Tuesday, May 27, 2014

The T Theory

After listening to Marty Schwartz' market wizard interview, I finally overcame my inertia and looked up Terry Laundry's Magic T Theory. The essence of the T Theory is:

  • The regularity of occurrence of market bottoms/crises.
  • The time symmetry between rallies and sell-offs, the longer the rally and the longer of sell-off. 
  • There are longer (40 year) cycles and shorter cycles (4 - 7 year).
T. Laundry's explanation of the time symmetry is like a process of cash buildup (during declines) and cash spend (during rallies). The other insight that Terry discussed is that market bottoms take place on panic selling. Terry also quoted another market newletter writer who observed that the market tops occur when there is excessive speculation. The behavior symmetry is mirrored by excessive greed and fear. 


Thursday, May 22, 2014

Tuesday, April 29, 2014

FCEL

Summary

The company uses fuel cell for power plants, different from PLUG, which is focused in forklift market. My understanding is that it is primarily for backup power generation. The main positive for the company is the perceived enormous upside if fuel cell technology gets wide spread adoption. This potential reflected in triple digit spikes, from time to time.

Although I have been involved in the stock market for many years, I really don't have any experience in analyzing companies of this kind and stock price under $10. I don't have a success model that I can follow. Please take what I say with a bag of salt, but I do want to be as honest.

Fundamentally, I see mostly negatives:

  • The company has a long history of losing money. There is no visibility of future profitability. 
  • The company has been around for almost 20 years, and yet its technology is still at its infancy. It is like a baby who never wants to grow up (different animal:). Usually, a break-thru or disruptive tech takes off very quickly (radios, tvs, cell phones, pcs, etc.).
  • The fuel cell technology is not completely clean and green because it still relies a relatively clean fossil fuel: ngas, but it is a fossil fuel nonetheless. Humans are becoming ever more challenged in finding and producing fossil fuel. The fact that we need to unlock ngas from shales shows that. Fracking can extend our reliance a bit longer, but ultimately, we need to move to renewables. 
  • The co. is at the mercy of the capital markets (equity and debt) for its survival. If you look, the company has a long history of stock issuance (dilution).
  • Natually, the co. is a big promoter of its own stock, with news of contract winnings. This is a big red flag because "pump and dump" was one of the worst dirty tricks in financial market.
  • Institutional ownership is only 31% and mutual fund ownership is around 8%. According to W. O'Neil, it takes big money (smart money?) to move stocks, not retail. 
Technically, it does not look either:
  • The market has been very brutal towards hi-beta stocks lately.
  • The stock is falling off from the right shoulder of the pattern, a major negative. According to O'Neil, you want buy break-out, not break-down. 
Questions that I don't know the answers yet:
  • Is it more efficient and more cost-effective to use fuel cell instead of burning ngas to get power?
  • What is the cost-reducing and efficiency-increasing curve going forward? 
  • There are ngas cars too. Is it more efficient and cost effective to use fuel cell cars instead? 
Again, I want to emphasize that I don't have a method for stocks of this kind. If I were to apply it, I would wait until the stock trades above $10 at least before I would even consider it. 

my 2c. 







Saturday, April 5, 2014

Jack Schwager


1. "Failure is not predictive. Even great traders often encounter failure – and even repeated failures – early in their careers."

2. "Novice should start with small amounts of cash because they might as well pay less for their market education."

3. "Persistence is instrumental to success. Most ppl faced with the early failures of some of the Market Wizards would have given up."

4. "Were it not for their relentless persistence, many of the Market Wizards would never have discovered their ultimate potential."

5."The idea that success is tied to finding some specific ideal approach is misguided.There is no single correct methodology"

6. "Generals always fight the last war; portfolio managers invest in the last bull market." [Rogers]

7. "There is no single true path in the markets; no single market secret to discover; no single correct way to trade."

8. "Those seeking one true answer to the mkts haven't even gotten as far as asking right question let alone getting the right answer."

9. "There are a million ways to make money in the markets. Unfortunately they are all very difficult to find."

10."Market success is a matter of finding the methodology that is right for you, not finding the one true methodology."

11. "Successful find a methodology that fits their personality."

12. "By living the philosophy that my are always in front of me, it was not so painful to take a loss." [Schwartz]

13. "If I try to teach you what I do, you will fail because you are not me." [O'Shea]

14. "If you don’t have an edge then the optimal money mgmt strategy is to bet it all at once–the epitome of bad money mgmt."

15. "Money mgmt cannot save you if you do not have an edge. It is helpful in preserving capital only if you do have an edge."

