What's Your Market Sentiment

some time ago. a friend and I had a conversation about market price movement... in his wisdom, i was reminded that fundamentally price movements are caused by none other than the first principal of economics, demand and supply... this is not an unfamiliar concept to many of us here...although we often forget ...

"market sentiments" as a concept is intimately tied to "demand and supply" principal.

often, we hear people asking : "how is it that just last week, when the world thought the european nations are collapsing under its debts, that this week, the euro currency is soaring? is the problem over? is it true that the issues are all resolved?"

i think, in this case above, euros soared, bcos the buying pressure exceeded the selling pressure; 1st principal of demand and supply, which my friend talked about...

that puzzles us as to why the demand is now stronger than a week ago, when obviously the financial crisis cannot have mutated for the better in over a few days....

imo, the problem by itself, is not the main reason for the price gyration... it is the collective reaction to the problem, the consolidated opinion of the market players, that sway the price one way or the other....

market players can and are often wrong about any given situation...Lehman, Bear Sterns, Dot gone, length of recession, etc... this could be due to the lack of info, misinformation or simply a wrong assessment.... and as information streams in, market opinion will eventually more accurately align itself with the reality of that problem... this is what "market sentiments" is all about...it is no more than an aggregated opinion on a situation.

market sentiments on a situation, create the demand or supply for that relevant traded instrument; such as eur/usd was actively traded when Greece threatened to go bankrupt ...
the financial crisis over at Greece probably hasn't changed much in the last 2 months; very likely, they are still in huge debt and have very little ability to pay for their loan obligations by themselves... yet, the Euros have stopped losing value since it hit a low of 1.18..today, it is about 1.27 against the greenback.
so, if Greece's problems are still around, then what has changed?

i say to you, it is the Market's opinion that have changed. it perceives that Greece is no longer an imminent threat to the global financial system, now that those rescue packages from IMF and ECB have flowed into Greece.

with this change in Market Sentiment, the demand and supply equation is now re-written....

in summary, problems do not get solved in a short timeframe and it almost always stays problematic over a short timeframe...what has changed is the market players' opinion, collectively known as Market Sentiments... and that causes the relevant instruments to change in value...

Piercing Candle - A Reversal ?

Piercing Candle - kennynah May 2010

you will see such a piercing candle formed last Fri, 21May2010, on SPX daily chart...

it is important to understand that not all candles formations will pan out exactly the way textbooks state them... just like any other technical indicators, some formations will fail at times ... nothing is guaranteed... but they serve as a guide to be complimented along with other TA indicators for better decision making...

particularly, even if this piercing candle reverses prices, we must still consider the macro picture...we should not read candles in isolation without putting that in context to the overall daily/weekly and monthly price actions.. that said, it means, that price could reverse, but for how far up is not addressed by candle studies... so, it could go up and shortly afterwards, revert back down again...yet, that reversal did take place and will be applauded by candle technicians that it has done its job..

but for the candle rookie reader, he might not take profits as the candle hit higher and see it turn back down later.. and then say candles didn't work for him...

so, in other words, once the candle signal gets into play, keep that earlier signal in mind, dont get all too hung up on it because you want to start looking for the next candle signal/formation, that either augment or negate the earlier candle signal...

in this sense, candle reading is a post mortem technical study..

your thoughts? thanks.

Trading/Investment Review

Trading/Investment Review - kennynah May2010

The way to improve, is to get better at what you do. Doesn't that sound just rhetorical?

Employees receive periodic job performance reviews by peers and/or their supervisors. Behavioural science professors from ivy league schools write thesis about this subject. MNC HR departments implement such reviews. Employers spend resources and must be getting some real benefits out of such performance reviews.

So many people can't be so wrong about the need to review work performance.

For those who trade, especially professionally, there's no such formal review system. We are on our own. We have no work peers nor supervisors. There isn't such quarterly or yearly performance reviews.

So, how do we know if we are trading optimally? How will we know if we could have traded better or avoided those mistakes? We won't, until we actually review our trades.

The only way to fully understand our trading performance is for us to review our past trades. But unlike corporate reviews, done quarterly or yearly, we must do this more frequently. It is individual preference as to how frequent this happens. The objective is to stamp out any bad trading habits, acquire good ones and improve as fast as I can. It's my money on the line, not some shareholders' money.

