Updates

I haven't really been updating recently, but that's because I've been trading less than usual. All my money is tied up in $YRD, which I think is heavily undervalued and will continue to move higher as a leading growth stock in the emerging bull market.

There was phenomenal revenue and earnings growth disclosed and the stock has been moving higher since. Amazing growth projected into 2016. I can't see a scenario in which the stock does not eventually print over $50, especially once it hits the IBD 100.

I think another great opportunity is $HIMX, since that stock will benefit from the success of AR/VR. It's a pureplay on the AR/VR idea and you don't have to pick which of the AR/VR companies will succeed. I could see this trading for over $50-60 as well, but I like $YRD more with the smaller market cap.

My short tight oils idea continues to work, but I'm not in it. There's more money to be made sitting on growth positions in a runaway bull market than holding terminal shorts in the tight oil companies. The most a short can ever give you is 100%. Buying stocks on their way up early in margin can yield thousands of percent.

I may continue to trade a small piece intraday in order to stay in-tune with the market.

Setups

Down day for me. Played some setups that didn't work out. Made a few mistakes, but didn't make egregious mistakes with position sizing or anything like that.

Obviously didn't end up buying $CPXX or $VCEL. Don't like buying into weakness, and these breakaway gap stocks usually have such high RSI that they tend to reverse after a week or two. They do eventually become good buys in the washout though. See $ERII for what I mean. $ELMD should do the same.

I didn't have shares available to short $CBDS. Missed the short in $VCEL even though I was watching it, I should have had a stronger short bias -- that was the trade to make today. With today's weakness in $CBIS and $CBDS, I have a short bias for the parabolic move in $TRTC tomorrow. Looking to put on a starter short in a gap down or green/red move, and then add into any pops that are lower highs. I can actually get shares to short of it. If instead it spikes, I know what to look for there too.

Still watching oil stocks for a bigger bounce to get short in.

My decorrelated long plays are $SPIL, $YRD, $TRXC

With $TRXC I am looking for the stock to hold 4.50, which it has had problems doing. If it holds 4.50, my bias is for the stock to have a wide range day to the upside assuming the market is not weak that day.

Taking Uncorrelated Portfolio Positions

I think it should be clear by now that I am as comfortable holding overnight positions as I am making intraday trades. If there's a sizeable edge I will take it.

Yesterday, I recommended shorting tight oil stocks into a sizeable pop. I still heavily believe in that trade, but I don't think I will put on a massive position like I would in my youth.

Yes, these companies are very likely to all go bankrupt. In the short term however, they can be influenced by oil prices and can move in a very correlated fashion. If oil opens up five bucks overnight, any shorts in oil companies I have may gap up and I'll be in a very uncomfortable situation. I would be left in a situation where I am either down or breakeven on all of them with the uncertainty of whether the session will fade or rip higher. With a smaller, manageable position I could comfortably add into that pop.

In other words, I'm starting to think of all these oil shorts as possibly being a single position due to the correlation. I need to manage the total aggregate of all these shorts. If I want to take on more overnight risk, I should ideally be looking for uncorrelated positions to reduce the risk and volatility. The best kinds of positions to put on would be longs in stocks that are not in the oil industry. That would hedge me against oil price volatility and general market volatility.

I've been thinking about looking to buy some of these recent biotech runners in a decline for a longer term hold. I think there's a bit of short-term alpha there, but I really want to hedge the high-conviction shorts in these tight oil companies. In particular I am looking at $VCEL and $CPXX. I haven't done enough research on $VCEL but I like the price action. $ELMD is a possible candidate as well since it has pulled back some but remains above its breakaway gap.

Good Opportunities Coming

I covered pretty much all my shorts into the big washout this morning, although I didn't get the best prices on $NADL as I would have liked. I covered about 1000 shares at 2.42 and then most of the rest in the 2.60-2.80 range. I can't believe I didn't cover all of it when I recognized there was a morning panic.

Oil stocks look like they might bounce in the next few days, which will provide a lower risk entry for putting on swing shorts. Can't wait.

$CBDS continues to run higher. The thought had crossed my mind to buy this pump a few days ago (in small size), but I missed it with everything else going on. It's going to set up to be an amazing short though, and that's a trade that can be taken with higher conviction. No shares to short at any of my brokers though... If one of you readers can get locates, then it's just a matter of sitting around and waiting for the top.

