Design a site like this with WordPress.com
Get started

Tag: money

Why you need to get better at taking losses

If you have any dreams of becoming a trader, one of the most important things you can do is take losses.

Taking losses is admitting defeat.

Taking losses is means you analysis was wrong.

Taking losses is unacceptable.

These are myths that we tell ourselves about taking losses.

The three most costly trading errors you can make

According to Mark Douglas, author of Trading in the Zone (book notes here) the three most costly trading mistakes you can make are:

  1. Not predefining your risk
  2. Not cutting your losses
  3. Not systematically taking profits

Taking losses hurts. But why does it hurt so much?

On a psychological level, you don’t want to be wrong. Being wrong means losing money, and you don’t want to lose money. Losing money is painful.

Being wrong is a hit to your ego. It means your analysis failed.

Too often traders allow themselves to sit on a losing position, waiting for it to come around in their favor. I can speak from personal experience regarding this.

For about my first year of trading, it was so difficult for me to cut losing trades early on.

I didn’t know when to cut a trade. I thought to myself “if I just wait a little longer, the trade will come back my way. I just know I’m right.”

Frame losses differently: the cost of doing business

Losing trades are a business expense.

They are the cost of doing business as a trader. Don’t look at them as anything else. They are not a reflection on your analysis. They are not a reflection of you as a person.

Losses are merely the cost of doing business in an uncertain environment with uncertain outcomes.

 

 

Advertisement

How I document my trades

document

This is the format I’ve been using to track my options trades recently. As you can see, I show the Underlying Ticker, Type, Expiration Date, Strike(s) (multiple for spreads and such), Quantity, Cost per Contract, Cost Basis, Purchase Datetime, Underlying Price at Purchase, Open or Closed, Sale Datetime, Underlying Price at Sale, Sales Price per Contract, Sale Price, Profit/Loss, and Percent Return.

I’ve found with much of my data analysis, this is the ideal format for me with minimizes excess documentation.

One distinction with this is that I use the Open or Closed column to easily identify and match up trades on a First in First out basis (FIFO accounting).

I like having the purchase datetime exactly along with the price of the underlying stock to help review and analyze my entry and exit points within the greater context of the market.

How do you document your trades?

Did the Federal Reserve Kill the Volatility Trade?

On October 11, 2019, the Federal Reserve announced they would begin buying Treasury Bills in an effort to ensure there are “ample reserves” in the banking system through the end of the year.

fed treasury oct 11

On October 11, 2019, the Volatility Index (VIX) sat at 17.4. Today on November 26, 2019 the VIX has recently closed at 11.5. As you can see from below, it appears as though this not-QE program that is “organically” growing the Federal Reserve’s balance sheet has effectively killed the long VIX trade.

fed vix chart

The case made that supports this idea is that investors are engaging in more risk on behavior, because they are basing their decisions based on the Federal Reserve’s prior balance sheet expansion programs (QE 1-3).

Because the Fed is purchasing T-bills, they have eased some of the money market pressures. Liquidity in the market has proven to be a positive catalyst to the market.

Why do I believe this?

It can’t be the trade deal.

That’s the only other source that has been moving the markets higher according to many daily stock market new reporters. And I don’t believe these markets are pushing higher on hopes of a trade deal.

I think the Fed’s easy money policies have once again eased tensions. For now.

A lesson to me

This whole scenario has taught me a valuable lesson about position sizing. I’ve learned to not be so overconfident in my predictions.

Every trade made is a small bet. Each bet will abide by the Kelly criterion.

Never go all in.

Grow your money slowly and strategically.

Live to trade another day.

Read

Barton_options on Twitter has been a great resource for me to learn more about the Federal Reserve operations and how it relates to the Treasury and the overall economy.

He recently wrote about this in a newsletter you can read here.

This is what’s going to happen in the market this week

In this article, I’m going to review my past predictions and make some new ones.

On August 3rd, I wrote a post laying out what I thought would happen. Shall we take a look?

As I mentioned earlier, I expect IWM to pullback 5-7% since it broke the $153.50 support level earlier today.

IWM finished this week down 1.28%. I didn’t put a date on the 5-7% pullback, but this is something I expect to play out within the next two weeks.

This would give you a range of $144.95 all the way down to $141.90 coming into play.

At a minimum, I do believe that $145 will be retested. This is the level that IWM dropped to in May following the added tariff announcements. See IWM chart below:

iwm81019

SPY is a little trickier for me. It tends to whipsaw in price when volatility picks up, possibly due to algorithmic and HF trading. I think we see SPY revisit $285 range before the end of next week (Aug 9 expiry), but it’ll be a rocky ride.