It is said that we make better traders, when we spend more time thinking than actually trading. I think, there's some truth to this. Afterall, repeating bad habits frequently, wont make trading badly more profitable.

How should we go about this reviewing process?

Personally, I like doing this every week, usually over the weekend. I go through my trading log, capturing entries and exits, profits and losses for each individual trade.

I reflect on each of them, recalling the reasons and the accompanying emotions that motivated me to open and close off those positions.

I not only focus on what went wrong but also what went superbly well.

Sometimes, when I screw up big time along the week, I stop trading momentarily. I find a quiet spot and immediately reflect the entire episode. After Action Review is best served when the memory and emotions are still lingering. I pen them down. It could be "lacked discipline" or "snatched price" or "impatience" or "there was no signal to initiate", etc... I remind myself not to repeat those mistakes.

When I pen these trades, I also relook at earlier weeks' entries. The purpose is to check if I have recommitted earlier spotted errors. I am aware of my personality to know that I repeat errors. So, I have to make every conscious effort to eradicate them.

By reviewing past records, I get to reinforce my correct trading habits too. I get more motivated to seize those successful trade setups.


Summing It All Up
In a gist, we must review our previous trades periodically, so that we can improve on what works, remove bad trading habits and hone our overall trading skills. No one will sit us down to check whether we achieved our KPIs. We are our boss..we check up on us, ourselves.

There's an adage "It takes 3 days to learn to be bad, it takes 3 years to acquire good traits". It has to be a continuous review effort, if we hope to benefit from this exercise.


Happy trading

14May2010 - PreWeek SPX Review

15 May 2010 - Weekend SPX Review

The anecdotes within the Charts explain my outlook...but in summary :

a) Daily bias : Bullish to Mildly Bullish - Trading Market; Scalp Sell on high print and buy on dip .. range bound between 1100 - 1185
b) Weekly bias : Mildly Bullish; Swing Long at 1100 region
c) Monthly bias : Neutral; no position for me yet; but a break below 1100 could signal Position Bear

Your thoughts, please... thanks.

Stop Loss as a Invested Capital Management Tool

Stop Loss as a Invested Capital Management Tool - kennynah May2010

Often we treat stop loss as a form of limiting our losses before those adverse trades kill off the trading account. There can be no further truth to this concept.

Now, an extension of this concept can be applied to money management, to ensure that we keep those trading profits close to our chests.

Let's use numerics to expound this idea.

Starting capital : S$10K
End of week/month/quarter : S$15K
Profits : S$5K

It's now the start of the trading week and you are deciding what stop loss you are willing to accept for each position you initiate. This is definitely the right approach.

However, I suggest that you take into consideration, how much of the profits you are not willing to lose, as a factor as well. Instead of simply having an arbitrary % cut loss.

In this example, let's say, I am willing to lose no more than 20% of the profits accumulated thus far. This means I'm willing to risk 20% x $5K (or $1K) for my new position. I then correlate that $1K to the amount of price adverse movement accordingly and put in my stop loss exit order. In the worst situation, I'll lose $1K and no more.

I would still have $4K of profits remaining and have 4 more attempts in making money from my later trades. This means, I can withstand a total of 5 continuous draw downs of $1K each, without dipping into my original investment capital. In any case, if I had a string of 5 losses, I think it wise to stop trading momentarily and take stock of the negative events.

Now compare this to setting a 10% cut loss of total capital; ie 10% of S$15K (or $1.5K per trade of cut loss). 5 such drawn downs = $7.5K. I would have damaged my original investment capital.

Agree that allowing $1.5K of stop loss will allow for more room for the underlying asset price to gyrate. It is all about understanding your underlying price movement that is key to making the decision on which is a preferred cut loss amount.

Nevertheless, playing to win and preventing giving back profits in anyway possible, is the name of the game. Otherwise, in the long run, you wont be able to accumulate more profits, if you keep chancing your original investment capital amount at risk.

Your thoughts?

