Confessions of a swing trader

It is Dec 19 2015 and a whole year is almost behind me. It has been a momentous 12 months for me and I have a learning experience to share. My trading account had gone on a nosedive and gave back my year to date gains and then some. How did that happen? I was over confident and sold more puts and were holding a few stocks at the top of the market when I should have been sitting on 50% cash knowing how frothy the market had become (hindsight is 20/20 but there was no excuse as I had gone through 2008). Considering the fact that I had close to 40K+ of realised gains (100+% ytd returns), the one thing I should be doing is scale back risks and not business as usual. I am no Niederhoffer, but what my portfolio went through the last 3-4 months albeit tiny compared to his billion dollar portfolio reminded me of Niederhoffer's trades before and after Sept 11 2009. This was told in the April 22 2002 New Yorker article titled "Blowing Up" by Malcolm Gladwell. Victor Niederhoffer was collecting juicy premium selling LEAP puts on S&P and when market crushed big and he was sitting on those upside down put options and his account holding decimated as a result. Niederhoffer would spend the next many years trying to rebuild his trading capital. Here is the article on Gladwell.com a very entertaining read.

August was THE month that undo all the good deeds. I remember how in July I had noticed volatility was starting to pick up. Daily market range had gotten bigger à la summer 2008. As Aug 1 kicked in and summer boredom took hold and the angst was palpable. The market was not bored by any stretch of imagination on the contrary one could tell from the daily point swings that the amplitude was about to get bigger. Day traders, machines, algos, just about everyone were antsy (the smart ones had gone to the beach in the Bahamas). A lot of chatters, twitter rumors, anything to get the market to move bigger. Everyone was talking about a market top but no one wanted to be the first to get out of the door. In the mean time scalpers and day traders were still trying to trade and fade and trying to irk out a living every day.

My trading strategy over the last 2-3 years have not changed much. I would pick a stock I don't mind holding if it gets put to me and sell cash covered puts on. If it ends up getting put to me, I would turn around and sell calls, thereby generating my own dividend income so to speak. My criteria for stock selection is one that has a good beta, and higher beta stocks are usually associated with high risk stocks. High beta can also come about if there is upcoming earnings or anticipated news. My rule of thumb is one where the option premium will pay me at least 5%-6% or more over 1-2 months and stock price of anywhere from $4 or $5 to $10 a share. Unfortunately, this only exists in stocks that are highly speculative, and usually one with debts and risks. These stocks are also the ones shorts like to target which means they can be subjected to pretty relentless shorting and inversely occasionally a huge short squeeze. I do not ride my put options till expiration so I can make 100% gain if they expire worthless. I typically close out my options once they have decayed sufficiently and don't quiver over the last 5 cent decay over 3 more weeks. This protects me against an unforeseen big shock and I can take advantage of the next volatility spike when it presents itself. In short I sell volatility. This strategy works fine until a broader market shock happens quickly and there is a stampede. In addition, if this is a biotech or pharma speculative stock and had a disappointing trial result, shorts will be feasting on the stock and decimating the stock. Similarly if someone had written a damaging article and publish it online for everyone to read, the Twitter world and everyone would be all over it and its stock price would move sharply lower swiftly. This is what the US stock markets have become, every man and woman for his or her own greed.

In my case there were only two culprits: namely XOMA and PVA. XOMA, a case of a 30 year old Bay Area pharma company not being able to successfully develop a working drug after 3 decades but somehow manage to chuck along and survive. PVA, a case of everything that can be wrong with the management of a natural gas exploration company and is wrong, a company not executing the right plans, taking on debts when the going was good for the firm. I was overweight these two stocks having made money trading and selling calls and puts on them. The option premiums I collected over the past 16 months had more than zeroed out my cost in XOMA's case so everything I made from that point was a mice steady income. This was true until the stock got decimated by shorts on bad trial data one morning I woke up to, The move was swift and there was no time to exit any options, they were upside side. My put options were exercised and I was holding worthless XOMA shares once expiration day came. In the case of PVA, I was awe struck by the speed at which the stock sank, as oil price went from $70 to 60 to 50 a barrel in a few months and natural gas price sank to fresh 52 lows each week. I was like a deer frozen by the headlight, in disbelief. You asked why didn't I use stop loss, I do not normally use stop loss as I don't want my stop loss to be hunted (now NYSE has done away with Stop losses and GTC orders). . PVA share price went from mid 6 to 5 to 3 and soon to $1 in the span of a few weeks. The mistake I made here was liquidating both positions walking away too late only when I realised that conserving trading capital is RULE ONE.

