Walking the tightrope. Fri Feb 26

I'm practising technique using intraday 5 minute charts and the moves often have little to do with any overnight leads. While I'm sitting waiting for something to evolve, it's quite easy to jump into a trade and then get "imprinted" into being bullish or bearish. Along the lines of "I know nothing", I'm trying to take an academic rather than a personal interest in the trades.
I've already broken a couple of my rules today, to my cost, and had to pull myself together again. The chief mistake was to get excited about the possibility of a larger breakout and put a position on without good confirmation.

Actually, I'm really tired today which is why this post is thin. I've also been impatient with my intraday trading, cutting a Cba long without a trigger just before a big surge. I would have been wise to sleep in today and try to find a couple of trades later in the day.
Here's Cba on the 5 minute.

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Got long this at 5341, around 12.30 pm and cut for square - for some silly reason like I was temporarily bearish the Spi - only to watch it race up 75 cents before a recent pullback. I obviously failed the "I know nothing" test today! It's a good lesson though, don't trade tired.

I know nothing. Thu Feb 25

Like Manuel from Fawlty Towers, I've been insisting "I know nothing". I haven't actually been saying it out loud, instead I've been using it as my silent mantra.
My issues in the last year or so have been more to do with attachment to being right and self sabotage than to foolish methods. I've really had to grind it out for week after week but in the last couple of days I've been practising day trading using 5 minute charts and managed to leave things alone - by and large - which has been lucky because we've had a market that's gone in one direction intraday. Choppy markets will still be tricky but at least I allowed my positions to come to fruition.
By repeating, "I know nothing", I'm reminding myself to wait for the market to show that's it turning around rather than using guesswork. I am doing a bit of guesstimation along the lines of the targetting I wrote about yesterday but I'm letting the market action have the loudest voice so that if I'm unsure I'd rather give away some upside by waiting until a level is broken.
Here's the Woodside Petroleum chart on a 5 minute intraday basis. I thought it might rally today but it rolled over around 2pm and I shorted it at 4380. For once I stayed in until squaring up near and at the close because there was no reason to get off before then. Previously I might have picked a support level and cut too early.

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Exit stage left. Wed Feb 24

Once more on trading methods.
I like to work my way out of positions when I'm taking profits because it seems psychologically more satisfying but intellectually it can be difficult to justify. A lot of your money is made on the trades which you're able to hold for a long time and if you only hold a third of your original position for the best part of the move then you're cutting back your upside substantially.
I don't think that the stepped exit is always unjustified. I've done a fair bit of work on targetting versus letting the market take you out and I think that most of the time you get a similar or better profit result with a shorter holding period through targetting. You also ensure you've made something when a stock has a sudden reversal but nevertheless you do miss some of the mega moves.
It would be pretty subjective trying to work out which approach is best because the holding period reduction muddies the water as does the greater value of a smoother versus a lumpier profit profile.

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I pretty much chose a stock at random and there was an example of what I'm writing about. Looking at the Bhp chart above, let's say you noticed the 1-2-3 buy signal forming in the first week of November. You might have gone long knowing that you could use the low from November 2nd as your stop. Gratifyingly, the stock took off and if you were using a 5 wave completion as your stop you might have got out when the 5th started to stall sometime in the 3rd week of the month. By contrast, if you were to wait for the last swing low to be breached which would be a reasonable, conservative trend following approach then you could have ridden the rise for another 2 weeks. In the end, though, your stop would have been around 4075, maybe 30 cents better than the other method but with a much longer holding period.

Then again, if you were trend following with a looser stop you might have stayed in till late January when the stock signalled a decent correction or a change of trend with a 1-2-3 pattern. Your exit in this case might have been close to 4290.

In this case you've held the position for two more months but made another, say, 7% on your original investment.

It's probably a matter of preference as to which approach you prefer, depending on how much time you have to devote to trading, how much action you want and how many better opportunities you might come across.

My preference is the targetted approach as I want to capture momentum and I feel that I have the time to find something else that's moving when a stock stalls. My only problem now is to actually stick to this plan. In the Bhp example above, I would probably have sold a third after a couple of days - just in case - and another third a few days later. I'm practising changing this habit using intraday trading in some high cap, high volume stocks in order to fast track things. 

Excitement. Tue Feb 23

I'm still thinking about some of my impressions from the Van Tharp book. The guy's not lacking in ego, he suggests you read the book 4 or 5 times and that you'll pick up on different points each time. Fortunately for him, he can walk the walk and the book does justify multiple readings.
There is a fairly limited psychological section in the book and it gives an example of a self assessment from Tom Basso, a successful money manager. One of the quotes from Basso says, "I certainly don't think of myself as compulsive. I don't find trading exciting at all. It's just a business to me. I look at trading as an interesting brain tease."
I found this slightly irritating because I really enjoy trading, I would do it as a hobby or at least something similar that was challenging mentally. But actually it's a sensible approach and I think I reacted badly because it hit home. What I've been doing is caring too much about the outcome of any particular trade. When I've had my best periods trading I've been willing to accept whatever the result might be.
I've written before about trading statistically rather than focussing on a single trade so that you measure success by how well you stick to your plan rather than by whether any particular trade made money. I've found it hard to put into practice though and it's only by dint of repetition that I've been able to improve in this area. However, one of the things that Tharp does with Basso is to test whether you can make money by using a random entry with the idea being that your money management is far more important than anything else so that even with a coin toss entry it can provide a winning edge.
They found that they could easily do it and somehow the idea has had a liberating effect for me. Rather than fretting too much about the perfect trade selection it has got me much more comfortable with the casino idea where you keep taking the bets because you always have an edge. Given that I spent 10 years as a market maker where much of your business is about capturing edge, you would think that this would be an easy concept to grasp. I suppose the difference is that when you're a market maker you understand that you're trying to make edge. A lot of the trades you take are passive where you're obliged to go one way regardless of any directional opinion you might hold. Obviously you hedge and a lot of the time you don't really care where the stock goes.
When you're doing directional trading, you've had to form an opinion and it can then be harder to accept mistakes. But if you realise that your returns are determined in a small way by your entries and in a large way by your exits and risk management then the importance of your initial opinion is much reduced and it should be easier to take the right follow up action.
We'll see what happens but it was an "ah ha!" moment for me.

Pragmatic Elliott wave use. Mon Feb 22

As I mentioned in the last post, I've been re-reading one of Van Tharp's trading books. I can see from the book that the author is a systematic person. For example, he seems quite anti Elliott wave techniques because he sees them as an attempt to find some magical order in the market in a Da Vinci code sort of a way. No doubt, a lot of people are attracted to that, but for me it's a tremendously useful technique.
What I like about using Elliott wave ideas is that you are trying to put patterns in context and you gain more information that way. For example, a market has just had a good surge up after building a base, what an Elliott wave person might call a third wave. A correction follows and you get what looks like a straightforward 1-2-3 signal down. I would rarely take this because I would interpret it as a correction which won't go far. On the other hand, if the same pattern was in the direction of the trend after a correction I'd be very happy to go with it.
So I use the technique in a pragmatic way and because it is not easy to backtest - eg it's not just a matter of scanning for 1-2-3 breakouts - and many are uncomfortable with this subjective approach to chart interpretation there are not always going to be a lot of people using the same method as me.

By the way, I'm losing enthusiasm for posting trades every day as I don't think I'm getting much value out of it now and the posts are probably becoming humdrum. What I'll do instead is to post on issues of interest I might be working on and perhaps use the odd example to illustrate.