Chart Your Success

looking at this daily chart (eur/usd), i can't help but get reminded of the similarities to Home Builders ETF (XHB) chart...

the similarities are so stark, it makes me sick to my stomach for not having realize them earlier.

you see, Charts do not ever lie.... in fact, they sometimes foretell a situation before the market or news agencies catch wind of it... as in this case with eur/usd and also XHB.

in the case of XHB, the chart exhibited very clear signs of a slumping housing market a good 6-9 months before before anyone heard of subprime mortgage issues...i'm not attaching this chart here bcos if you were serious enough, you need to do fish this out of the pond.

the same phenomenon is seen on this eur/usd chart....




so, if there's a secret to successful investing/trading, it can be found in charts..dont't leave home without them...

by the time the world is aware of this crisis, eur.usd has slid from 1.52 to 1.32....

even if eur/usd gets to 1.28, there's just bones left....bulk of the shio ba meat gone....aside from this, this trade now becomes a higher risk one...

A Trading Plan....

my simple idea of a trading plan... - by kennynah

i'll put them down in point form...simple english... no unnecessary pulling of wool over eyes...

a) know what you are trading....know as much as you can lay your hands on....eg. you choose Citibank as a stock you wana buy or sell... know C's business, know how it's making money and how it lost billions recently...know that indian chief...know C's price from the day it started trading...know when C will be announcing dividends....know the historical dividend payouts...know the employee size worldwide...know what are the common products/services C is offering to consumer clientele....better still, know how they syndicate major loans to corporates...know C like you know your girlfriend...you are afterall spending money on this trade...know C as if you wana get into C's pants...
if you trade futures, know the rules of the game...start time, end time, what econ data move the futures, know the daily volumes, know the price volatility, know when it expires, know what happens if you left the position into expiration, etc...
if today, your friend propositions you to invest $10K in his business, i bet you will sit him down for days asking him all sorts of questions about this investment...right down to knowing if his mother is also invested in this venture.. so, why would you do any different when putting down $10K on a trade position?
you want to know everything you can know about your choice of trading vehicle...

b) have an entry and exit plan....well before you commit a position, NOT after.... by doing so, you would not have to react to news/unexpected events that move prices...

c) know how much you are willing to lose... if you set a predetermined amount of losses you are willing to accept, you will be better prepared to handle such losses when they occur and they will.. this is as assured as death itself...no one ever not loses on some trades...

d) know how much profit you want out of the position.... very often, traders will stare a substantial paper profit deplete as price reverses...stoned cold...and finally cut off at breakeven or even at a loss.... why does this happen? 2 words...planning and greed.... rather, the lack of planning to exit when profit reaches a target....and greediness clouds the mind of the trader thinking that price will shoot for the moon in a day....
let's face it...no one will ever know where prices will go to... maximum profits will be known only in hindsight...
so, it's ok to exit a position when a target profit is reached...even if after that, price continues to choo choo on.... the job and objective is reached...be contented and move on to the next trade...

e) know your trade timeline.... scalp? swing? position? coffin trade? each different approach has its different tactical approaches and considerations...know them all very well....don't make the mistake of using a fork to drink a bowl of soup...

f) 3 strike rules.... just as in baseball, a batter is allowed only 3 strikes before he gets thrown off the plate... similarly, if you find yourself stuck in a rut and losing streak...step away...dont force the issue... you are not at your best psychologically to make a good next trade....take a break...a day or a few days...go bowling...go watch a movie...take a short trip....read a book....do anything that is not remotely connected to trading...let your brain reboot and your emotions heal....
some people start the day with a preset loss amount...if that happens, all trading stops...some set weekly loss amounts...and if that is reached...next week is a self imposed holiday...
the markets is a almost a 24/7/250 affair....it'll wait for your return....as long as you still have the ballistics to throw at it...

g) keep the objective in mind... different people trade for various reasons...for most people, the only objective is to make money...and if this is the reason, start the trading day reminding yourself of this ....before you finger trigger happily hit the "order' button... have good reasons to make that trade...use fundamental or technical reasons, it dont matter...but jolly well have good reasons for making that trade...
at the end of the day, be grateful and happy if you make some money.... you've attained your objective....but if you made a loss, was it within the parameters? if so, be grateful, you had been disciplined to fight another fight another day....