SPY surprised me this week with the massive selloff that took place on Monday. I thought it would be a rockier ride to get down to $285, but we actually touched as low as $281.72 on Monday!

I was correct about the whipsaw though! Tuesday and Wednesday started off as days that looked like they were ripe for shorting, but the market ripped back almost 2% higher come Thursday, and 4% higher off Wednesday’s lows.

I believe that this upcoming week (August 12-19) will see SPY dropping as low as $279, retesting those levels reached around May 13 this year, in the midst of the May selloff that took place.

I’m also watching the $272 price level to get rested in the next two weeks. See SPY chart below:

I think VIX will also whipsaw next week, seeing a range with a low 14.7 and all the way up to 23.5. That’s just my guess.

This week, VIX saw a high of 24.8 and a low of 16.8. Not too bad of a prediction!

Next week I’m looking for a high of 26 on VIX and a low of 17. Keep in mind, when VIX is this high and with the current news, a much higher VIX is always possible.

I mentioned on my Twitter that I picked up some VXX call options and XLF put options to set up for whatever could happen next week.

These are a small part of my portfolio. I have positions both long and short in tickers or tickers derived from the ones mentioned above.

What’s going on in the stock market today? August 7th 2019 Edition

In the futures market, the S&P 500 was up 50 basis points overnight just before 6 am this morning.

As of this writing this the S&P 500 futures have tanked precipitously. At 8:10 a.m. the S&P 500 futures are down 45 basis points, almost a full 100 basis point swing from just two hours ago.

https://www.tradingview.com/x/p8mSqCAI/

What are bonds doing today?

Bond prices continue to rise today. The 10-year T-note Futures are up 50 basis points this morning driving expected yields down as central banks across the globe continue to implement easy money policies.

What is the Yuan doing today?

Yesterday, it appeared that China was letting their foot off the gas. However, their currency is devalued again today. After dropping slightly yesterday, the USD/Yuan exchange rate is up 34 basis points.

https://www.tradingview.com/x/tXuE6O4l/

The concern is if China doesn’t have control over the currency. As I mentioned the other day, if China loses control over their currency it could be very bad for global markets.

What should you watch for today?

Based off the futures behavior in the past two hours, and the volatility index spiking up 9% off of its morning lows from just a few hours ago, this could be an interesting day in the market with more selling to come.

I’m not sure what’s going on in the market at the moment but it seems like investors are dumping risk assets.

Money seems to be piling into bonds at the moment.

Also money is piling into commodities. Gold is up 1.62% from the prior day. gold continues to Rally in the face of easy monetary policies engaged by the central banks across the globe.

What’s going on globally?

According to a report from Bloomberg, global easing is picking up pace as New Zealand shocked the market with a bigger rate cut than expected.

New Zealand’s Central Bank reduced its cash rate by 50 basis points. New Zealand Reserve Bank Governor Adrian Orr didn’t rule out negative interest rates to help prop up inflation.

This cut by New Zealand mirrors what’s been going on in  Europe, Japan, and what will be coming in the United States in the near future.

Interest rates are getting cut. They’re going to get caught big. They’re going to go negative. This is going to have a significant impact on  the bonds in commodity markets especially.

Keep an eye on GOLD and TLT today to see what the market is pricing in. Check out the article I wrote about on game theory and the markets, and why you should pay attention to not only equities, buy bonds and commodities as well.

 

What is the Federal Reserve going to do with interest rates this month?

There’s been much speculation among market participants about what the Federal Reserve will do with interest rates.

Many investors are pricing in the belief that the Federal Reserve is poised to cut interest rates for the first time in over a decade. The speculation hasn’t been about whether there will be a cut, but rather whether the cut is going to be 50 basis points or 25 basis points.

Debacle

James Bullard, President of the Federal Reserve Bank of St. Louis said he would like to cut by 25 basis points at the upcoming meeting.

This came after John Williams, President of the Federal Reserve Bank of New York said the Fed should “take swift action when faced with adverse economic conditions”. This led to much speculation and market positioning that bet on the FED cutting rates by half a point at the end of the month.

A spokesperson had to clear things up for Williams, and stated that he was making an “academic argument”, and NOT talking about the Federal Open Market Committee and their plans for the two-day meeting on July 30th and 31st at the end of this month.

JP

Federal Reserve board chair Jerome Powell has faced harsh criticism from Donald Trump. Trump’s relentless on Twitter about the Federal Reserve and the decision to hike rates in recent years.

