The Seven Rules of Magic Trade Compounding

In The Lure of Doubling your Money, I wrote about a fantastically profitable AREX trade that offered investors an opportunity to double their money in a single 4 month trade in late 2011.

The problem with this trade was that it was the only opportunity all year, in this stock to get a 100% return. Investors that spotted this beautiful rally and stayed in for the full 100% were very patient, very skilled, or very lucky.

I made a number of AREX trades in 2011, but wasn't one of the lucky traders who nailed the 100% gainer. And that made me pretty annoyed. So I've been looking at a better way to make 100% returns on your money in the same time frame, but without having to nail a single, big lucky trade that only occurs once a year. 

The 100% Six Month AREX Backtest
So what I did was backtest AREX using what I'm calling the 'Magic Trade Compounding'  starting with $5000, and using  swing trades under 15 day duration, based on a common set of technical analysis charting tools. I didn't refer to an index once, and used no news reports of the stock or the market. I completely ignored earnings and fundamental information.  During that seven months, the market was all over the place, and AREX ended the six months at a lower price that when it started.

Here's the result:

1/3/2011  Start Capital $4,688  (200 shares at $23.44)
23 trades later.... (less than one a week)

7/1/2011 End Capital  $10,418.00 (450 shares at $23.00)

122% Return in 7 months

The Seven Rules of Magic Trade Compounding
1. Choose a volatile stock with clear chart movements
2. Trade the same stock again and again
3. Use the same charts, indicators and rules every time you trade.
4. Reinvest the new account balance on every trade, whether you win or lose.
5. Make your trading decisions at the same time(s) every day
6. Never make a trading decision before 10:30 in the morning EST.
7. Decide how much profit or loss to take based, and automate trade exit.

The Magic of Trade Compounding

In The Lure of Doubling Your Money, I gave an example of a fantastically profitable trade on AREX that allowed savvy investors to double their money in only 45 trading days. The catch: you had to spot a key reversal in the stock, and also get in and out at exactly the right time. Difficult, stressful, perfect timing required. Does that describe what you want as a trader?

Lets look at another way to manage your money as a trader. What are the other ways to double your money? Lets say instead of trying to double your money in a single trade, you commit to making a lot of small trades, where your target is just to make 5% every time. Is it easier to find a opportunity to make 5% than 100%? Of course! Is it easier to make 5% again and again, than make 100%. Probably. But you will definitely get a lot more practice, learn a lot more, and risk less of your capital if you do it right.

The Magic of Trade Compounding
Trade compounding is where you strictly reinvest your entire profit from each trade in your next trade. The principle is exactly the same as the idea behind compound interest in a regular bank savings account, except for instead of the bank paying interest on a yearly basis and reinvesting it automatically, the profit from each trade is reinvested.

In this simplified example, we start with $5000 in our trading account, and make a series of profitable trades. Each trade makes a profit of 5% over a 3 day duration. The profit is reinvested each time, just as interest would be in a bank account. Each trade buys the amount of stock listed in the start balance column. You can see the end balance after 15 trades is $10,395, so we have doubled our starting capital in 45 trading days.


There are a couple of really important things to notice here. The total amount of profitable trades is only 75%, yet your capital gain was a little over 100%! So straight away, trade compounding gives you a 25% increase in profitability, when compare to attempting to pull off a single 'double your money' type of trade with a 100% gain.

Of course, a succession of real trades is never going to look like this. Sometimes you lose right? And the duration of trades is never the same.  So won't your trading log look a bit more like the table below?

Here, as well as trade compounding, a strict 3% stop has been introduced. We are going to compound all our trades by reinvesting the entire start balance on every new trade. But we are also acknowledging that roughly every third or fourth trade we will actually lose money. To limit the impact of the losing trades, we are going to apply strict discipline in the form of a stop. Our rule is that we  are going to limit losses by using stop orders on every single trade, based on around 3% loss.  Profitable trades we will let run to see how far they go. 


Again, there are a vital things notice in this table. At this point, this is still just a theoretical example. But it's looking a lot more realistic right?   While theorectical, the durations and percentage returns are quite realistic for small cap stocks which trade on the NASDAQ. There are thousands of stocks that have price movements over 1,2, 4, 10, 15 day duration, of between 3% and 20%. But stocks have 100% price increases are much harder to both find and predict.


Notice also that even though 4 from 15 trades were losing, the End Balance only dropped below the original start balance of $5000 once! Isn't that a lot better than the nightmarish 'buy and hold' rollercoaster described in the 'Lure of Doubling Your Money' article, where as a buy and hold investor, you saw your investment swing from 25% gain to a 39% loss, and your timing had to be perfect in order to bag the elusive 'double your money' trade?

You can also see that the losing trades, when a strict 3% stop is applied, the lost ends up being  just temporary setback to your ever growing capital.