It looks like I broke my own money management rule in 2015. Lessons learned and I shall strive to be a better trader in 2016.

Here is a book I recently read and found it to be entertaining and helpful to my trading. I highly recommend anyone interested in being a better trader to read it.



Here is an excerpt from the back of the book - "Trading is a battle between you and the market. And while you might not be a financial professional, that doesn't mean you can't win this battle". Through interviews with twelve ordinary individuals who have worked hard to transform themselves into extraordinary traders, Millionaire Traders reveals how you can beat Wall Street at its own game.

Reading The Tape, Jesse Livermore and Nassim Taleb

I am a momentum trader and I watch the tape like a hawk. To me the most important skill a trader can have is to be able to read the tape as there in lies the collective greed and fear of the masses. Knowing the tape intimately also helps to identify tricks such as a small cap or penny stock pump and dump. This is especially important in today's "Man Vs Machine" computer algorithum driven markets.

In my opinion, profitable trading is not so much that you the trader get the price of a stock right, but rather it is the ability to anticipate correctly what the masses will do and be ahead of the crowd, whether that is to buy into or to sell out of a position.

I trade stocks and sell covered calls and puts. Some days I am just scalping a stock if I can see which way the momentum is. Other days I swing trade and hold on to a position for a few days or weeks if an opportunity presents itself. Otherwise I am just as happy to be in cash until the risk rewards is good enough for me to risk my chips. I don't have fancy software nor can I afford Bloomberg terminals. In the picture below, you can see my set up - A six year old 14 inch Acer laptop tethered to a 18.5 inch monitor, and a 12 inch Lenovo Thinkpad (which is also my "mobile" trading station when I am on the road). I use TOS (Ameritrade's ThinkOrSwim) platform and also Fidelity Active Trader although less on the latter. It is a very basic setup, nothing fancy, but it works and I trade profitably for a living from 5am to 2 or 3pm PST. I love being on the west coast, as I am done by 1 or 2pm most days and have the whole day ahead of me still to do everything else.

One of my favorite trading books is "Reminiscences of a Stock Operator" by Edwin Lefèvre - a book about a legendary stock operator by the name of Jesse Livermore. You can read more about the book and Jesse Livermore Here on Wikipedia. It is a book I read and re-read many times. The tales in the book as related by the writer taught me more about the psychology of trading than any other trading books I have read. The greed and fear of the masses is what makes an irrational market stay irrational for a long time, much like what we have today - a market that is far removed from fundamentals and the real economy on Main Street.

If you are serious about making a living trading the market. You have to get yourself a copy of the Jesse Livermore book and read it from cover to cover. You won't be disappointed.

The other book I highly recommend is "Antifragile: Things That Gain from Disorder" - by Nassim Nicolas Taleb. It is an easy (or rather easier) read than many of Taleb's books. If you are adventurous and up to the challenge, I would suggest also picking up a copy of "The Black Swan -The Impact of the Highly Improbable" another book by the same author. Both books are about "fat tails" and unexpected event risks. The first book has a more personal tone with the author's real life stories, the latter on the other hand has lots of technical charts and analysis.

These books are indispensable to me. It is funny that I enjoy reading them more than books of any other genre (except for photography), but that is me I guess.

Trade with caution. Have a profitable trading week.

My Reading List....Eight Website Links

My weekends and evenings are spent doing web research on stocks I own and potential stocks I would like to buy or sell puts on. I scan the web for headlines, opinion articles and scan the message board postings for comments worth noting. I look into short interest and insider buys or sells. Below are a couple of very useful links I use on a daily and weekly basis.

1. Top of my list is Insider Monitor - Find out if insiders are selling or buying - Link Here Type in the ticker symbol and your jaws may drop, you have been forewarned. Here you get a long list of insider buys and sells, dates, shares, share price and whether they are options exercise (See for yourself how much Google (GOOG), Apple (AAPL) and Priceline (PCLN) executives have been selling their stocks as share prices hit 52 weeks high these few months). Do you see what I see...There is not a doubt whom QEs benefited, and who has been buying up California's luxury real estate last 12 months courtesy of the Fed's printing press? Still think it trickles down anyone? Someone sends this link to the Fed please, they should see it for themselves.

2. Looking for information on short interest? I like Nasdaq short interest Link page. Here you will find info on short interest first of the month and mid month, days to cover and trend, whether increasing or decreasing. If you are looking for a candidate for a potential short squeeze play (and assuming you have done all your other research into the company, products or services and management and financials), this is a good site for an overall picture where the shorts might be active.

3. I watch daily Gold chart - Link Here and Silver chart - Link Here for major spillover moves in mining stocks. They can be found on livecharts.com and I prefer their charts to the charts on Kitco.