Tomorrow is a market holiday. Everyone should take this time to review their trades or go through educational material. Stay safe everyone.

Updates

Not much going on lately. I've been working on not overtrading and not trying to open new day trades after 12PM EST.

I'm holding shorts in $NADL, $EPE, $REXX, and $TPLM from higher prices. Looking for a washout this week to cover some into.

I think that $EPE, $SN, $OAS, $JONE, $DNR, $ATW, $NE, are good shorts, along with pretty much any overleveraged tight oil play guaranteed to go bankrupt with low oil prices. I'll compile a full list soon.

However, I would NOT short them here, and I certainly wouldn't do it with big size. They've already been sliding off in the last few days. A better spot would be to wait for some kind of sizeable bounce to put shorts on. If you are lucky enough to have some short, you are currently in the drivers seat.

When you do put on these shorts, I would be prepared to hold them for days, weeks, possibly even months to collect that FREE money. And when I say free money, I really do mean free... zero chance a company like $NADL will make it through the next couple years without bankruptcy and restructuring.


I'm also keeping an eye on $WNDW to see if it goes parabolic in the next few days/weeks. That will set up to be a nice trade to the short side.

Stay safe out there.

Getting Back to Basics

Did some thinking over the weekend. I'm going to try to strive and be more consistent by narrowing down the amount of setups I'm looking at.

I'm going to focus and specialize on shorting garbage stocks that are overextended. Ideally the stock will be up on a wide range day, or it will go parabolic intraday with insane range. I'm looking to find the top in these stocks, and I'm not looking to short into grinding up-movement.

Stuff I'm potentially looking at for tomorrow:

$CARA
$SRPT
$HGSH (wish it had better liquidity)
$KTOV


I'm also looking at $ZYNE as a short over multiple days if we can get the price to pop up some more.

Lots of these cannabis stocks are being brought up sympathy due to $GWPH. But you can see with $ZYNE just what happens to these sympathy stocks the next day after a big move.

Reviewing My Mistakes

Not a great trading day for me today, but a good learning experience. I suspected the sector move but traded poorly. Instead of ending the day up 2.5-3K, I ended up about 350 with a ton of churn. I probably made out with half of that net after taking commissions into account.

One thing that crushed me is I traded way too much size in $VTAE. These overnight gap up microcaps really throw me for a loop when it comes to position size. They're cheap so your first thought is to buy a lot of shares, but there's so much volatility. It turns out that buying 4000 shares of $VTAE is NOT the same thing as buying 8000 shares of $TCK on a day like today.

I waited off the open and it looked like there was buying in $VTAE. I accumulated some on a dip and added more, without realizing just how much size I put on. The next thing I know, the stock rips lower and I'm down quite a bit. I got a bit chopped up when I tried to flip it around to the short side. The thing is, I don't like shorting gap up stocks since they're still green on the day. The risk/reward just isn't there.

Going forward, I am going to really watch my size on these microcap low floaters.

Luckily, I caught a piece of the commodities sector move. I had expected Steel would lead since it led the last leg, but I was wrong.

What I should have done was spot the relative strength and focus all my efforts on $TCK. What I ended up doing was dividing my focus among $TCK, $FCX, $ATI, and $AKS. $ATI and $AKS were good winners for me, but I would have done the best just buying $TCK when I noticed that it didn't fill its gap up on the morning washout in $XME and $XME made a new high. That was a good, easily-captured 50 cents of upside that could have been done on huge size with no fear.

Today's experience has given me another data point for revising and improving stock selection and entry in commodities sector moves. I'll post on that after I think through the problem some more.

Why the Equities Markets Have the Biggest Edge

Third post of the day, wow. I'm really pouring my thoughts into this blog.

In undergrad, my professors taught strong and weak efficient market hypothesis. I went to one of them mentioning that I believed that I had found patterns in the market, and she practically laughed at me.