So let's get real....how do we consistently make small 3 - 10% percent profits. The key is the next piece of magic - Trade what the Market is Doing, not Where You  Want it To Go

The Lure of Doubling your Money

Most traders dream about doubling their money trading. They read through investing newsletters that scream about 79%, 135%, and 250% winners. They scour company reports, and try and figure out which companies have the best possibilities of doubling their money.

But are they just wasting their time? Is looking for trades with 100% or more returns worthwhile, or more a matter of luck? Lets look at a real example of a possible 100% trade from 2011. This is a theoretical trade, but using real market data.

Doubling your Money on AREX
Let's say we have a hunch or get a great tip about AREX, an oil and gas stock listed on the NASDAQ. Let's say the tip was that because it had hit the years low, a reversal was likely.  We invest $5000 buying AREX stock at just at the right time at $16, just hours after it hit's the low.  We hold on all the way to the magic 100% gain at $32, where we sell during an aggressive pullback, where it drops nearly 8% in a single day. The duration is a fairly fast (for doubling your money) 45 trading days. This is real market data, so there are definitely investors out there who nailed this exact trade.

Our theoretical trading log might look something like this:

The question is, how many people actually spotted this trade? , How experienced would you need to to be to spot it? AREX started the year at $23.18, and ended the year at $29.89 If you had bought AREX at the start of the year as a buy and hold investor, you would have made at very decent 28%. However, for about half the year, you would have actually been in the red. At the worst point, when it dipped to $14.14, your original $5000 would have shrunk a whopping 39% to only $3050. That's a pretty big loss for most investors to stomach over 9 months of buy and hold.

AREX Weekly chart over the entire 2011

Looking at the weekly chart, you'll realize that in fact, this was the only opportunity in an entire year to make 100% trading AREX stock in a single trade. So you had have to have waited 6 months to spot this opportunity and commit your money. But are you really that patient, observant, or psychic?  Are you really that experienced?

Lets look at another way to both trade and manage your trading account, that lets you double your money without your account balance ever losing more that about 5%. I call it The Magic of Trade Compounding.

Swing Trading Strategy Example Day 1

1. Determine what the trend on the daily chart, based on color and trend of candles, EMA averages, MAC-D and RSI.  The easiest and clearest way to mark a trend is to simply draw a single line through the candles that mark that trend.

2. With most swing trades, we are trying to pick the point where the price turns around and goes in the other direction. This is because reversals tend to move the price more quickly in a short space of time than longer term trends.

Example: AREX 9/26/2011 - 1 day chart

Trend = strong down trend. 


The trend on this graph would normally signal a short trade, however RSI-7 is way down at 10, which indicates a very high probability of the trend turning around. The price has also penetrated the lower bollinger band in two successive candles, indicating there will be a strong tendancy to 'spring back' if the trend does not continue downwards. Going long in such an aggressive downtrend is a risky trade as if the downtrend continues, we'll be stopped out within a day or less.

4. Fill in the Plan section of the trading spreadsheet with the reason for the trade and the planned position. Our target is to make 3% per trading day, with this being a short fast bounce trade.

3. Determine how much to trade. It's best to stick with the same amount of shares in one stock, so you are comfortable with the win and stop lost amounts related to that amount. Only trade bigger positions when you are comfortable with you record with that amount.

5. Once you had decided to commit to the trade, determine the exact entry point based on the 5-minute chart. This is where patience comes in.

AREX 9/26/2011 5 minute chart.  This chart shows the entry point. The stock appears to have found support at $16 after the aggressive 5 day downtrend visible on the 1 day chart. Such an agressive downtrend is perfect conditions for a bounce to occur with the RSI so low.  We'll enter at 16.25, just as it starts to tick up and the EMA-8 flattened out then rapidly started to climb. Notice the MACD cross, which signals the start of an uptrend.

6. Fill in the Execute section of the trading spreadsheet with the exact trade entry price once the opening order has been filled. At this point the Last price is the entry price. The Income at Last Price show an $18 loss, which is the commission.

7. Now calculate the "Take Profit Price" and the "Stop Price" for this trade, and enter these into your broker as triggers to close the position automatically - both high (income) and low (expense).

The Take Profit Price is where we will sell the position regardless of what the stock is doing. This is take decision making out of the equation in the heat of the moment. Even if it is going up, we will sell this position at that price using an automated trigger to close the position. This is to ensure that gains are actually converted to cash. The other reason is to capture gains if the price spikes up to this price, even for only minutes while you are not there to hit the sell button. This price should be set at a level where you would be entirely happy just walking away with money in the bank, thinking "that was easy money".

The stop price is the amount that you are willing to lose if the trend does not do what you want. This is also automated using a stop market order. You want a stop market order, not a stop limit. If the stock dives fast and is thinly traded, you want to sell immediately to limit further losses. A stop limit order may not achieve this if your order cannot be filled.

For our AREX bounce trade, we are setting the Stop Price at $15.75, which would result in a loss (expense) of $168. Our Take Profit price is $18.25 which would result in an income of $582.

8. At the end of the trading day, update the Last Price in the spreadsheet based on the closing price for the day. Adjust your Take Profit Price and Stop Price if required.

