STANZ presentation

The life of a trader, generally, unless you happen to work in an office with a Prop. firm and other traders, pretty isolated. I write this blog, largely for a bit of interaction with other traders, and also to prevent myself from over-trading.

So when I spoke in Auckland the other night, it was actually very refreshing to get questions on the presentation, as they highlighted areas that other’s were interested in, when I may have, and in many cases thought that there wouldn’t be too much interest.

As a result, I’m going to make some changes in the newsletter that became quite apparent, would be of interest. Basically the various independent calculations that I perform, that form a large part of the decision and recommendation that I make in the newsletter each week, one of which is an analysis of the COT data.

A second lesson is that Options are still a bit of a mystery to many. The problem with Options is that you have to first get an understanding of the basic greeks and their purpose. This isn’t straightforward. From there, you need to understand the basic strategies, and here the problem is that there are lots of strategies. I use pretty basic strategies, simple here is better in my book.

So in the newsletter, the trade of the week, which is an Options trade, in the Weeklies, will detail the strategy, and various issues. On the blog, I’ll periodically address various issues around the greeks. IV crush was one issue that was raised. A good and valid point, but one that can be managed.

Contango/Backwardation are techniques of analysis that I use. There wasn’t enough time to go into a detailed breakdown of the fundamentals in this, so again, I’ll include the analysis in the newsletter, and possibly explore some of the theory on the blog.

Overall, it was a good night. I was made to feel very welcome. Considering I spoke for 2hrs, and no-one actually fell asleep, I take as a positive. I enjoyed myself, I don’t often have a captive audience prepared to listen to stockmarket based discourse, so it was very refreshing to be amongst one’s peers.

Stop losses. Are, a market timing construct. You place a stop loss in part to conform to money management, and this is quite correct. But in the form of a hard stop, essentially you are performing a timing analysis.

You are saying in effect, this trade will work here and now, and if not, I am out. However, intra-day prices are subject to market maker games. The paranoids will say that all the stops can be seen, I’d say that’s nonsense. However, market makers are good, very good traders. They know that various technical levels attract stops. They gun them. Fact.

If you place mental stops, you open a Pandora’s box of psychological issues.

The type of market that is trading of course has a huge relevance to hard stops. A rangebound market, is a hard stop graveyard. The wide range that we saw last year was chopping swing traders to pieces. In the current trending market, trailing hard stops have probably outperformed. Further, the volatility plays a huge role.

Another factor. Generally to make money in the market, you have to be in the market. This means due to the type of market, combined with volatility, you have to adjust your hard stop calculation, or, do away with them entirely.

To generally catch big moves, you have to always be in the market. You cannot forever being stopped out, losing positions, and bam, the market moves. Option spreads keep you in the market, provide multiple strategies to trade market conditions, are always in the market. There are also stock based strategies that do not trade stops, but they are long term. For short term, always in the market, with defined risk, Options cannot be beat.

The classic business cycle. Various industries lead and lag in the classic business cycle analysis.

Early contraction: Utilities
Late contraction: Financials, Consumer cyclicals
Early expansion: Technology, Transportation
Middle expansion: Capital Goods, Basic Materials
Late expansion: Energy, Consumer Staples

So this is the classic business cycle. Is it still relevant in a QE driven market? Probably less so, but it’s still worth taking a look. To do so, conduct an analysis on the broad market by industry. Find the data at stockcharts, see the link in the bar.

Depending on the type of market, rangebound, trending, certain strategies may suggest themselves, or, provide an insight into the macro-picture. Currently, the big winner, over the last 200 days, is Consumer Staples, which includes retail.

First this provides an insight via the classic theory that the market is in late expansion, that even with QE, or even because of QE, the market is late expansion. This can provide background information, if trading long currently, that certain areas of the market are lower probability trades from the long side.

Sentiment is really one thing that I ignore. Economics has a term, demonstrated preference, unless you have a position backed by money, save your breath, no-one is interested in your opinion. The market, and non-market data, provide enough data to get a pretty good handle on demonstrated preference.

There are two ways that you can approach this: [i] have a stock that you believe due to analysis will do abc, and select an appropriate strategy to trade that outlook, or [ii] have a strategy that you have faith in, and find a stock that will fit that strategy.

Both work. Both revolve around timing the two variables and fitting them together. Which one is better? The one that suits your emotional set-up. There are some differences that are worth paying attention to.

The first strategy requires you finding a stock that contains all the variables that you seek with regard to predictable patterns and behavior, that you know well, you are very in-tune with the stock. Simply then as the stock moves through trending, pullbacks, consolidation, etc, you fit the strategy to its particular phase. This will require using Options, as they provide the flexibility to follow this style of trading.

Conversely, you have a limited number of strategies that you know well, and are very comfortable trading. Strategies that allow you to actually trade the strategy to its natural conclusion, you are not tempted to jump out of the trade, or be forced out of the trade by temporary adverse price movement. This then requires a scan, or watch-list large enough to provide enough trades to adequately employ capital.

I know traders who are one or the other, even a few who are ambidextrous. Ultimately all that matters is that a profit is earned.

Does your stock follow the index, or does it trade independently? This will change. So the answer is to calculate it’s correlation in the timeframe that you are interested in trading it. This will give you some idea of what may lay in wait for you when planning your trade.

Just a couple of random thoughts on technicals.

The first is that when analyzing price, it is important to look at it in context of the closing price. This removes the fluctuations of the daytrader noise that you’ll get intra-day where, yes, the market makers play with technical levels that will likely accumulate stops.

The second is really only relevant for earnings season, which, is of course what we are slap bang in currently, and that is pricing in volatility expected for the stock move after they report. AAPL reported yesterday, the ATM Calls/Puts were $25/$19, which calculates out to a 7.4% move. Sure enough, AAPL today +8.5%. Does the calculation tell you which way, unfortunately, no.

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