16. "So what exactly is your methodology? If you cannot answer that question, you are not ready to be risking money in the markets."

17. "Successful are confident that their methodology provides an edge."

18. "To make money you need to have an edge and employ good money management."

19. "Good money management alone is not going to increase your edge at all."

20. "If you have an approach that makes money then money mgmt can make the difference between success and failure."

21."I always want to be better prepared than someone I am competing against. I prepare myself by doing my homework each night."

22. "I was amazed to find that so many of the great traders I interviewed were workaholics."

23. "Why are so many people attracted to trading? Because it seems like an easy way to make a lot of money. "

24. "Trading is probably the world's only profession in which a rank amateur has a 50-50 chance of being right in the beginning."

25. "The possibility of short-term trading success by pure luck beguiles people into thinking trading is a lot easier than it is."

26. "It is a quirk of trading that you could be successful for the short-term without knowing anything; that possibility fools people"

28. "If trading is going well, it will seem effortless. if trading is not going well, you can't force it right by working harder."

29. "If you are out of sync with the markets, trying harder is often likely to make matters even worse."

30. "You have to learn to let the arrow shoot itself"

"In trading, just as in archery, whenever there is effort, force, straining, struggling, were trying, it is wrong."

32. "Keep reducing risk during equity drawdowns so that you will have a gentle financial and emotional touchdown." [Seykota]

33. "After a devastating loss, I always play very small and try to get black ink, black ink… And it works." [Schwartz]

34. "I will keep on reducing my trading size as long as I'm losing." [McKay] 

35. "In the end, losing begets losing. When you start losing, it touches off negative elements in your psychology" [Marcus]

36. "When I have had a bad losing streak, I have been able to say to myself, "you just can’t trade anymore." [Marcus]

37. "When you are getting beat to death, get your head out of the mixer." [Dennis]

38. "If you are in a losing streak, the best solution is not trying harder, but rather the exact opposite: stop trading."

39. "Traders may be aware of a losing streak but slow to realize that a loss has far exceeded acceptable levels."

40. "If the trend in your equity is down, that is a sign to cut back and reevaluate." [Marcus]

41. "My biggest losses have always followed my largest profits." [Schwartz]

42. "Winning streaks lead to complacency and complacency leads to sloppy trading."

43. "If your portfolio is sailing to new highs almost daily and virtually all your trades are working, watch out!"

44. "Don't focus on making money; focus on protecting what you have."

45. "You can do well with a mediocre method and good money mgmt, but go broke with a superior entry method and poor money mgmt."

46. "The amount of attention most beginning traders devote the money management is inversely proportional to its importance."

47. "Know your uncle point." [Schwartz]

48. "The most important trading advice if restricted to only 10 words: know where you will get out before you get it."

49. Why is deciding where you will get out before you get in so important? Because before you get in is last time you have objectivity

50. "You have to be willing to allow enough risk for the trade to work."

51. "Placing stop too close can lead to multiple losses. Traders will want to get back in b/c they don't think they're wrong" [O'Shea]

52. "Place stop at level that disproves your trade premise, not your pain level. Mkt doesn't care about your pain threshold." [O'Shea]

53. "In-the-money options may sometimes provide a more attractive risk management tool than stops."

54. "The need to be 100% right prevents many from considering partial liquidation.

55. "By trying to be 100% right, many end up being 100% wrong."

56. "If undecided btwn liquidating losing trade + gritting teeth + riding out remember there is 3rd alternative: partial liquidation."

57. "When in doubt, get out and get a good night's sleep." [Marcus]

58. "While you are in a position you cannot think. When you get out, then you can think clearly again." [Marcus]

59. "It is the 80/20 rule of life. In trading, 80% of your profits come from 20% of your ideas." [Platt]

60. "By only risking 1%, I am indifferent to any individual trade." [Hite]

61. "Effective money management is not a matter of complexity, but rather a matter of discipline."

62. "When I get hurt in the market, I get the hell out. It does not matter at all where the market is ." [McKay]

63. "If you stick around when the market is severely against you, sooner or later they are going to carry you out." [McKay]

64. "As long as you are in a position, there is tremendous anxiety. Once you get out, you begin to forget about it." [McKay]

65. "It is truly amazing how the market will not let traders get away with even a momentary lapse of discipline."

66. You have to follow your own light. When you try to include someone else's style you end up with worst of both sides. [Marcus]

67. “If you listen to anyone else's opinion, no matter how skillful or smart a trader might be, I guarantee it is going to end badly.”

68. “Confidence is one of the most consistent traits exhibited by the successful traders I have interviewed.”