Wow, our AREX bounce happened as intended! We made 5.97%, or $291 on $4875 capital in a single session.  To lock in some of this profit, we will raise the stop price to $16.90, which still gives the stock some room to move, but means our guaranteed profit for this trade will be $177, so we can relax. Our Take Profit Price will stay the same.

Here is the five minute chart to show how the day went. Our initial $15.75 stop price was not triggered, even though the stock did dip back down to $16.20 before climbing fast in the afternoon.

8. Day 2 Begins.  As we have an automated 'Take Profit Price, and the automated 'Stop Price' in place that will both make us money if triggered, there is no rush to be at your computer when the market opens. In fact, trading the open is something that is usually just not worth while unless you are specifically a day trader, and very experienced.  Trends are rarely visible, and if the market or a stock 'gaps up', the gap is often closed with the first 30minutes of trading, and the real trend for the day only comes obvious later.  I usually start looking to see what has happen at between 10:00 and 10:30 am. This is a good time to make decisions, and adjust Stop Price or Take Profit Price triggers based on where things appear to be heading.

Our AREX trade is spectactular! It gapped up to start trading at $17.8, then shot up and triggered our Take Profit price trigger within the first five minutes of trading. Our Take Profit trigger closed the position at $18.25 before we even had a change to check what the markets were doing. In other words, we started the day with real cash in our trading account, not just stocks at a higher value.   This trade took advantage of a highly volatile situation to make $582 profit on capital of $4,875, which is 11.9% gain within 24 hrs. A day trader would have missed much of this profit by closing out their position at the end of the day.   This trade way exceeded our expectations of 3% profit per trading day so we self-scored a perfect 10. The expense we were willing to occur in this risky trade was moderate at $168.

9. Fill in the Actual area of the trading worksheet to record the details of the trade


The 5 minute chart.

The 1 day chart

As you can see, in volatile market conditions of autumn 2011, combined with a volatile oil and gas stock like AREX, there were plenty of similar sized moves to this one.

AREX taking profits on the way up, and down

AREX is one of my favorite stocks at the moment, as it has nice clear movements up and down. I'm not getting the timing right though - could have made double the profit on both directions on these trades.

The first long trade was 3% profit in 4 days, the second 6% in one day, thanks to yesterdays crash. This is the daily chart.

The market is doing what the monthly chart was saying it was likely to do. Go DOWN.

More carnage today.

Check out my post from 8 August. The market is doing what the SPY monthly chart was saying it was likely to do. Go DOWN.

Technical Confirmations of building multi-month bear market momentum
1. Two BIG Red Candles (BAD) The red candles crossing right through EMA18, so that adds huge momentum to the downtrend.  This is why this is not going to be a repeat of Sept 2010. Notice last year the EMA18 actually provided support for three months at the end of the summer. This year we just blasted through it.
2. MACD Cross (WORSE) Cyan crossing over yellow downwards, above the midline, indicating the down trend is just getting warmed up. More of the same is in store. The MACD crossover usually precedes the EMA crossover.
3. EMA Crossover to the downside to come (REALLY BAD). Confirming the MACD cross to the downside, the next technical indicator of a sustained (multi-month) downtrend (and Recession 2.0) will be the EMA8 crossing downwares over the EMA18.
4. Note RSI-7 (bottom graph) is still at 13. Don't look for the long term trend to turn around until RSI clearly ticks up, or has bottomed out under 10.

Summary
At that point, we want all our short term trades to be shorts, unless we are trading bounces in downtrends, or microcaps not affected by the overall market.  In your 401K,  starting holding your breath and keeping on dollar cost averaging into your 401K - it probably doesn't matter what you invest in, just don't stop funding it.  If you haven't sold any 401K funds yet that were in profit after the March 2009 to April 2010 bull market, it's probably too late - you might as well keep them for the long term and endure the pain.

8 Augustl

PANL Huge 100% rally, and then what?

After a huge 100% gain in the last weeks, I thought the price might collapse again, so I took a short position.

Things weren't developing clearly, so I exited while in positive territory with 1.5% profit in 3 days. I still think PANL is way overbought, so will watch for signs of a definate collapse. There is a lot of hype out there around this stock, and the Vice President sold $750K of stock yesterday, so it could still happen.

Trading CIGX bounce for 32% one day profit after patent lawsuit issues caused massive 70% drop

32% profit in 1 day after collapse in CIGX due to confusion over value of the company due to lawsuits. Risky situation but worked out well.

Could have made a lot more holding another 4 hours, but when I saw the Bloomberg article reporting “This is a complete loss for Star and basically makes their business worthless.”  I was glad to be able to exit gracefully.

This is the four hour chart showing the worthless company producing a 32% one day profit.

Trading a bounce like this requires extreme care about the entry because of the huge volatility. Here are the notes about how I chose the entry point.

Trading the bounce after Hewlett Packards bad earnings and weird business decisions

When a company like HP (disclosure: I'm an HP employee) makes major business decisions that no one appears to really understand, and has disappointing earnings as well, the stock market often reacts a little more than strictly neccessary. Great conditions for profiting from a bounce!