4. Indexq.org Link for my pre-market morning dose of overnight closes and summary of world market indices and currencies while I am having my cup of homemade latte

5. Kitco for macro news and technical analysis on gold and silver and other precious metals. Must read if you are interested in the hard metals

6. Volume Leaders, Price % gainers, % losers etc Link if I am looking for a new stock candidate to buy or sell puts on. I have this page open first 30 minutes of the morning market hour to help spot movers and find potential stock to add to my watch list

7. Folks at ZeroHedge - Link Here and the many interesting, enlightening and non mainstream articles I enjoy reading daily. All gloves are off here in the comment section so don't take them too literally

8. Last but not least, my favorite site and favorite folks at Dailyfx - link with their up to the minute real time forex and econ news and awesome technical analyses. I have learnt much from charts and videos you put up. I do not trade forex but use the charts to help me understand equity market behavior. A big Thank You

No, CNBC is NOT on my Reading list....

I used ThinkOrSwim Ameritrade. It took a little getting used to switching from Command Center, but I am liking it. All the info on one page(or two pages depending on how you set your screens up). Level II bids and asks, volume, implied vol and greeks for options, broader market indices and all the technicals you need to monitor a stock closely plus latest news, earnings date at your finger tips.

Hope you find the above links useful in your trading .

A Trade At A Time...Staying Vigilant Amidst Market Volatility

Uugh...I have definitely been procrastinating here.

Update.....It is late afternoon Friday Nov 8, 2013, a day after the big sell off in the DOW, the Nasdaq and the S&P (from the get go in the morning, one we have not had in a long long time). Today is also the day the markets (miraculously) recouped all the previous day's losses (despite Twitter (TWTR) losing another 8% and Tesla (TSLA) trying to find support). One has to respect the market. The market is after all a reflection of the collective actions of the trading crowd and psyche - the greed and fear. The % of folks using margins to trade and the amount of leverage used is now as high as in the summer of 2007 during the Lehman crisis. Market indices seem to move in clips, my level II quotes have also not been orderly to my naked eyes. The culprit to me is the HFTs, hijacking quote feeds many seconds ahead and stalling some whether intentionally or otherwise. Often, my level II quotes on some stocks on Ameritrade ThinkOrSwim (TOS) look very disorderly while on others they look fine. This is how flash crash happens, bids being withheld to precipitate a drop in the asks from the unsuspected sellers. This market is Man versus Machine, it is clear ordinary investors are being had. Many have written about the HFTs extensively and I want to know why hasn't the SEC taken action! Do they need another 600 point flash crash before they act!!

So in the last many months I have watched my portfolio yanked 180 degrees, up and down and sideways and I am ahead by about 15% when it could have more if I had been more diligent. It is my own fault really. If I had known the Fed would be too chickened to taper and the DOW, S&P and the Nasdaq were going to make the 20-30% relentless climb in 2013, I would have put 1/5th of my money in a broad market index fund...hindsight is 20/20. The last 10 months have definitely been bad news is good news, business as usual with the Fed flooding the market with all the money it can print. Well, even PIMCO's Gross has his bad days, what about a small fry like me who is just trying to make some money from trading to pay her bills.

One can no longer trade on fundamentals, stock price defies logic and leaves even many professionals searching for explanations. It is the Flavor of the Month trade, the whatever is on CNBC trade. I find myself reaching for Alexander Elder's book "Trading for a living - Psychology, Trading Tactics and Money Management" on my shelf. I am a momentum trader, I get into a position if my level II data suggests good size bids and/or momentum. For me to put my cash to work and sell cash covered puts or add a position, I look for speculative stocks often in the news with moderate to high beta and implied volatility on their options of between 70%-130%. After all I am selling volatility in puts. When that volatility subsides (or time decay), I will collect a neat sum for the premium if the trade does not turn sour on me. This in essence is my trading strategy. I trade for a living, albeit a small one (my life is simple), so anytime I can scalp for profits I will trade.

