10/23/2014

Grit is important



Grit is most important criteria if you want to be successful trader. 

If you have grit then you will overcome many psychological obstacles. If you study most successful traders it took them 10 years or so to become consistent. Most people do not persist that long and give up because they blow up or do not have grit. early failure leads to fast exit. 

After trading 14 years profitably and talking to many other traders the consistent theme is ability to persist in initial years after many setbacks. Some blow up multiple times before finding their unique edge. The edge they find may not be big but the process of trial and error and persistence leads to their unique personality that can not be easily replicated.

Grit and self efficacy beliefs are biggest determinant of success in this field.

Most edges are small but how you play around with them is what matters. Take a small edge and marry it with well thought out process flow and good risk management and you will develop a larger edge.

but if you have grit it will work , absent that this is difficult game for many. 

10/22/2014

Momentum burst setups showing up

When you have set method and you follow them daily, you don't need to be rattled by market moves. With the market improving in last couple of days post Fed panicked and assured they will postpone QE if needed, that has resulted in another V shaped recovery in index.

The momentum burst scans I run have started to show up candidates. When market was in correction the scans were not showing many bullish candidates as momentum was on downside. During bull moves stock move in sharp momentum bursts of 3 to 5 days after that they rest or revert.

If this rally has legs same thing will happen. Stocks have started gaining momentum. They will in few days go sideways as buying cools on those individual names and then they setup for another move higher.

Sharp V shaped recoveries has been the hallmark of this market especially in last 18 months as Fed panics every time market goes in to correction mode of even 5%. They come out with new interventions or delay end of QE , and sometime just do verbal intervention like some Fed members dd this time once market starts correcting around 10%. That signals the market no matter what Fed will not allow market to go down. So happy days are back again.

During a bull move hundreds of momentum burst setups will show up if market continues its advance. So task for speculator is clear , scan for stocks with established momentum and look for those that are setting up for possible momentum burst and also run daily momentum burst scans and look for good setups.

If you did not lose money during this correction, you are in good shape to profit from this move as long as it lasts. If it fails then bearish setups will proliferate. 

10/21/2014

Signs of stabilisation

After few weeks of correction the market is attempting to put a bottom.  During correction market had around 9 % correction. Typical corrections are 8 to 10% in bull market.

So far the reflex bounce has held up well , but it is still not all clear . Many reflex bounces can fail after few weeks. The individual stock action is dominated by some V shaped bounces . The V shaped bounces have become the defining character of this market in last few years.

But some sector action in last ten days points to probably emergence of new leadership. Healthcare and residential construction shows best setups as of now.  REITS and defensive sectors also dominate the action.

From momentum burst kind of swing trading as of now not many A quality setups are showing up, but if this becomes a bottom that situation can fast change. When situation changes tons of good setup will show up suddenly. 

10/17/2014

Reflex bounce in most oversold names

Bearish moves are often punctuated by sharp snap back rallies. We are due for one as market in short term is oversold.

These sharp bounces are led by most beaten down stocks and not the stocks holding up well. You will see signs of that in last 2 days.

Big drop attract bargain hunters and also the short sellers cover. This leads to these reflex rallies. Most reflex rallies eventually fail but for mean reversion kind traders are good opportunities. But one need to have well defined setup for that.

When stock or ETF go down often the earlier reference point become anchor for many trader. They think the stock will bounce back to its high.But that is not at all necessary and also does not happen. Once a stock breaks down , it might have number of counter trend rallies but it may never come back to previous levels.

 Once the reflex rally plays out some of the same stock become shorts again. If market puts in bottom then , some of the reflex rallies stick and after a period of back and forth establish new trends, that is when stocks with momentum start breaking out.

Watch stocks with momentum carefully here, if they start breaking out it will be good sign. The top 200 ranked stocks by 6 month momentum is what I am watching currently. 

10/16/2014

Keep drawdowns low to profit from next bull move

A market which is way oversold that refuses to bounce indicates weak market.

Probably a capitulation kind selling with huge breadth will be needed for a tradable bottom. we have not seen any high volume selling so far. If you go back and see Market Monitor down moves often have huge 1000 plus stocks down 4% before a bottom is established. That kind of selling leads to forced liquidation, margin calls and seller exhaustion. From that kind of selling a sustained rally can start. We are not at that level yet as breadth has not been very negative by historical standards. 

Currently we are down only 9% from high.  Which is a correction but may not be sufficient correction for a 5 year bull move. In last 3 years we have not had 10% plus correction . So if we get one it will not be out of character.

And some sort of action by Fed to induce confidence will at some stage may be required but with markets down just 9% it is unlikely to worry them.

Remember every rally since 2009 started with launch of some Fed program like TARP, QE1, QE2 , operation twist and so on. At some stage if market goes down a lot then Fed's hand will be forced. And that could be a signal for bottom.

Bottom is a process and might require time and level. Either way how you handle bear markets depends on how much is your risk tolerance. Barish market tend to be very volatile and most trader who survive the market for decades after experiencing few big ones tend to focus on capital protection during such time. If you do a good job of that and don't have much drawdowns or maintain your capital emotionally it is easier to trade when new bull move starts. Which invariably starts once traders capitulate. 

This is the time to upgrade your trading skills , improve on things you want to improve. Develop setup ideas. Work on market timing . Bear markets give you an ideal opportunity to do that. If you do that you can profit handsomely in next bull move. 

10/15/2014

Corrections are good

We are getting good broad based correction after many many months. By historical standard this is hardly big correction. It is just normal action after many months of rally.


Bull markets create situations where at some stage they run out of gas. just few weeks ago you had IPO going up 60 to 100% on first day, that kind of wild action does not last long.

Corrections like this are good as it creates conditions for better returns in future as new leadership and new companies emerge post corrections.

Corrections are also good as it thins the rank of amateurs and wipes out some overconfident traders. That is healthy process. It ensures only speculators with good risk management skills and trading skills survive to profit from next big bull move.

this is good time to learn how to manages risk and trade profitably.