miss a trade:
- Just because a stock is on a breakout or breakdown and you miss it, that does not mean you shouldn’t still try to get into the trade on a pullback. Put out bids and offers at the pivots, it’s that simple. We are calling them out all day, don’t just call it out, make a trade.
The biggest money is always to be made when a stock dislocates, meaning it is up 10% or down 10%.
No Fear:
- There is no reason for anyone to feel fear, take every trade that looks good. Our jobs and our money is not at risk for taking trades on the pivots. If you are a manual trader, you are going to make mistakes. You are going to get a little emotional at some point, it happens, if you feel it happening take a quick break and get your head back on.
- The first few months are not for making or losing money, it’s about figuring out what style works for you, what is your methodology. Don’t fear your PnL, especially at our stage of the game.
You need to be able to write a paragraph on why you are in a trade, if you are in a trade and you can’t give a paragraph explanation as to why you are in the trade you probably should not be in that trade.
How should you trade your ideas?
- Understand position sizing and scaling. Mark used to get in with largest position and exit with the full position, in order to make money he would have to be correct more than 50% of the time, which is not a key to success.
- You need to be able to adjust on the fly.
- Have more shares when you’re right and less when you are wrong. Pick quality entry points and understand position sizing. Let the stock tell you when you are right and when you are wrong, and let it breathe a little. It’s very hard to let a stock breath if you have your max position size in, it will make you too emotional. Usually start with 20-30% in a trade unless you’re very confident. What is the reason you are in a trade and is that reason still valid, if so is it valid enough to add into the trade. If you are obsessing over that trade than you should have your max size in.
- Keep your initial investment small and it allows you to have a clear head. Enter and ask yourself some questions:
- Did the stock continue to go higher
- Is that a place I want to add in
- Do I still like the trade as much as when I got in
- What is my line in the sand
In the beginning when you are starting out, it takes a little longer to run through your check list.
- If the stock begins to move in your favor, you should add in right away and re-evaluate your position. You can trade around that second position
- Know your names, see which names fit your style, and trade those names. You need an edge and when you have an edge use a larger share size, when you don’t have one then use a smaller share size
Bond allocators stop playing at 3:00 and generally enter the stock market at that time, so volume should pick up a little
If you have a thesis and you miss your level and don’t be afraid to chase it just a little bit with a smaller share size.