If you are interested in Alexander Elder's books Here is the link on Amazon

In the past I would sell cash covered puts on a candidate I have identified, 2 to 3 months out for a nice 6-10% if they expire worthless come expiration time. In the last few months, the market has been so volatile that my puts would decay quickly and then it would just stall out as market or my stock get whipsawed. Often it would come under bear raid as they call it; traders emboldened by cheap leverage. Not surprisingly, this often happened on a bad market day coincided with momentum traders reacting to a negative opinion piece on SeekingAlpha. To me, the market has become nonsensical, the gyrations on individual stock much too big and it can only point to margin trading and participants trying to ramp a stock up or down and profit from it. 'Risks On" with the leverage one can get it seems. So I find myself pulling the trigger to close out a profitable trade sooner than ever before. For the same reason I no longer sell covered calls on every stock in my holdings but instead ride my positions and exit when share price reaches my target. If I had sold calls and the stock spikes a lot I would have to pay more to close out my covered calls and would therefore not be able to participate in the sudden big gain. I recalled Cramer telling his viewers that he does not want his viewers to sell covered calls (for the same reason). I am not a big fan of Cramer, however, his calls do move the market and many traders listen to what he has to say and take the cues from his show whether they choose to trade against or trade with his calls.

Lastly, why isn't Pimco's Bill Gross a candidate for the next Chairman of the Fed? I am certainly not the only one who thinks he would make a great Fed Chairman. Wall Street bankers may not like the Bond king, he is however a sensible man if you read his investment letters and writings. America's financial future and the future of the next generation is much at stake here and another artificially created boom bust cycle will no doubt dethrone America and the Dollar from the world stage if that process has not already begun.

A good week

Like many of you out there, after watching your portfolio ride the gut wrenching ups and downs of the stock market in August and September, I swore I was never letting that happen again. Watching the market gyration, it was dizzying to say the least, like being on a boat in high seas. In today's trading environments where HFT and hedgies are always ready to pounce and the shorts lurking around at every S&P resistance, I have pared back my holdings and abandoned Buy and Hold. Financial markets have clearly changed and they are so interconnected that today there is really no place to hide. Markets go up and down together, one can no longer hide say in Emerging markets if US markets and European markets took a hit. Yes, you can still hide out in fixed income, but at some ridiculously "obscene" low interest rate if you are lucky, going backward with your money. I am better putting my money under my mattress at least I know where they are or storing them in physical gold.

So I operate now on the new mantra of keeping a position for only a few days, often just overnight or I would close out end of the trading day. I hate doing all that reporting on my tax returns but that seems to be the ONLY way I will be in control of my portfolio. It has stopped going backward and it is now growing steadily. The market is now driven by headlines, rumors, speculations and fundamentals is not a place to hang one's hat on right now.

So with that backdrop, I wanted to say that last week was finally a good week. The market chart is a 3 day chart. If we get a big rally (short covering induced most of the time), that rally may extend itself a bit more the second day after the media and all the smart people chime on it. Those sitting on the fence may decide to jump in so as to not miss the boat. Unless we have more positive news from day 2 to day 3, that rally usually fizzles out as longs get scared and took profit. On a market down day, it works pretty much the same way except the inverse. I watch market sentiments closely.

This past week, I decided to sell cash covered puts at or before 10:30am when market got sold hard from the open into European close, I then bought them at the end of the rally as shorts covered and was able to lock in the gains. I like not tying up my cash overnight as I never know what events are going to be brewing in Asia and particularly Europe that might affect the market. I also unloaded my last LVS position that I held for a few days for a nice profit on Friday. I had gotten out of my other LVS position the Friday before for a 8% gain. I did not like how LVS traded the whole week and Level II confirmed my fear. It went nowhere and had trouble breaking and staying above 45 convincingly (China's less than good numbers did not help). It does not mean we won't see it rally above 45 or 46 next week, such is the market today and everyday is a brand new day. The broader market also rallied on low vol. My gut feeling said to get out and reassess Monday morning.

What do I watch daily during market hours? without a doubt the EUR/USD and AUD/USD crosses. I have this feeling that a lot of traders pair trade currency and SPY as well as GLD concurrently and watching the currency chart gives me a heads up. I normally have the Dailyfx real time new feeds with the live forex chart next to Ameritrade Command Center on two separate screens and that format works well for me. I am up early, by 5am. With my home made latte in hand, I watch Bloomberg for overnight and early news and at 6am, I switch to CNBC and catch up on live actions and news/insights from the bond pits. The TV is really just in the background with my ears tuned to it. (Not to digress, but I bet the market gyrations would be cut in half if there is no CNBC seriously, everyone seems to be have an opinion on where the market and their favorite stock would trade and sometimes I think it became a self fulfilling prophecy). Aapl makes up some 9.5% of Nasdaq volume so I watch it closely for signals that market may turn one way or another on cues from Nasdaq. (shouldn't Nasdaq do something about this so we even out?)

I enjoy trading and watching the markets and how the financial world managed to self destruct with the subprime crisis. It is an interesting world we live in today. One thing is for sure, I am guarding my hard earned money like a hawk. My cash is safer in my hands than anyone else's !!!