69. “One way to gauge whether you will be successful as a trader is whether you are confident that you will succeed.”

70. “One sure sign that you lack confidence in seeking the advice of others.”

71. “If you know you have won the game of trading before you start, then there is no problem taking a loss.” [Dr. Van Tharp]

72. “What is the ultimate rationalization of a trader in a losing position? I will get out when I am even.”

a. “Why is getting out even so important? Because it protects the ego.” [Schwartz]

73. I was able to become a winning trader when I was able to say, "to hell with my ego, making money is more important." [Schwartz]

74. “If you get out even, you can say, "I was not wrong. I didn’t make a mistake." That need not to be wrong is exactly why people lose”...

75. “Amateur traders lose money because they try to avoid losing. Professional traders understand they need to take losses to win.”

Zanger: Learning to read charts is a lesson in "acceptance". Accept what the charts are saying right now. Don't let bias cloud your judgement $$

76. “To win at trading, you need to understand that losing is part of the game.”

77. “Do not confuse concepts of winning and losing trades with good and bad trades. Good trade can lose money and bad trade can make...

78. “A losing trade that adheres to a prftbl strtgy is still a good trade b/c if similar trades repeated process will win on balance.”

79. “You can't win if you are not willing to lose.”

81. “There is plain fool who does wrong thing at all times but there is Wall St fool who thinks he must trade all the time”

82. “Having a quote machine is like having a slot machine on your desk – you end up feeding it all day long.” [Seykota]

83. “Dangers of watching every tick are twofold: overtrading and increased chances of prematurely liquidating good positions”

84. “One of best rules anybody can learn about investing is to do nothing absolutely nothing unless there is something to do” [Rogers]

85. “I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.” [Rogers] 



“The fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions. In other words, take 100 percent responibility for your results.”

one of hardest things in markets and life is to look forward and not begrudge and bewail the mistakes of the past

Saturday, February 22, 2014

Strategy Summary

Strategies:

A successful trading strategy in a way is similar to a chess game like GO. The difference is that one is you and the other side is the market. Good chess player should be able to handle different moves by your opponent. A good trader should also be able to deal with different market movements as well. In the case of GO, the goal is to capture the bigger territory than your opponent. Very often, you have to sacrifice a few stones to achieve the goal as long as the potential territory (gain) is greater than the lost stones (loss). The concept of margin of the victory or loss is also important. In Go, if you can minimize your margin of losses (a few points), and maximize your winning (10+ pts). You can still win even if your winning percentage is below 50%. This is exactly what a successful trader does. When he loses, he manages to lose small. However, when he wins, he wins big.

A professional GO player can think of many potential moves by his opponent. This is because some players are very good in capturing territory through attacking techniques, while others are better in defending their territories by employing efficient formations of stones. Some players prefer territories around the corners and edges of the board. Others prefer the middle. Based on the understanding of his opponent, he needs to guess what moves his opponent would make. Then, he would picture how several scenarios would play out. Then, he would pick the best play. His opponent often places the stone at a point to his surprise. He has to think of a new move to counter that. A trading process should be very similar. You should always have a plan to deal with different market movements. Strategies of dealing with different stocks (opponents) should differ under different market conditions (bullish or bearish). But, there should be a common thread in discipline, loss cutting, etc. An amateur often assumes that a stock will go to his plan (up). When the stock does not, he will be at a loss of what to do next. If you are surprised, it means usually that you are not well prepared. It may even indicate a hole in your strategy.

Assessing the current environment

Before considering any trade, one should assess the condition of the market, the condition of the stock in consideration, and the condition of the relevant sector. If one is interested in the long side, one should only buy when "all the ducks are lined up", meaning the market and the sector is in a bullish mode, the stock has a strong fundamental outlook in the near term. Technically, the stock should be the strongest stock, and the stock has a right setup, meaning that it is just about to satisfy a buying criteria (could be 80day - 15day SMA crossover points, or breakout point, or reversal pattern, etc.). One should avoid buying "extended" stocks, no matter what the justification might be. In other words, don't chase the stock. The key is to buy the right stock at the right time, regardless of the time horizon. Once bought, stay on the bullish side until proven wrong. ONE CANNOT MAKE BIG $ TRYING TO TRADE BOTH SIDES! If the condition is indeed bullish, the stock should spend most of its time going up. Up-leg should be long both in price and duration, and the down-leg should be brief and short. The down-leg is the potential risk and the up-leg is the potential reward. Don't try to capture every wiggle of the price movement. If this is not the case, your assessment was wrong and you should exit your buy. The same is true on the short side.