HP has been on a downward slide for three quarters now, but this 20% post earnings drop outdid the previous ones even. So there was an opportunity for a bounce trade.

Entry was at $23.77 on August 19, which was a whole dollar off the low of the day, and underneath the lower bollinger band. The bollinger band represents the tension of the movement in price, so when the price is below the lower band, there is a tendancy for the stock to spring back.

The trade hit my 1% per day profit goal after four days, so I put a very tight trading stop in on August 25, and was stopped out the next day. 4.8% profit in 4 trading days. In this sort of bounce, the trades should be short term. The reason is that that when the bounce occurs, it usually then drops off again, just as a ball does. Drop, bounce, drop, bounce, with each bounce getting smaller until the stock stabilizes at the new level.

Missed the boat big time on my AREX bounce trade

Sometimes, it's hard to decide whether you are smart or an idiot. Looking at this chart, in hindsight, this exit from AREX looks insane. Technically, the setup looks perfect for a bounce. I nailed the bounce entry point, took a day or two of a beating, then it looked like a recovery was starting.  This trade made 4.63% in 2 days in wildly swinging markets which is not bad, but it missed out on a 25% profit in 4 days if I had stayed in for the ride

Here is why I exited. This is the 5 minute chart from the morning I decided maybe the market was turning to the downside, not the upside. The last bar shown below is where I decided the market was going down, not up. In hindsight, waiting 15 more minutes would have shown me that the trend was upwards again. But 15 minutes in last weeks market could have also erased the entire trade profit from two days in the most volatile and unpredictable market since 2008. The 75 cent swing in the first hour of trading on a $17 stock was really scary, and AREX is a twictchy, unpredictable stock at the best of times. I took my 4.5% and ran, thereby missing a 25% profit in the following three days.

Accumulating dividend payer CPLP during the crash

Here is a picture of my 'dividend accumulation strategy' throughout the crash and bounce.

I'm still down 11% on CPLP, but the stock I bought at $5.95 will pay 16% dividend at the price I paid. If I'd had a bit more courage, I would have bought three times as much, and with today's huge bounce, would have been profitable already on the overall position, with an average dividend payout for the whole position around 14%.

This position was by no means perfectly managed. I missed the bottom of the bounce by a whopping 15%, but things were so damn scary 5 days ago I just feel grateful that my stomach is no longer turning knots. However, monthly SPY chart still says this bear market is only getting started, so this is still a longer term position designed to accumulate dividends in a sector that the global economy cannot function without.

You could argue that accumulating into a crash is crazy, but I've been trading CPLP almost every dividend cycle for 2 years, so know this stock is extremely cyclic, and bounces back over the next dividend quarter. Supertankers don't dissapear overnight, so when a stock like CPLP dives 40% in a month, you can be fairly confident the market is incorrectly valuing CPLP and a bounce will occur.

Another Recovery day - huge 18% bounceback for CPLP on merger news

Huge bounceback today helped my 'dividend accumulation' strategy on CPLP.

I SPY carnage: Financial Crisis 2.0

Disclosure:  Personally, I have over lost 20% of my portfolio in the last two months. Today I dumped everything that wasn't already past the point of no return (i.e. less than 15% loss, and paying less than 10% dividend at todays price).  I'm keeping my dividend payers (AOD, AGD, CPLP) that are past the point of no return.  The losses in these are now too great to think of these stocks as anything more than 5-10 year dividend reinvestment vehicles for my future. Lock em away and forget em.

On the bright side right now, dividends reinvested in AOD will be making 14.6%, dividends reinvested in AGD will be making 12.83%, and CPLP 19.02%.  CPLP dividend is payable in few weeks, AOD and AGD pay monthly, so the dividends average out the losses as quickly as is possible in this situation.

The other reason I liquidated half my portfolio is that I need money to trade short in the bear market, or just have some cash sitting around to pick up the unbelievable bargains that are going to appearing in the next few months. The next few months will see some stocks so devastated by the lack of confidence that we are seeing in governments, business and our financial system, that 100%, 200% and more gains will be possible. But you'll need cash available to make those gains.

Here is why I think the bear market is just getting started. Have a look at the monthly chart for SPY (S&P ETF).