It seems absurd to me that academics cling to EMH like they do. Take for instance, the scenario in which an insider knows of an upcoming buyout in their company for $20 a share higher than the current market price. That insider can purchase shares all the way up to the buyout price and make a killing, beating out uninformed market participants. This example shows an instance for which the market is not efficient by illustrating how someone trading on inside information can reliably beat the market. Since only one example is needed to disprove a theory, I just went ahead and disproved EMH.

Today, I got thinking about this some more. In the movie Margin Call (watch it if you haven't seen it), the character John Tuld says: "There are three ways to make a living in this business: be first, be smarter, or cheat."

All of these edges are informational in nature!

You can be first if you run a HFT shop and front run order flow, in which case you have information about market orders.

You can cheat if you have knowledge of an upcoming catalyst that is not publicly known, like the insider trading example I gave.

I can't trade like a HFT fund and I can't cheat, which leaves only being smarter. But even that is informational in nature.

That information can be in the form of experience, allowing for stat arb trading. I know that when X, Y, Z conditions occur (e.g., a setup), there is a X% likelihood of something happening which is exploitable for positive EV.

That information can be in the form of fundamental evaluations, such as valuation models or being able to value a stock better than other participants. I may know that a stock is a fraud that is worth zero when the stock is trading at $20 due to sheer hype. I put on a short against the prevailing herd mentality.

That information can be in the form of due diligence, where I pour through SEC filings and company reports to find something everyone else missed.


Whatever your edge is, it all comes down to knowing more than the other market participants. Like in poker, we are purposefully exploiting less-informed opponents. Thus, all our edges are informational in nature. The more information we have over our opponents, the bigger our edge. In other words, our edge is maximized either by us having more (relevant) information to make decisions on, or if market participants have less information.

For this reason, it should become obvious that stocks will generally provide a much bigger edge than futures, forex, options, and anything else. The players in other markets are generally more sophisticated and knowledgeable, while in stocks there are plenty of mom-and-pop retail participants. There is also plenty of available information for stocks. You can look up company filings and websites, the short interest in stocks, other stocks in the sector, and so forth. This gives an edge to someone who does their research over lazy participants who choose not to.

This carries over to individual stocks as well. Your edge is greater in stocks for which the average participant is less informed. This is important knowledge. Once you truly understand this, you will understand that your trading results can be improved by purposefully seeking out stocks for which the inefficiency is greater. I suspect this is why a lot of the top traders on profit.ly have made their money shorting pumped up penny stocks, which is optimal for the reasons I just gave.

Account Size and Trading Strategies

If you are trying to maximize account growth, the trading strategies may differ based on account size and the liquidity of the instruments being traded.

With small accounts (2-4 million and under), your best strategy is to trade volatile microcaps or stocks under $20 on a short term basis. In other words, you want to trade stocks that have smaller floats and have some kind of catalyst. They make the biggest percentage moves intraday and you can really compound your money consistently that way.

With an account of $4-20 million, you can continue to trade some short term moves. But a lot of stocks won't have the liquidity needed to use all of that capital (and there won't be enough plays), so you will have unused capital. With accounts of this size, you might be best served with a CANSLIM type of approach and taking chunks out of long term moves in growth/speculative stocks during good market environments.

With an account of $20-100 million, you're trading a lot of growth stocks but you'll probably have to graduate to a long-short balanced portfolio. You're probably not trading much intraday moves since you won't have the time.

With an account of $100M-1B, you're probably looking to take advantage of market environments more than anything. You can continue to long-short, or you can just buy market-tracker ETFs like SPY that can absorb all of your size. But the idea is, you want to be long in bull markets and out (or net short) in bear markets.

With an account of $1B or greater, you're going to be looking beyond just equities most likely. You might look at all sorts of macro trends and instruments to absorb all that size.

What's the takeaway from all of this?

I'm nowhere close to having to use strategies other than the ones I'm currently using that are working for me. But I look forward to the day where I'm doing all kinds of different trades and timeframes. I'd imagine trading would become really complex at that point in terms of managing all the different positions.

The Sector Move is Back

Had a decent day today, primarily on the back of $ORPN. I saw the morning volume and caught the move from $5 to $8 for about a dollar. I'm OK with missing out on an additional $2 of upside since the intraday range on the stock was so extended already.

