I'm annoyed with myself because I felt very uneasy yesterday and should have sold out of Bhp despite the 60 minute chart looking less bearish, just because I already had too many positions and the daily was very undecided. I had also toyed with dumping Qbe but held on as it traded briefly through 2000.
Anyway, it highlighted for me a flaw in my trading which I've been unwilling to address. I'm increasingly comfortable with the type of trades I like - generally involving going as early as I can on a breakout and having a tight stop - but my problem is rationing the trades when I have too many signals. You would think this would be a core issue for any trader: that you have a finite amount of capital, you want your position size to be consistent along with your risk/reward profile and therefore you have to weigh up which trades to take when you have many signals.
For some reason, I've been unwilling to tie myself down to a maximum dollar amount and quantity of trades. This is a shame because the advantage of this method is that it encourages me to unwind a trade having made, say, a quick 4 or 5% and then to replace it with something else that is looking better. All too often I hang on to the first trade for another couple of days and it doesn't really get any better. This is not a style that will suit everyone but my aim is to get into a stock which is on the point of acceleration and to get out as soon as it stalls. It's also to get out if nothing has happened for a day or two even if I haven't been stopped out.
You might think that this is stating the obvious, that everyone would want to trade like this, but I'm not sure that the time frame is to everybody's taste and a lot of traders either don't want to trade for short term moves or don't believe they can pick them. It also takes a fair bit of psychological flexibility which is not for everyone either. I find that I can get in a zone with this type of trading and do very well for a long time but then inflexibility can creep in and suddenly I'm swimming against the tide.
That inflexibility is usually driven by incompatible aims. For example, I might have got excited about the prospects for a stock, thinking that perhaps it can run 10 or 15% in a particular week, but instead it runs a healthy 3% and stalls. Normally, it would be a good bread and butter trade but in this case I might feel that I've missed out on 7 to 12% and stubbornly hang on only for the stock to retrace, perhaps even making a loss on the trade. Another incompatible situation is where I don't take a tight stop because the market has gapped through on thin volume. That's fine, it's ok to give it an hour or two until the dust settles but you still need to take the stop unless there's an amazing reversal. So the intention is to keep that core goal in mind always and not be distracted by other time frames.
Since I've been writing this blog I've found that I've been able to identify the types of trades I like much more specifically and interestingly my trading preferences are a bit unorthodox in that I prefer to pre-empt signals. Previously, I would often take these trades but be guilty about them and also take the orthodox signals. I'd then have way too many positions - a lot of them pretty good - and I'd have very confused ideas about my stops. I think reasonably good trade selection covered a multitude of sins in relation to stops and portfolio size but my profit and loss swung around too much for comfort.
All this is a roundabout way of saying that I'm making a New (financial) Year's resolution. I'm now happy with my trade selection, my profit taking and my stops so the next step is to be disciplined about the number of positions I'm willing to hold, the dollar value of my book and to trust my intuition as to when time is up and I need to get out of a position on which I've neither been stopped out nor made a profit.
On to the day's action. It's 12.15 and the market is down only 1.4% as we might have had some of our fall yesterday. Things also look a bit different in this part of the world as we face towards China and an economy that only exports 7% of GDP to the US and 8% to Europe (according to Tim Price at thepriceofeverything.typepad.com) and could surprise on the upside with economic growth.
I've sold out of Bhp at 3365 (v 3435), Ncm at 3050 (v 3065) and Qbe at 1963 (v 1992). None of it too disastrous. I was tempted to hold Ncm but the difference between the trailing stop and the next stop was too far. I would have sold out of Rio but it is suspended from trading as the company has a book build to cover a small shortfall in the rights issue.
I've kept my position in Wdc, it briefly went through yesterday's low of 1103 but the next stop is very close at 1095 and as the stock is still well bid I'm happy to keep this position with the proviso that 1095 holds. I'm wondering whether I'm contradicting myself immediately with my stretching of the stop but there are tight stops and there's cutting off your nose to spite your face.
2.10 I've answered my own question in Westfield. After showing signs of strength and rallying back to 1114, the stock has slipped below 1103 for a second time and I've stopped out for 1101 (v 1115.5). I sold a third yesterday at 1124.5 so the loss is not large.
The only position I have now is an option position in Ozl which is 2 cents lower. I'm holding on to this is they are August calls and I can't lose much on them. I've been doing some homework on my option trades and find that when I trade in illiquid options, or where the option spread is very wide (as in Ozl), I tend to hold the options too long and lose on time decay. In future, my aim is to use options in the bigger dollar stocks (where the spreads are smaller) and get out of them within a few days.
2.35 I've been going through my charts and since I've still got one position in Rio, I've got room for one largish or two smallish positions. I don't want to force a trade but going through the top 50 it seems that most of the signals I thought were bullish over the last few days turned out to be 3 wave retracement rallies that have failed. There are some slightly bullish charts in some defensives; telecoms, property trusts and retail but I'm more interested in putting on a short position. I thought Amp, Cwn, Mqg, Osh and Ost were all plausibly bearish but I'm leaning towards Oil Search and One Steel.
The chart of Osh shows a weak sort of 3 wave rally after a pretty sharp fall.
The 60 minute chart is also looking weak...
4.14 Rio unexpectedly resumed trading and fell as low as 4905. I sold some of my position at 4960 (v 5225) but given that there'll be no US trading before next Monday I thought it ok to try to get a better exit when we re-open. Also shorted some Ost at 247 on the close. Market down 49 points.
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