1. Bearish Engulfing Candle. This months candle is a monster bearish engulfing candle that exploded through the 17 month moving average (pink on the top graph) like is wasn't even there. See when that last happened? January 2008. It took 16 months for the market to recover when that last happened.
2. MACD is just crossing downwards on the monthly chart (blue crossing yellow). That means this downtrend is just picking up momentum. There is no good economic news out there. Europe is in disarray, the US public has utterly lost confidence in both the contribution of Wall Street to middle-class society, and Washington's ability to make any sort of coherent economic decision whatsoever. Corporations are sitting on piles of cash, but CEOs are paralyzed by fear of their boards, their big investors and of losing their inflated compensation packages.
3. Bollinger band Look at how far away this months candle is from the lower bollinger band. This months down trend has now built up so much momentum to the downside, that it continuing down to the lower bollinger band is a high possibility, taking the stock market right back to 2003 levels. Technically, if that does happen, it could even accelerate downwards, which is what happened in 2008
4. RSI is still at 15, meaning that a bounce is possible, but by no means certain, especially if small investors start to panic and yank their money out of the market to stem further losses. RSI is a great indicator that a bounce may be coming, but really only if it gets below 10. We are still some way off that, and RSI can stay low for some time.
5. Volume. Look at the volume in Jan 2008. It's about what we have seen so far this month. So, the panic is just setting in. Regular investors are only just starting to get how bad this is.  If more investors panic, then volume could increase, adding fuel to the fire, and getting panic based selling up to similar levels that we saw in Financial Crisis 1.0.

In conclusion: We may see a huge bounce in the next month. Or the entire global market could crater from here on out for the rest of the year as people brace themselves for Financial Crisis 2.0.  Either way, you want to half at least half you whole portfolio is cash right now and do nothing with it until things settle. If you haven't taken at least half your 401K out of ALL stock market funds by now, I recommend you consider that seriously. (Disclaimer: I am not a financial advisor, just a blogger).

Anything your broker or financial advisor says to you about global diversification right now should treated with contempt - the US debt downgrade is as global an issue as any we ever see in our lifetime. If you don't get out of funds and have a big chunk of your 401K in cash or bonds,  long term stock market funds in your 401K funds will probably be well on track to being back to 2004-2005 levels, erasing the last five years of gains if there is not an immediate bounce.  Sit on the cash, then watch for the recovery in about six months and seek to use your 401K as a trading account to be invested in only when the market is in clear uptrend.

Meltdown

First, Wall st causes the financial crisis in 2008.  Next, the Tea Party and their insane ideology drives fiscal irresponsibility into Washington and causes this one.

A Tea Party market

Yep, this is the market response to Republican political antics. Lets hope all those Senators who were playing Russian Roulette with the debt ceiling debate got stopped out of all their open positions today.

How well will these 10%+ dividend payers weather the debt crisis?

My entire portfolio is high dividend stocks right now. I don't have the time to second guess the Russian Roulette being played by Republicans in congress who would rather destroy the worlds largest economy than pay more taxes, and as a result the market is simply too volatile for my usual style of swing trades to work.

Here is the breakdown of my current dividend only Portfolio

CMO (finance) - currently paying 14.5% 

NLY  (finance) - currently paying 14.87%

AGD - (Global Dividend Fund) - currently paying 10.17%

AOD - (Global Dividend Fund) - currently paying  11.32%

CPLP - (Supertankers) - currently paying 11.44% 

My income portfolio is fairly diversified, but did get hammered in the last week, so I was glad to see the recovery today. Look at this graph of the bounce back from the last weeks vicious drop.

Taking FFC modest profit on shaky market

Selling FFC because of a weakening trend and negative market influence. Two days ago green candle penetrated upper bollinger band. When this occurs and the momentum accelerates, I would hold.  However, it was followed by two red candles and the big drop in the Dow yesterday. Better to take profit rather than wait and see what the market does. Missing out on the dividend, but have to wait another 10 days until dividend record date, and it is not worth the risk.

This was a 23 day trade with 3.47% gain.

CPLP Sold as market softens after the rally of the last two weeks

Sold CPLP for 9.2% gain in 19 trading days. Market looks like it is softening after the rally in the last two weeks. Price dropped under the 7-day EMA (green line), and Williams and RSI indicators show uptrend has been broken.

CPLP Trade is going well - 12% in 18 days

If a trade is going well, it's time to take some profit out and put it in your pocket.

The entry was a little early - I didn't follow my recommendations in the June 3 post exactly. I only waited one day after the candle was completely inside the bollinger band, but I also only entered with a small position due to recognizing the risk was higher. Actually a good part of the timing was the fact that I went on vacation on June 13, and didn't know how much time I would have to check progress while on vacation.

In hindsight June 15 was actually the perfect entry day, when the candles straddled the 7 day average and the green line was completely flattened out.

I'm quite happy to sell this right now.

 In 15 days, the profit on this trade

  is more than the yearly dividend

 for this stock. 

This is what I like about trading CPLP - it is very cyclic because of the dividend, but if your timing is right you can trade the cycles to achieve a yearly dividend every quarter.

I'm now putting a stop in to exit at 9.5% profit if it drops back. If it goes higher based on promising jobs data, then let it run for a bit more. Williams R and RSI both show some weakness, so there is no certainty that it will keep going up. So if I get stopped out at this price I won't be surprised, but I won't be upset either.

Make 15% in the next 60 days on cyclic shipping stock CPLP

CPLP has dropped off over $2.50 a share after they paid their dividend and then the market went down, exaggerating the usual post dividend revaluing of the stock.

Now is the time to

 start thinking about 

buying CPLP again.