Too bad it faded back so high from the high of the day, since it would have made a good short candidate tomorrow. It reduces the amount of potential profits for an unchanged or gap down open tomorrow. Still a good short candidate if the stock gaps up at all overnight, the bigger the better. My ideal scenario is for the stock to gap up to $5 or higher and then dump off the whole day.

I didn't see anything else interesting out there with volume so I sat on my hands most of the day, until after the Fed meeting when I was surprised at the sudden spike in $X. I saw that it was confirmed with the rest of the commodities/materials stocks and took a position, netting about 35 cents in 30 minutes.

Here's the sector move I was looking for. It didn't come from the hot-rolled ITA decision like I expected, but that shouldn't change much. $X is still clearly leading and will probably be the easiest to trade out of the bunch. Some of the lower priced commodities stocks like $FCX, $TCK, $VALE, etc may give overall decent returns on a percentage basis, but as laggards will probably be tougher to trade with choppier price action.

I do expect a gap up in these stocks tomorrow, after which the plan is to wait for a bit and let them pull back in a bit before looking to get aggressive.


I'll probably also take a look at anything with volume as well, although that will take less of a focus than usual with the potential of a commodities sector move out there.

Bios In-Play

I got a bit too excited on Friday morning and bought $X off the open without waiting and observing the price action. I was up a couple grand at one point, but I noticed $AKS was selling off... next thing I know, someone sells a huge block of shares and crushes the stock 70 cents lower. Dumped everything out for a small loss. Luckily my Thursday afternoon cheat buy was able to bring down my average cost and keep my overall loss minimal. I think I lost around $300 overall, which is pretty good considering how much size I had on.

I got a little too excited because the volume bars in the first 10-15 minutes were insane. I definitely thought it would be a big volume day,

I'll probably wait the extra 3-5 minutes off the open from now on rather than get in at the open. The hot-rolled decision will probably be a catalyst tomorrow, but I'll settle for a smaller, more predictable profit by waiting for $AKS to be above $4.20 to confirm the move.

I had a decent up day today playing a couple earnings winners in $DDD and $KNDI. Missed the move in $ZYNE though since the volume was still a bit low in that morning consolidation. Will definitely be watching it tomorrow to see if the volume is there.

$CPXX is on my watchlist. Big move in the afterhours on the back of the unexpectedly great phase III results. It's a low float stock, so it could really move tomorrow.

The Steel Sector Move and the Easiest 5% You'll Ever Make

So some of the Oil stocks have finally cracked lower, including the soon-to-be bankrupt $LNCO and $LINE. This is why I mostly avoid buying stocks that are  range-bound - it's generally hard to predict what a stock will do when it's range bound. There's temporarily an equal amount of buyers and sellers, and you usually will not have enough information to predict the next event that will bring in enough buyers or sellers to tip the scales.

Some of the oil-correlated commodity stocks do look like they are setting up for higher though, like $PBR and $BTU. $BTU showed impressive volume today as a follow-up day to yesterday's earnings release. It wasn't bad for a day 2 move, and my ATR/3 formula would have helped you safely score 60 cents without overstaying your welcome if you bought it any price under $6.52, which is awesome considering the almost-parabolic move off the lows in the morning. Speaking of that, Nate Michaud bought into $BTU on that morning washout and crushed the stock for $1.25 a share on some of his sells, which comes out to like 20% on one trade. I don't trade the morning washouts myself, but I definitely want to track the setup going forward. I think I might demotrade it or use small size until I can figure out the factors that further increase the probability of that setup.

Now onto the main focus of today's post: the sector move in steel.

I suspected this would happen when $X held up really well in the decline of the last few days. The stock is now surging upward, almost breaking out of the multi-day high at $14.54.

$AKS followed as well, almost breaking out of $4.20.

You can see the extreme imbalance of buyers versus sellers. In one day these two stocks moved all the way from the bottom of their range to the top. The price action was so strong that I couldn't help but start accumulating (my initial buy on $X was 13.75) before the breakout even occurred (gasp!) for an overnight hold.

I felt comfortable doing it since the setup is such a high EV trade. When trades like this come around, I like to cheat the breakout a bit to give me some cushion to really swing big size at the breakout. It's unique to my trading style and lets me capture huge returns on these special setups since the shares at the lower price bring down my average share price. I am never red on the position and don't get shaken out if the stock pauses and consolidates a bit above the breakout level.