He’s been critical of Powell and the Federal Reserve for not cutting rates while central banks across the world are cutting their own interest rates and engaging in other monetary stimulus.

Trump believes that if the Federal Reserve Cuts rates the US will continue to grow and reduce their debt burdens.

Respect

Personally, I believe Jerome Powell has handled the criticism from the President fairly well. I believe he’s done a good job (since December) at communicating the Federal Reserve’s expectations and focus going forward. I don’t know if it’s a popular opinion, but I like Jerome Powell.

He hasn’t caved to Trump, at a time when other individuals have made pathetic attempts trying to appeal to Trump through the media, in an effort to get a position with the Federal Reserve. And I respect that of Powell.

Why Cut?

]Economic numbers have actually been decent in the most recent reporting month. Retail sales rose by 0.4% in June which topped a 0.1% expected gain. On a year-over-year basis, sales increase 3.4%. From a consumer perspective things are still looking pretty good.

What about in job growth?

In June, non-farm payrolls rose 224,000, which was well above market expectations of 165,000. Unemployment rate edged a little bit higher to 3.7%, but is still sitting near 50-year lows. Wage growth was 3.1% year-over-year, one tenth of a point below Market expectations.

Trump continues to tout how great the economy is, but then he wants the Federal Reserve to engage and easy monetary policies which are generally reserved for times where markets are shifting tides.

Trump is trying to toe a line here and all he wants to do is have somebody to blame if the market does go to shit before the next election.

My Predition

I don’t believe the Federal Reserve is going to cut interest rates next week. I think the  stock market will sell off. I think gold and treasuries will sell off.

Many investors have priced in a rate cut already, and they are preparing themselves for a potential devaluation of the US currency. If the Federal Reserve doesn’t cut rates, those three things will likely be going down.

Following all this volatility, the Fed will cut rates by 50 basis points in September. That’s my prediction and I’m going with it. What do you think?

When I stopped trying to be right, I became a better trader

I began my journey trading stock options in September of 2018. When I entered the trading arena, market volatility was picking up. This was the environment I traded and adapted to over the three months from October to December of last year, 2018.

During this time period I learned to trade options in an extremely volatile environment. I was able to successfully gain over ten thousand dollars on my small account in December by being short on the market.

I primarily bought put options on bank stocks and other stocks that were experiences drastic declines at the time. My portfolio saw outsized gains which I had experienced up until that point. Enjoying the outsized (mostly unrealized) profits that I reaped up to Christmas Eve, I continued to buy put options on the market.

This turned out to be disastrous.

The subsequent decline

All through January until April, I had the thought that the market shouldn’t be going higher. I absolutely knew what was going to happen next. Or so I thought…

At the time, I was following Fintech Twitter. I wanted to know what was “happening” in the market, and took to Twitter to see what people were saying.

90% of the people on there seem to be bearish during the first quarter of this year. This influenced my investing and my perspective of the market.

The illusion of being a good trader

It took a while, but at some point I realized that being right, or the illusion of being right, doesn’t put money in the bank account.

I called it!

On Twitter it’s easy for people to create the illusion that they called many good trades. It’s easy to do. All you have to do is post a bunch of charts calling bullish or bearish, put them on Twitter, let the market play out, and then delete your tweets that were wrong. Then you can easily pin your tweets where you “called” the market top or Market bottom.

I got caught up in the Twitter atmosphere and my trading suffered. Being right doesn’t matter.

Hedging instead of guessing

In recent weeks I’ve developed better hedges on my trades.

I like to build up large put options positions at times when I believe the market could go down over the next few months.

In the first quarter of this year, I built up put option positions, and lost a significant amount of the value that I put into those positions. It’s only after reflecting and experiencing the pain of those few months then I realize how important it is to hedge my trades.

I was concerned with effectively predicting what was going to happen in the market. I wanted to be right, and I would only enter trades on one side of the mark get out of time. This was stupid. I lost out on a ton of games I could have gotten all throughout January and February and even into March and April.

Current endeavors

I’m currently building up put option positions on SPY and IWM.  I’m hedging the position by buying shorter-dated call options, debit spreads actually, and then collecting profits when the underlying stock price land somewhere in between the two strike prices of my debit spread. This has been a much more effective strategy and has kept my portfolio more even overtime while I continue to build up a larger put option positions.

Ideally, call options on the S&P 500 and the Russell 2000 Index will continue to gain value in excess of the value that I lose on those longer-dated put options while the market continue to rip higher. Then, when the market does turn, I’ll have built up a decent size put option position to benefit from larger price declines.