h) don't be obtuse..be flexible... often, we take it personally when market proves our initial trade opinion wrong...we may even feel inadequate if we get a string of losses...we may begin questioning our abilities and skills...while it is good to be mindful we need to improve, it is not necessary to harbour any anguish within ourselves... it is debilitating and self destructive...adds no ounce of good to our endeavour to profit from the market.. we must be mindful of our ego and emotions when trading...leave them aside...we must try to be as emotionless as we possibly can...granted that it's a difficult task... we must train ourselves to see that at times, we are utterly wrong and accept the fact... you are your worst enemy...conquer this and you conquer your worst nemesis in this market...
there's no such thing as paiseh..no face...supposing i said the market will tank..but for the last 3 months, it went rocket up.... i want to face up to the mistaken opinion...and move on... so what if everyone else laughs at me? as long as i bring the bacon home...i've done my job as a trader...


finally, know that this is a business that requires a lot of effort and continuous learning....and to be successful at it eventually, you must have very good reasons to believe this is worth your time, money and perseverance....you must enjoy this process...


HUat HUat everyone

your thoughts? additional comments? i want to learn from you....thanks in advance...

Market Reverses after my Stop Out...Frustrated?

very often, our losing trades get stop out and price promptly reverses, distressing us immensely. happen often enough, we start losing confidence. we begin imagining that the market has singled us out to be the sucker of the day, week, month.

after a while, we outsmart ourselves, by reversing our trade positions once we get stop out only to see price again going against our this next trade. we cringe, get more frustrated and throw up our hands in disgust and despair.

so, what do we do when we encounter this situation?

for the case above, where i put on a short term trade...and get stop out, do i open an opposite position? it depends....

but let's first deal with the stop outs... stop outs are capital preservation mechanisms and a way to profit from the market in the long run... it is a cardinal rule of trading...without this risk management in place, soon, the trading account will be depleted and emptied...

thus, a stop out is either to limit losses or a way of acknowledging that my market outlook is wrong...

a) if it is a stop loss mechanism, then, my market outlook could still be correct, except that my entry point was flawed...if so, i may look for a re-entry based on indicators...

b) if my stop loss was activated becos data supports to invalidate my original market view, then, i may look for a entry point in opposite trade...

but, from experience, jumping from a long to a short, just becos my stop was reached, should be avoided for one main reason.... emotions... very often, we allow the stop loss to emotionally cloud our decisions and we click the mouse before we have time to re-evaluate the situation bcos we are bent on wanting to recoup that earlier loss... this is very human...we want to stem the pain from the first loss...usually resulting in adding fuel to the burning fire...

if we only begin a position by being able to accept that pre-determine loss, it is one way to be less emotionally affected by that loss, when it arises.

some things we can read all we want... but until we actually try it out, we wont ever really appreciate the written text...

so, i would suggest that you start off with small positions, allow time and trades to guide you to become a better trader... no amount of reading can offer you the real experiences that only the passage of time can... good luck...and stay positive...

we must stay positive becos rookies and seasoned players alike, we will also make mistakes... the differences between those who bring money to their bank and those who lose their houses n the long run will only be

a) having risk management
b) patience
c) technically more skilled
d) life long passion for this business to overcome the immense pain of losses at the beginning..

Greed, Fear and Arrogance

Greed, Fear and Arrogance
1Mar2010 1740h +8 GMT)
by kennynah

Very often, the novice trader/investor enters a trade, giving it plenty of upside potential and insufficient attention to downside risks. This is a very natural, afterall, who ever enters a trade hoping for the worst to happen.

Still, the way to winning in the long run, is really to foremost measure the downside risks to every single trade before the proverbial counting of the chicks before the eggs hatch. It is counterintuitive but a necessary skill that every trader/investor must first acquire, if there is to be a chance of winning in this investment game. Simply put, learn how to lose before learning how to win.

To tackle this issue of learning how to lose effectively, one must come face to face with our emotions that accompany our trading/investing journey. We are humans, and as such, we are emotional beings. To imagine that we can truly remove emotions within ourselves is not realistic. Still, trading/investing while we are emotional can only hurt us more than benefit us. Thus, how then can we ever hope to resolve this conundrum within.

The simple answer is that we don't try to remove these emotions but manage them; the Fear, the Greed and the Arrogance within us. I am suggesting that trying to isolate such humanly features will be similar to attempting to stop breathing. We will suffocate. We just cannot hope to remove our humanly emotions. It is just not possible.