My plan is to plow my entire account into $X on the breakout, which will likely happen at the open. That's another reason why I love $X and $AKS, as well as some of the other institutional commodity stocks in general. Their floats are so thick compared to their daily traded volume (which is also pretty high) that they don't gap much, if at all. It allows most of a big move get captured by day traders, as opposed to gaping up $5 overnight to reward people holding overnight. They're also so liquid when they make these moves - you could comfortably trade $2-4 million dollars worth of shares in $X alone without pushing the price around that much. Not to mention you could hold about half a million in $AKS.

Although the rest of the steel stocks like $RS, $ATI, and $NUE are moving up as a group and have better fundamentals, $X and $AKS are putting in the biggest moves. I finally figured out why today:

As of 3/1/2016
$X short interest: 52M shares
Today's volume: 29M shares

$AKS short interest: 40M shares
Today's volume: 14M shares

These short shares are only about 25-35% of each respective float. But they're massive compared to how much volume these stocks are trading, and keep in mind they both did 255% of average volume today. These short sellers are locked short. They couldn't all possibly get out of the stock in a single day, even if they wanted to.

It's like starting a fire in a crowded theater when there's only one small, narrow exit.

These stocks are likely to rip higher tomorrow, and may even put in continuation moves the following day. The price action is very similar to solars like $CSIQ and $SPWR years back, with the reward/risk heavily skewed in favor of upside. I could see $X and $AKS doubling (possibly even tripling for $AKS) before all is said and done.

I don't know if the highest EV move in the short term will be to just blind hold though. These stocks are now trading on hype and anticipation of the USDOC tariff decision on hot-rolled steel to come out on March 14. Since we're now trading in anticipation, there's no real way to predict the decision or even how the stock will react to the decision. From a logical standpoint, the hot-rolled steel decision should theoretically be less impactful than the cold-rolled steel decision. Hot-rolled steel is cheaper, lower margin steel and the case does not involve China, who made up a massive portion of the total cold-rolled market and was given a country-wide 265% import duty since none of the Chinese companies responded. If the hot-rolled steel case involved China, this would be a total no-brainer slam dunk -- why would these Chinese companies respond now when they didn't for the cold-rolled decision?

The safest, most predictable profit would be to buy the breakout and sell prior to the close. But is that the highest EV outcome? I don't know...

A Second Leg Higher for Commodities Stocks?

I had to close my overnight $LNCO short position at a loss since crude was up, causing some of the beaten down oil stocks to gap up. It was actually a great opportunity to short, as $LNCO and $LINE along with some of the other gapped up commodities stocks faded off the open. I'm not sure the reward would have been there though, since that trade is betting on $LNCO to double barrel when the volatility and range is likely to be lower than the previous day.

I noticed that buyers came into $X and $AKS this morning, which makes sense considering they led the last move, they're now upping their steel prices due to the import duties, and I believe there's still the tariff decision for hot-rolled steel to come. I think March 14 based on message board chatter, but don't hold me to it. 

The strength in crude also forced me to check out oil stocks across the board. Some of the in-play oil stocks have held up surprisingly well, $LNCO and $LINE being some of them. I think this further confirms that you can't predict a stock like $DNR to have gotten crushed in the selloff, at least not on fundamental reasons alone. Selling it too soon was almost certainly the higher EV play.

Seeing certain oil names holding up well and the commodities laggard $BTU move up today on high relative volume leads me to believe that there could be another leg higher for some of these oil stocks. Shorts were salivating when these junk names were flying higher since there is a certain degree of inevitability for some of these names going bankrupt. 

However, in the short term they can still move higher if oil prices trend higher. My plan is to prepare a list of some of the stocks that have been holding up well and buy on the multi-day breakout if the sector confirms the move. These would be short trades and I wouldn't hold longer than one or two days max.

In other news, $TRXC is squeezing higher after the earnings report and in anticipation of FDA approval.