Conclusion

I believed I had to try to predict the market and be correct. Instead I have to be flexible, I have to adapt, and I have to head to effectively on my positions.

What is the next catalyst that will move the stock market?

This week in the stock market has been a very slow news week.

We had a big news story with Boeing’s new 737 Max 8 crashing for the second time in six months. As a result numerous countries have grounded the 737 Max as a precautionary measure.

Also in this week’s news, Jerome Powell, Chairman of the Federal Reserve, spoke to 60 Minutes on Sunday evening to discuss the Federal Reserve policies and the current state of the economy.

With the exception of these two news stories, there hasn’t been a ton of newsworthy items this week.

What happened to a China Trade deal?

One of the most popular news stories from past two months was the promise of a China trade deal. If you look at this week’s headlines, there is little to no new information about a trade deal. This makes me believe we’re not going to have a China trade deal anytime in the next month or two.

So, with a slow news week it seems as though investors are waiting for some catalyst to move the market in one direction or another. Today, the S&P 500 Index touched the $2817 price level for the first time since October. I see the S&P 500 Index hovering around this level and continuing to consolidate within the $2780 to $2820 for the time being.

So with all of that in mind, what’s going to be the next Catalyst in the market? Which way is the market headed next?

Potentially positive catalysts for the stock market

Favorable trade deal for the US with China

If we are able to come to a trade deal agreement with China that is favorable to the United States, that would be great for our stock market.

For a trade deal with China to be favorable to the US it would need to protect our intellectual property rights and would also have some sort of a trigger for automatic tariffs if the Chinese don’t comply with the agreement. This would be the absolute best case scenario for the United States.

However I don’t think an agreement like this will come to be anytime soon. Xi Jinping, President of the People’s Republic of China, wants to maintain an appearance of strength for China. For this reason, I don’t think they’re going to make any concessions to United States any time soon.

According to Robert Lighthizer, we’re still a ways off when it comes to a favorable trade deal for the US.

Better than expected earnings

The second potential positive catalyst would be a positive earnings cycle in the first quarter of 2019.

Fourth quarter earnings from 2018 turned out to be better than expected and I believe this gave investors some confidence to continue to ride the market up in January and February.

If first quarter earnings are better than expected in the market this could be a positive catalyst for the market as well. It’s possible first quarter earnings go well, as some of the economic numbers we’ve seen are not quite as disappointing as expected, namely fourth quarter GDP growth, suggesting that perhaps Wall Street overreacted to slowing growthg. The worst economic numbers we’ve seen thus far of those of the non-farm payrolls added in February.

Personally I’m not too optimistic of either of these two scenarios playing out.

Potentially negative catalysts for the stock market

Worse than expected earnings

The first potentially negative catalyst would be if companies have worse than expected earnings in the first quarter. If we see earnings numbers come in below expectations this would likely drag the mark down.

Earnings estimates for the first quarter have declined for the S&P 500 as a whole, with estimated earnings for the index at -3.4% as compared to the previous year. In addition,  there have been 76 companies in the S&P 500 Index that have issued negative EPS guidance as compared to 22 companies issuing positive EPS guidance. (Only 103 companies in the S&P 500 have issued guidance).

It’s important to pay attention not just to EPS results, but to the guidance we get from companies going forward into the second and third quarters of 2019.

Trade talks sour, and the US slaps more tariffs on China

Another potentially negative catalyst could be if the United States growing frustrated with the negotiations with China and decides to raise tariffs. Remember that President Trump delayed automatic tariff increases that were scheduled to kick in on March 1, 2019.

If this were to happen, it’s very likely China would raise their tariffs on American products as well. Much of this has to do with how well the negotiations go and if the two sides can at least agree on some sort of a framework of a trade deal moving forward.

Economic data is disappointing

A third catalyst would be if economic data continues to point to negative growth and growing in unemployment. If we begin seeing unemployment numbers rise, that could spook investors as rising unemployment tends to be an indicator of potential stresses in the economy.

In addition, the Federal Reserve Bank of Atlanta projects first quarter GDP to come in under 0.5%, which surely would be negative for investors.

Federal reserve raises interest rates

Finally, a fourth catalyst could be if the Federal Reserve does decide to raise interest rates this year. As I mentioned in my previous article, many investors are pricing in a rate cut this year.

If the Federal Reserve decides to raise interest rates, it would be due to the threat of inflation in the economy while unemployment rates remain low.