But we can successfully harness these emotions to our very benefit. We just need to first recognize them and come to accept what these emotions do to our trading/investing habits.

Let's begin with Greed.
How often do we allow winning trades turn into losses, only because we refuse to take profits off the table. How often, do we impose our beliefs that the market ought to reap us more profits than it would. It may not surprise you that often times, we allow Greed to dictate our trading/investing approach.
Given that SP500 futures on average move no more than 15 points within a day during low VIX reading, it is unrealistic to expect unrealistic gigantic moves. They do, at times, but we cannot trade based on unrealistic profit targets.
So, instead of allowing Greed to push us into believing that our winning positions can go on gaining, the moment we “feel” Greed creeping in, it is time to be alerted. It is time to quickly evaluate the technical/fundamental indicators and decide quickly if we should close off the position and take those rewards.
There is nothing worse than turning a winner into a loser. Allow Greed to signal you internally to sit up and look at the market intensely.

What about Fear.
Just like Greed, Fear can work for us, than against us. Fear is nature’s way of keeping us out of dangerous situations. Imagine that you are crossing the road and your attention turned to your ringing mobile. You answer the call and momentarily get totally absorbed in the call, unaware of your surrounding. Suddenly, in the corner of your eye, you see a flash and hear a loud horn. Chances are, you don’t freeze on the spot, you bolt and run across the road, regardless if it was really an oncoming vehicle speeding towards you. Your instinctive Fear takes over and you react to remove yourself from a precarious situation, even if that was really a tourist flashing his camera and the ice cream vendor on the sidewalk hawking his business. Of course, this is an exaggerated example, but hopefully, you get my drift.
If you get into a position that went adversely against you, you begin to feel Fear. Instead of turning that emotion to Hope; hope that the price will start moving for you, recognize the Fear as a signal for you to bolt out of your position. This feeling of Fear could save your account from certain death. Don’t second guess your instincts.
There are many opportunities for other profitable trades/investments, so long as there is still funds in your trading account. Learn to lose, before you learn to win.

Arrogance is not just a sin, it is a trading flaw.
We may get away with arrogance at work or with friends and family, but in trading, this characteristic will burn your trading account, very unforgivingly.
How do we identify this negative trading habit? It is easier than we imagine.
After we establish our trade, the position suffers a loss. The loss is not as large as to be stopped out by our predetermined loss exit point. We hang on, allowing the market to gyrate as it always does. But there will come a point when our stop loss is reached and if it wasn’t pre-ordered in, such as a hard stop but a mental stop, and we begin to waiver, that’s when we are being obstinate. We are being arrogant. We refuse to accept that the market is gently informing us that we have been wrong in our original outlook. We begin fighting against the market. We think we can telepathically turn the market around to our favour. We begin moving our mental stop loss exit, again and again, until the pain is so great we exit at a much larger loss than we originally intended.
Therefore, identifying arrogance in its multifaceted forms, such as being too eccentric about our imposed views of the market direction, will help us to realize when we are being obtuse. Arrogance is far worst a trading trait than Fear and Greed combined. Arrogance blinds us from becoming winners but very damaged losers.
Lose the arrogance, by knowing when we have become one.

Good luck !!!

Stop Loss

i think it can only make sense with discussing stop loss quantum, when viewed from a bigger picture...

the common Stop Loss Exit methods:

a) Long stock $1, stock drops x% => exit
b) Long stock at $1, willing to lose 50cents, stock drops 50% => exit
c) allocate $1 to purchase stock, buy and hold, as long as stock doesn't drop to $0, => no exit (% portfolio theory)

and perhaps there are other variations to the above....

whichever the method stipulated above and the variations to them, it is incomplete until the trader/investor also considers the chances potential rewards... let me elaborate...

take for example, GE shares....in the 2 years between 2005 and 2006, the price gyrated something between $33 - 37 (give and take a few cents)...and we are now in 2007, not knowing where the price will head too, except that i am convinced GE is a great investment and I buy some ... now, do I adopt a), b) or c) stop loss exit plan? the answer really can be a), b) or c).

but i am suggesting that it is not a comprehensive trading approach to choose any of the above conventional methods, without considering the Historical Volatility (HV) of GE price. clearly, GE price exhibited very low HV, something like <7% annualized in 2005 and 2006.