The volume is definitely there. You can see it on both the daily and weekly charts. If there is some constructive sideways action at these levels it could prove to be a nice trade above 4.75. It could run for a dollar or more past that level if you hold until you see a climax buying day. A lot of short sellers have been putting on short positions in this last month (see the streetsweeper report for proof), and the short interest has increased. It reminds me of the price action in $PLUG back in 2014 - lots of  PR and hype fueling the buyers, early short sellers pounding the table about the valuations and the multiple dilutive offerings pushed out by the company the whole way up, and a ton of money to be made by those who know what they're doing.

This would be a short term trade for me since this is a stock I'm not sure I want to hold into the FDA decision. Since we don't know when that FDA decision is, it could come at any time. There's lots of hype and expectation built into this thing already. If for some reason there is no approval, the share price could get cut in half overnight. 

$LNCO Overnight De-Coupling Trade

I talked about sector plays in my previous post, but I wanted to discuss this interesting trade setup before I discussed sector plays some more. Although you could consider this trade to initially stem from a sector move.

I mentioned how $LINE and $LNCO had been moving higher on the back of a larger sector move in oil stocks:

These two made some speculators a lot of money in that move higher, although I doubt there were many who held all three days of that move. Today we had the sector sell-off in oil stocks and commodity stocks overall. A lot of the junky oil stocks that became overextended sold off today and made great shorts. $DNR ended up close to down 40%! 

As a sidenote, I actually shorted $DNR, picking up about 15 cents in a stock that sold off over a dollar. The ATR/3 I had calculated for it was around 21 cents. I think the correct EV-maximizing move was to hold for longer (like the whole 21 cents, maybe a bit more than that), but I don't think you can say that it was a mistake to not have held it the entire day and nail it for a full dollar or more. I don't think there's a way to predict (yet!) that $DNR would have been the stock to collapse when some of the other oil stocks bounced a little after the morning washout, so I think covering too soon here is higher EV than holding and risking potentially puking the position into strength.

But something really interesting to me is a potential $LNCO short into the close (alerted by Tim Sykes). $LNCO and $LINE are very correlated, because $LNCO is a holding company and holds interests in $LINE. You can see for yourself in the graphs I posted.

Both stocks bounced for most of the day, which signaled to me that there were dip buyers in these two stocks. This was somewhat peculiar, since $LNCO and $LINE are junk companies that many predict to be eventually bankrupt. These companies were being bought when other speculative oil companies, some having better fundamentals, were being crushed. I checked r/wallstreetbets and suspected that uninformed dip buyers were likely buying into these two stocks (no doubt setting themselves up to be bagholders), which was holding up the price temporarily. However, the law of junk stocks is that they can move higher a lot (percentage wise), but fall down a lot as well. I suspected that these two stocks would eventually crack and "catch up" to the rest of oil stocks.

That happened in $LINE, as the stock cracked hard into the close, selling off about 35 cents in an hour (which is a huge percentage move on a $1.60 stock). However, $LNCO did not budge in that selloff. $LINE and $LNCO became temporarily de-coupled in price action. Why? Maybe someone big was buying just $LNCO or selling $LINE in that last hour, but my conclusion was that there was clearly an inefficiency.

In other words, I believed $LNCO and $LINE would trade in lockstep again, in which case $LINE would have to move higher to regain its loss or $LNCO would eventually crack and "catch up" by trading much lower to follow the move that $LINE made. So I placed a short position on $LNCO into the close thinking the second scenario was more likely to play out, and I would look to cover in the morning. I am already up in this position overnight, so $LNCO could very much open 10-20% lower. I wish I shorted more, but honestly it was the first time that I've seen this.

It's an interesting scenario, and probably not a scenario that will occur often (at least, often enough to be worth focusing on). But it is very clearly an inefficiency, and something that suggests these lower priced stocks are full of inefficiencies. It should give hope to anyone looking to beat the game. If anyone out there has ideas, I'd be very interested in discussing or figuring out why this setup happened.

Trading Sector Moves

I like trading in-play "special stocks", such as earnings or contract winners (or some another powerful catalyst), as much as the next person. However, I also love trading sector moves. I'm a firm believer that sector moves are a high probability setup (which I will explain in a later post), and allow traders to reach the "next level" of trading. 

Imagine having a single in-play stock, such as a $5 tech stock doing 2 million volume. Let's say your liquidity cap is 100,000 shares, meaning you could comfortably trade $500,000 of the stock. A 10% move would be a nice $50,000 gain.