Conclusion

Overall, I believe the potentially negative catalysts are more likely to occur and impact the market. I believe that we’re going to see a downside move within a month or two, given that the recent market rally has been a little too hot in the current global economic backdrop.

However, it’s not outside the realm of possibility that we get positive news that could drive the market to all time highs before beginning to hit some resistance.

These are just a few of my thoughts on what I believe could impact the market moving forward. What catalysts are you watching out for in the market?

What has caused the market to rally from December through today? (It’s not the promise of a China trade deal)

If you’ve been paying attention to the stock market since the Christmas Eve bear market, the S&P 500 is up 19.5%. Much of this rally has taken place in January and February 2019. If you’ve been reading the news headlines, a lot of the rally was contributed to the promise of a China trade deal. In my opinion these news headlines are wrong. Let me explain why.

Enter the Federal Reserve

Investors have a tendency to pay very close attention to the actions of the Federal Reserve board. If you’re not familiar, the Federal Reserve primarily has the task of influencing interest rates.

To illustrate this point, look at how the market reacted in the times where Jerome Powell discussed the interest rate policies of the Federal Reserve.

On October 3rd an article by CNBC, Powell said we were a long way from a neutral on interest rates. This was an indication that more rate hikes were to come.

Jerome Powell said that interest rates were extremely accommodative and that this was necessary when the economy was weak. We no longer needed low interest rates anymore. He went on to say that interest rates were still accommodative but they were moving to a place where they can finally be neutral.

What happened next?

https://www.tradingview.com/x/fBJ8XGWK/

Following these comments by Jerome Powell we saw the S&P 500 index drop through the month of October (see the red arrow above). The S&P 500 continue to experience high volatility through November and into December.

Interest rate policy uncertainty

There was a lot of fear in the market when it came to the interest rate policies of the Federal Reserve. The Federal Reserve continued to hike interest rates in December which set off a wave of selling in the market.

From December 3rd until the low point on December 26th the market dropped 16.1% of its value. This came after a slight bounce back in November following Black Friday shopping.

Jerome Powell continued to say that interest rates needed to get back to neutral. He said that the Fed was relying on the data to tell them when to stop raising rates.

The language used by Jerome Powell scared the market because they believed that the Fed would continue to raise interest rates two or three times in 2019 along with the interest rate hike that they had just completed in December of 2018.

Fear and pressure from the President

A lot of investors took this language as being quote “hawkish”. What this means is that the Federal Reserve is using tighter monetary policy which would raise interest rates and help cool down the economy and keep inflation in check.

There was a lot of fear in the market in December and Donald Trump wasn’t a fan of Jerome Powell raising interest rates.

In my opinion I think Jerome Powell faced a lot of pressure from investors and our President to take a more neutral stance on interest rates. As a result the Federal Reserve went from being hawkish to what they called dovish.

For this reason I don’t believe that any of this rally has to do with a China trade deal. I think the rally from January until February and now going in March is entirely on the back of the Federal Reserve.

I believe that a lot of investors are pricing in an interest rate cut at some point in 2019.

The Fed’s dovish opinion on interest rates combined with short-side investors getting squeezed, algorithmic trading, day traders, have all contributed to this most recent market rally.

What comes next?

We are at a level in the market that we have struggled to get over time after time.

There seems to be a lid on the value of the S&P 500 Index around 2,800 to 2820 price level. We’ve touched this price level multiple times and have only broken through the level one time since last February, when the market rallied over the summer.

It will be interesting to see how the market plays out over the next few weeks. I believe many investors have priced in the Federal Reserve decreasing interest rates at some point in 2019.

If the Federal Reserve decides increased interest rates one more time this year I think it could be extremely detrimental to the market and how they perceive things.

I don’t think an increase in interest rates should have such a drastic effect on the market, but because investors are expecting expecting a cut in interest rates instead of an increase, this could set off some pretty drastic, expected action in the market.

I believe that Jerome Powell wants to continue raising interest rates and try to get back to a more neutral level, I just don’t know if the political pressure will allow him to do so.

The case for raising interest rates is to allow the Fed some more room to cut interest rates if and when we do eventually enter into a recession in 2020 or 2021.

Conclusion: Don’t pay too much attention to headlines

Don’t believe what you see in the news. I don’t believe the market is rallying on the back of a China trade deal. I don’t think the market believes we’re going to get a China trade deal in the next two months.

I think the market is hyper focused on the behavior of the Federal Reserve and that has caused much of the volatility from October through December, and the Federal Reserve’s complete 180 on interest rate policy has also caused the market rally up to this point in 2019.