now, does it make sense to adopt :

A) 10% loss exit when GE drops by 10% in price?
B) losses of ~$17 per GE share, which represents 8.7456% of your total investment capital
C) willingness to accept the risk of losing all of ~$35/share of GE (% portfolio theory)

to me, this is how i rationalize the following options above :

A) GE shows me that it has only a ~7% historical volatility...why would i be willing to lose 10% of the share price, when the possibility of making at least 10% is not statistically present? it's foolish to adopt this stop loss option

B) just becos I am willing to lose 8.7456% of my total investment, doesn't mean I need to structure my trade that allows for this possibility, when the investment shows me no reason that it can give me more than $17/share of potential profits. unless, i truly believe hat GE can approach it's "dot.com" high of ~$60/share, i should be aware of my chances of making that potential profit, and risking no more than that amount...

C) again, just becos I allocate 2% of my capital to buy $35/share of GE, doesn't mean I need to allow myself to lose all of that 2%.... % portfolio allocation theory is NOT even a Stop Loss Methodology.... it's for those with no idea how to invest their money except to defray their capital and hope for the best ....

Hogwash - Portfolio Allocation Theory

Hogwash - Portfolio Allocation Theory
27Feb2010 1725h (+8 GMT)
by Kennynah

quite frankly, i do not agree that a 5% allocation to one trading position is a feasible plan, if one has a small investment capital...

for example, if investment capital is S$10K, 5% allocation is a mere $500. even if this becomes a very successful investment and becomes a multibagger, say 5 times. the overall profit for this position adds $2000 to your account. that's 20% of the investment capital. let's face it, how often do you get a 5x return on your investment. if you are lucky, a rare few times in your entire investment career...

but then why do journalists swear on their ancestral graves that it is wise to allocate no more than 5% of total capital on 1 single position? imo, for 2 primary reasons:

a) they are referring to investment capital amount that is astronomically large; say 100s of millions to billions...think WB, Soros, Pimco category....

b) it's their day job to regurgitate articles to meet their publishing quota

but let's step back and think for a moment.... have a sip of kopi-o, teh-o, pu-er, tia guanyin, diet coke, etc...and ponder....

ponder why we get filled with articles day in and out, people proposing 5% portfolio rule.... why 5% or in essence, why a minuscule fraction of total investment capital ?

you guessed it... it's everything to do with managing risks... by allocating a small % of the total investment capital, one is minimizing risks. and as we know, with little risk, comes little potential profits... and if the total investment capital is small, that small potential reward won't ever make you wealthy...

those with less than $50K investment capital and stick to 5% allocation per trade, imo, are plain lazy. lazy because they know that no matter what, they will never lose more than 5% capital if their investment absolutely belly up...eg, the stock they used 5% capital to buy goes to $0.

let's be honest with ourselves here, if you have the knack of picking stocks that constantly nosedive to the abysmal $0, i think you need to re-evaluate your investment skills...

so, while there is always the chance that your choice of stock can become totally worthless, that chance ought to be tiny. if you believe this, you should not have to worry too much about increasing the allocation amount to more than 5% per asset investment.

instead, you should focus on how much you can afford to lose as your primary determinant on how you trade/invest. in other words, if your risk appetite dictates that you are willing to lose 5% of $50K, then your stop loss exit for any position should be $2500, and NOT allocating a mere $2500 for that position. in fact, you could allocate a substantially larger capital than $2500 and still not risk more than losing $2500, if you possess the knowledge and skills to protect your position beyond losing $2500.

of course, i don't advocate allocating 100% of your capital to one single position. however, minute the chances of this investment going to zero, there's still a chance. and if you invest/trade long enough (and here, i mean decades and numerically very large numbers of trades), it might just occur to you.

in a gist, allocating 5% is not advisable if you want to have a chance of making some real money, neither is it wise to constantly bet the ranch. a balance is needed here. what that balance is, depends on your risk appetite and expected returns.

the biggest advantage in adopting this approach is that this larger capital allocation can reap you a more meaningful potential reward....which is what every trader/investor seeks. remember, you invest/trade not for fun, but to make money....

next time, your friend tells you about his great 5% allocation theory, just smile and talk about the weather....either this or better be his closest buddy; he could be that tycoon you didn't know you knew...