 At the current price it’s paying over 10% dividend. But my target will be to make between $1 and $2 per share profit, within 60 days, or keep it for the dividend if the market doesn’t recover again over the summer.

Look for these technical buy signals

This is the chart from 2010, where I traded the cycles in CPLP due to it's big quarterly payouts.  The technical buy signal I’ll be  looking for is the purple and green lines to get much closer together.  You can see this happened at $8.20 back in August 2010, then $8.40 in November 2010.  You can see when green crosses above purples, that’s when the uptrend starts. We don’t even think about buying until the candles are completely inside of the lower bollinger band, and there is no hurry, CPLP usually trades up and down a bit before people realize that a 10% dividend is pretty good and that the global economy still needs supertankers to carry oil around the place.

.

The time is right to start bottom-fishing FFC

The meltdown in the last week is creating lots of buying opportunities. I got out of FFC at the right time fortunately, but I like this stock so am looking for a rentry point. This planned trade is  some bottom fishing with a small order about two days price action below the current low.  As the candles are still penetrating the lower bollinger band the downtrend could continue for some days yet.

Signals for re-entry in the order that they will appear are below. If all three of these signals occur next week, this will be all go and I will adjust the buy order to meet the market price, or increase the position.

1. Green candles trading entirely inside the lower bollinger band
2. Green and pink EMAs closing together.
3. Green EMA flat or climbing.
4. Three green candles in a row, and it will be time

This stock pays a monthly dividend, so can be an income stock as well.

Using a bearish Engulfing candle as a short entry point

Classic chart pattern. Strong climb up with bollinger band being penetrated three days in a row. The red candle inside the bollinger band was the first warning sign. that would have been an exit point. then another rally, and then a clear bearish engulfing candle. Dropped back to EMA-17, but the EMA cross where the green line finally crossed the pink was the death knell. The bearish engulfing candle would have been a good short entry point.

FFC Closed with 1.6% profit and $ 0.13dividend

Although I liked this longer term trend, FFC didn't reach my short term price target of $18.54, and technical indicators all show it to be weakening, so I exited with the monthly dividend and a small profit. It's post dividend, so may take a dive below the EMA 17(purple) and present a rentry opportunity.

Three Ways to Take Risk Out of the Stock Market

Using these three simple steps, you can reduce the risk in your stock picking plan:

1. Screen Your Picks. This might seem obvious, but patterns that look like they are developing into predictable trends do not always follow through. 

2. Get In. Get Out. Set realistic target exit prices for all stocks. Lock in high returns while the stock is high, and  get out before the market has a chance to change its mind. With Swing trades, this means taking profits from one part of the trend. As soon as the first pullback occurs, we get out and wait for a reentry point.

3. Set Tight Stop Losses. This step is absolutely critical to minimizing your risk in the stock market. If a sure-fire winner turns out to be a fizzled-out dud, your system needs to have a built-in, abandon-ship trigger. That is, you need to know when to cut your losses and move on to brighter prospects.

A stop-loss trigger around 3% is realistic for all but the most volatile stocks. So if a trade starts to go sour, you will almost never lose more than 3% of your investment.

These tips came from ChartAdvisor.com and were modified to suit the NeuroTrade trading strategy.

You and your money

Trading is not a way to save money. It's a way to use money to build wealth. Wealth is the possession of money, skills, knowledge and systems that allow you to create what you want and live how you want.

Trading is the process of anticipating changes in value, and taking action to participate in that change in value.

Trading is not about 

 sitting on the sidelines,

 watching your money

 at a distance. 

That's Investing.

Online trading uses money in a very active way. Your money and you are involved very intimately at many levels. As you skill in online trading grows, your relationship to your money will change.

Let me give you an example: One of my best ever trades yielded a 29% profit. OK, you say, that's pretty nice, kind of above the S&P, pretty good annual rate of return really. Oh, but I forgot to tell you something. That 29% profit was made in just one hour.

Now imagine how long it would take you to make 29% putting your money in a bank and watching the grow at 4% per year or whatever. Feel what it feels like to have your money grow 29% in just one hour.

Saving is the process of putting money aside in a safe place.
Saving is familiar to most people, it's hopefully a basic money skill that your parents taught you and you've done successfully or not so successfully throughout your life.

When we start trading our money, a lot of beliefs that you have about your money and what you do with it will start coming up.

If we do not address these beliefs and emotions, we are unlikely to grow as a trader

Watching this week BOOM long, FACE short

BOOM
Strong drop off after earnings drop. RSI-7 near lower 18, penetration today of lower Bollinger Band
Need to see how much further it drops, want to see RSI dropping to 10.

FACE
Surfing up upper bollinger band, but now trading inside. Nearing upper side of recent channel, RSI 77

NLY Quarterly Dividend paid 62c 13% p/a at current price

AGD Dividend paid 6c 6.7% pa at current price

New Chart colour scheme test

LEXG how to trade the bounce

LEXG collapsed today, after frantic 100% gain in the last ten days trading.