Now take a sector move. During a brief period, an entire sector of stocks becomes correlated and makes big moves. It is essentially a single trade idea, but now I can deploy capital across many stocks. That entire sector could absorb millions of shares intraday and you can swing size. 

In the last several trading sessions, the materials sector has been extremely volatile and in-play. You can see a chart of $XME below:

The last 5 trading sessions all had high relative volume, and the increasing volume shows increasing interest.

I think a big catalyst was the anti-dumping tariffs placed on Chinese steel that happened last Wednesday, leading to powerful runs in steel stocks $X and $AKS. Combined with higher commodities prices, all sorts of commodities stocks were being taken up in the run. Some of the heavily shorted oil stocks made huge runs over the span of a few days as speculative money flowed in, such as $SDRL, $LNCO, $LINE, $EPE, $DNR, etc. The junkier the company, the more it gained on percentage terms. And if the company had any kind of catalyst to bring attention to the stock, the volume was there.

Trading the sector moves allowed huge returns to be made. It was almost effortless.

This has led me to the realization that effortless trading could be found if I just sat on my hands and waited for the few times a year when a sector becomes in-play.

Getting Better at Taking Profits

A problem I've always had is taking profits. I've always been good at letting winners run, but part of being patient means accepting the reality that some winners will come back on you. It can be psychologically taxing to watch a big winner devolve into a breakeven trade. Based on some successful intraday traders I researched, I have an unconfirmed belief that I would be vastly more profitable if I repeatedly took "singles" instead of holding for home runs.

However, I think this is more of a mathematical problem stemming out of incomplete-information, rather than a psychological problem of being too greedy. It really has to do with how intraday stock returns are distributed.

Below is an image of some distribution shapes:

If stock returns had a distribution in which home run returns occurred relatively frequently, then the EV maximizing decision may actually be to hold your winners until the end of the day. It would be normal for some trades to come back on you. But there would be so many home run trades that they would more than compensate for those scenarios.

However, I have realized that is not the case. Our experience and intuition makes it clear that a $2 stock going to $10 is a rare occurrence, and even rarer still that I will be in that stock. For the vast majority of trades I enter into, the home run never occurs. In reality, taking smaller, consistent profits would be a higher EV route. Embracing this decision means that you MUST recognize that you are giving up home run potential and not beat yourself up when those home runs happen without you.

However, the question remains of where do you take those smaller profits? It's common knowledge that your average winner should be larger than your average loser. It's also common knowledge that you should sell into strength and cover into weakness. But beyond those platitudes, there isn't much more to go by.

Lately, I've come up with the concept of using ATR(X) divided by 3 in order to come up with a maximum profit target in order to force myself to close out positions. ATR is the average true range over X periods. The number I use for X is how many days the stock has been in play. 

This formula does not work if you are trading the first day that a stock has been in play. If you are lucky enough to be in on the start of a move, then your guidelines are the past ranges that the stock has been able to produce in the past, along with the size of the float, etc. I am more likely to hold into the close on day 1 if I have a great price.

However, if I am trading a stock after the day 1 move I begin to rely on my formula. On day 2, my formula would be ATR(1) divided by 3. In other words, I would take the ATR of the day 1 move and divide it by 3. That is my MAXIMUM profit target. I force myself to get out of that position if I am up by that much. Of course, I can always get out of the position before that target is reached.

This formula has the advantageous aspect of reducing my maximum profit target if the range of the stock decreases over time. It also allows me to capture profits as the stock begins to fall out of play and becomes less volatile. It also keeps me from holding positions longer than I should, especially on days in which there is a greater chance that the momentum may reverse on me.

I calculate it for the stocks I am monitoring the night before. 

First Post

This is the first post to my blog. I chose the name as a joke, as I really intend for this blog to be quite serious. I want to document some trades and potential trades, but more importantly I want to discuss trading theory and concepts that I may have conjured up from a unique perspective of poker, statistics, psychology, and economics. My theories will mostly be directed towards maximizing the expected value (EV) of each trade, a concept that poker players frequently use. My trading style can be described as context-based price action. My intent is to get really adept at trading an intraday time frame and then eventually expand my time frame by adding additional layers of complexity.