Long stocks, which are options: C, BAC, MTG, HLS at extremely depressed levels. The stocks themselves have become call options.

Long ZIV/Short VXX, UVXY

Key Strategy: 15d-80d crossovers

It is only supposed to work for hyper-growth companies. For others, it has been treated as a test-trade, where trend is prone to reverse.

Big Negative surprise announcement.

Other related patterns:

  • Head-shoulder formation
  • Heavy volume, on a high point, with little price movement. 
  • Break-out Pattern
    • Cup and handle
    • Others

Intra-day techniques:

  • Big-Up Day or follow-through day
  • Bid-Down Day and day 2
    • Intra-day hedging
  • Intra-Day postive surprise announcement
  • Intra-Day Square-Root pattern (plateur shaped upward sloping chart).
  • Intra-Day buying a stock whose competitor announced bad earnings, using intra-day 10-15 min chart patterns.


New ideas:

Intra-day Hedging

There appears to be a greater negative drift for companies, which missed earnings, on a bid down-day.
Today, 1/24/14, was such a day. IGT, GDII, ISRG, RMD all underperformed  the Russell 2000. It may make sense to short these stocks between 10-11am when it is clear SPX will be down for good (low advance/decline ratio, high VIX move).

looking for N

After a company pre-announced on the down side, buy its competitors' stock for a trade. It requires a thorough understanding of the intra-day trading dynamics.

Intra-day surprise announcement.

There seemed to be a way of going for the initial trend (positive or negative) following a surprise news. A surprise event during a trading day does not give participants time to figure out what to do. They are forced to follow the initial trend, which should continue until the middle of the next day because there are always participants who did not learn about the event until the end of the day and they would be participating the same trend the following day. The stock should settle down quickly to a new compromised price (within next couple of days) between buyers and sellers. The opportunity lies in the transitional chaos.

Selling Calls on companies with really disappointing earnings

BBY, AAPL, LULU are recent examples, where the stock prices never got a chance to recover. The market and sector bearish sentiment contributed as well. Some studies are needed.

VXX hedging

It seems that VXX has a low delta with VIX when VIX is under 18. As soon as VIX crosses 18 towards 20, VXX's delta picks up. More data is needed. One idea is to switch VXX short into puts.  

Monday, November 26, 2012

Dennis Gartman


Dennis Gartman's Trading Rules List

by OLIVIER on JUNE 28, 2009
Some food for thought for the weekend. Trading rules from great traders are always worth reading. If you spend some time to understand the concept behind each trading rule this will improve your trading skills and take you to the next level. Also check this video where Dennis Gartman talks about the concept of keeping it simple.
1. Never, under any circumstance add to a losing position…. ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!
2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.
3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.
4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is “low.” Nor can we know what price is “high.” Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed “cheap” many times along the way.
5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.
6. “Markets can remain illogical longer than you or I can remain solvent,” according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.
7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds… they shall carry us higher than shall lesser ones.
8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect “gaps” in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.
9. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In “good times,” even errors are profitable; in “bad times” even the most well researched trades go awry. This is the nature of trading; accept it.
10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we or should we, trade.
11. Respect “outside reversals” after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more “weekly” and “monthly,” reversals.
12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.
13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen… just as we are about to give up hope that they shall not.
14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.
15. Establish initial positions on strength in bull markets and on weakness in bear markets. The first “addition” should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.
16. Bear markets are more violent than are bull markets and so also are their retracements.
17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are “right” only 30% of the time, as long as our losses are small and our profits are large.
18. The market is the sum total of the wisdom … and the ignorance…of all of those who deal in it; and we dare not argue with the market’s wisdom. If we learn nothing more than this we’ve learned much indeed.
19. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.
20. The hard trade is the right trade: If it is easy to sell, don’t; and if it is easy to buy, don’t. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidlmayer taught us this twenty five years ago and it holds truer now than then.
21. There is never one cockroach! This is the “winning” new rule submitted by our friend, Tom Powell.
22. All rules are meant to be broken: The trick is knowing when… and how infrequently this rule may be invoked!



Monday, November 12, 2012

Option Price ATM

Call/Put (ATM) = Sigma * S/ sqrt(2*Pi)
                          = Sigma0 * Sqrt(t) * S/sqrt(2*Pi)
                          = 0.4*S*Sigma0*Sqrt(t)

C/S = 0.4*Sigma0*Sqrt(t)

3 Month ATM:

Call/Put = Sigma0 * S / 5 = 0.2 * Sigma0 * S

SPX Call/Put Option ATM with Sigma0 = 20%:

Call/Put = 0.04 * S