The collapse appears  based on news reports that "Lithium Exploration Group entered into an equity purchase agreement with an investor for the purchase of $1 mln worth of shares of the Company's common stock at the past five trading sessions' average price. "
Here's how I successfully traded the collapse of a super volatile much hyped stock. 
Nail the Entry:  I determined the bottom of the bounce by waiting until the 5 minute bars were completely within the bollinger band. Then I waited for two complete green candles had appeared before buying. Once the green candle crossed the moving average it exploded. I also monitored RSI-7. The RSI bottomed out at about 6.5. Using RSI-7, any value under 10 means almost certain direction change.
Lock in profits: When it took off it was bizarre, the price climbing very evenly, at about 1% a minute for almost an hour.  I  manually adjusted my stop every ten cents of price gain. 

Sell when it peaks. This is where the reality of trading highly volatile stocks hits home. When the top came, the price dropped so quickly that the queue of orders meant that getting filled was a crap shoot.  If I had been able to sell sold based on my stop limit order at $6.60, I would have made 68% in under 60 minutes.
Throw out all rules if necessary: When the price blasted through my stop price multiple times without selling, it was clear the price was collapsing faster than orders were filling.  I threw out the liferaft and put in a market order in, knowing that it would fill but at a terrible price. It did fill, over 5 minutes later, and at exactly 50% of the value where my stop limit order had originally been set. If you want reliable instant fills, trade AAPL, not LEXG. But you won't make 29% in a morning trading AAPL.
Don't lament what could have been:  I'd nailed the timing of the bounce which made me feel good, and made 29% profit in an hour of watching and an hour of market exposure. Not bad for a mornings work.


Happy trading.

LEXG Trade the Trend until the End

When a stock is in a trend, trade the trend until the end.

Day Trading Setup: 5 minute and 1 minute Candlestick charts. This trade was all over in the first hour of trading. The chart used to drive the decisions was a five minute candlestick, but things started happening so fast I was using the 1 minute chart

Trade strategy:  Based on the pattern of the previous days, it the price was  going up in the first twenty minutes of the day, jump in and hang on.  If its going down, wait for signs of a rally.

What actually happened:   It was going up within two minutes of the open  so I bought at 9:32am. The trend appeared to be continuing so I doubled up at 9:37.  I had a stop on the first position, so it sold a pullback to the moving average (green line on the graph) occurred after 13 minutes - the third 5 minute candle of the day. So the first trade was 4.6% profit in eleven minutes. Usually I am happy with 1% per day gain, so that was a pretty nice trade in itself.

Blast off and exit: Then it really blasted off,  and the second half of the position zoomed to 20.2% profit by 10:21am in 44  minutes.  I raised the stop-limit to exit manually three or four times to lock in profit. As soon as the candles stopped 'surfing up' (i.e. crossing) the upper bollinger band of the five minute chart, I assumed the trend was at an end, and exited. This stock reverses it's trend within minutes, so this was minute by minute decision making.

There were potentially other entry points during the day, but they weren't so clear. LEXG has shown a pattern of huge spurts first thing in the morning, or huge selloffs. However usually it just levels out after that. My theory is the huge sellouts are due to extended hours market manipulation which effectively means anyone that stayed in overnight and raised their stop to protect their days gains gets their stop triggered, which creates a wave of selling first thing in the morning. See the huge red candle in the overnight session, which encompasses the entire previous day's trading range. Ironically, exactly the opposite happened today. The market manipulators take advantage of this by coming in and buying into the bounce.

LEXG stock is clearly climbing because of  a clever online marketing campaign - it's the reason I first heard about it. Clearly no one really has a clue what the value of this company actually is, so trade the trend that is occuring,  not what you one you think might happen.  In the back of my mind however, is the uncanny resemblance of LEXG to HHWW so, I'm waiting for the 80% one day selloff to occur.

LEXG classic swing trade entry and exit lessons

LEXG has given me some easy profits, but many more lost opportunities.

The key to this stock in the last weeks was knowing which chart to use to trade it in order to get a clear signal about what was happening. This is a ten day chart with hourly candles. There is no scale, but both pullbacks (the large red candles) were over 10% within an hour of trading. Each time it appeared to signal the start of a complete price collapse.  

With a stock exploding as quickly as LEXG has, there seems no logical reason for the price to hold up. You expect it to go down just as fast as it went up - which means 30% to 50% in hours. To make it even more nasty, my broker doesn't accept trailing stops or even market orders on this stock. Meaning you basically have to manage with STOP and STOP LIMIT orders. The volatility is so great that most normal 5% or even 10% stop order prices get taken out within hours as well.

Even worse, overnight market market makers determinedly bid down the price to the previous days low just to make sure everyone's Stop order gets trigger first thing in the morning.

Recipe for success. Day trade, using 5minute and 1hr candles, and your finger ready with an order to sell as soon as you see a price collapse threatening. 

Or, alternatively, buy, hold and hope.

CMO Dividend Paid $0.41 12.68% p/a at current price

LEXG so close but so far. A lot of lessons

Weird things happening this week in my energetic universe. Last week I made a bit of profit on a stock called LEXG, which is a junior exploration company. The first trade I based on a series of daily gains within any pull back. I traded it for a quick 6.5% profit as a day trade.

The next day, there was a sharp pullback  - nearly 8 %. I decided that was an opportunity to get in again at $1.59. This time I held my breath a bit longer, keeping the position overnight. However I sold on the way down at $1.64 when another sharp pullback started. This time the pullback was  more than 10% in just a few hours. This all freaked  me out and I refocused on some other opportunities. I thought LEXG was going the direction of HHWW, when it's spectactular run up completely blew out back in November, leaving me in a panic selling, situation selling off the last of my position as it went from $3.25 to $1.03 in a day . HHWW never recovered, and is now trading around $0.40.

This week, the universe is giving me some lessons to be more persistent. If I seen the selloff last week in a overall trend for LEXG, kept my entire stake, and sold yesterday to close out the week, I would have made 80% profit in about ten days.

Here is another chart showing the extent of my missed opportunity.

The key here appears to be looking at the right chart. Because of my relative success with the two short term trades, where I was looking at a 5 minute chart, I missed the bigger trend revealed by the 1 hour chart above.

What did I do right?

 - On an intuitive level, I was attracted to the LEXG company and their business

 - The initial, very even trend felt similar to HHWW at the time I bought. Even daily gains with a number of green candles in a row. 

What do I need to do better?

 - Look at the big picture trend and stay with it. The pullback was healthy. There were multiple buy signals to support getting in again, all of which I missed because I wasn't looking. If I had seen these signals I could have got back in at say $1.60. Notice how it took off exactly where the previous sellout occurred - at $1.70. 

- The sell point would have been at $2.45 at the end of the day, when the bars stopped penetrating the bollinger band. With such a healthy 3 day profit, you have to have a stop in to retain the profit.  Once the candles were within the bollinger band, a suitable technical stop point should be the last penetration point of the bollinger band at $2.40. Or just pick a trailing stop of 5%. This would have given a three day trade of  $1.60 to $2.40 - 50% in three days. 

When to Exit a Trade

From Mark Mark  Deaton newsletter  mark@renegadetrader.com 

We'll first thing you need to do is understand the stages of your potential exits - when MIGHT you get out.

1.STOP LOSS - Step 1 is a stop loss - Literally when the trade goes against you from the start, this is the first time you would consider an exit.

2. IMPULSE MOVE UP - The next point of exit is when price is extended in the direction you forecasted, when price begins to move up, are we tolerating a pull back ?

3. MULTIPLE IMPULSE MOVES UP - The last time at which you would consider an exit is after many impulse waves up. In other words price went up, pulled back, went up and pulled back again and now went up. At what point to we decide to remove the position and take profits?

Before you enter any trade you need to think about all 3 scenarios you need to decide in advance what your going after, hopefully you have a plan of action and you know in advance EXACTLY what sort of target your shootin' for.

For example many times after I enter price prints a low that is lower than my entry, sometimes its much lower - My strategy ? When price prints this low I know that there is a very good chance that it will close up higher.  If it closes low I'M OUT IMMEDIATELY.

If you want detailed info., on how to plan all these potential outcomes in advance you would do yourself good by checking out my complete traders arsenal for here -

http://triplestrikemethod.com/index.php?page=home2

AGNC Long at $28

I've posted a lot about the highly cyclic nature of American Capital Agency and the opportunity to make money from it in multiple ways. I know Cramer hates this stock, as he can't understand how they pay out such a high dividend. Which is good for us, because anything that Cramer says drives activity in the market, and that means we can use that volatility.

 I've made more money trading the volatility of AGNC than from the dividend itself. The high dividend obviously makes people nervous, probably rightly so.

This entry into AGNC was automated - I had the order in since about a month, based on the sell-off that usually occurs once AGNC goes ex-dividend. I'd actually more or less forgotten about this order until this morning.

The game with this trade is to generate more profit trading AGNC short term than you would make just keeping the stock for the dividend. Given that the dividend is $1.4 per share every quarter, I don't think this should be difficult as AGNC usually fluctuations by up to $5 per share throughout every quarter.

As you can see from my previous AGNC trades, you can go both short and long, based on where it is trading within the broad channel that goes from the high pre-dividend ex date, to the low just after the ex-dividend date. If you want, just keep it for the 19.55% dividend. Or trade long, short based on the volatility and pick up 2%, 5% within days as the price jumps around. You might think that some of these trades are quite small,but most of them fit my '1% profit per trading day' rule.

AGNC past dividend paydate - BUY opportunity

AGNC quarterly dividend paid $1.40 19.55% p/a yield at current price

Short AGNC at $29.40

Closed AGNC Long Trade at $27.65 2% profit in 8 days

Closed AGNC short trade at $28.10 5% profit in 5 days

Close AGNC Long position with 3% profit in 3 days