Archive for January, 2009

Chart – Long GLD, Short USO

January 31, 2009

This is what the GLD/USO pair looks like on the dailies.

The lines going through the price are linear regression with standard deviation bands. Lower studies are the RSI (oversold breach) and my Super Secret Proprietary Indicator (green bars rising).

So where is this going?


Vladimir Visotsky

January 30, 2009

Time to grab a potato vodka martini and enjoy a little Vladmir Visotsky …

Stress testing in real time with real money

January 30, 2009

The market has a fee it likes to charge you to show you where your trade system is weak. This week, my bill came to 52 pips times three contracts, or $156.

A little background for this week’s classroom:

I have a trade system for day trading forex that includes four studies.

On the actual price chart (candlesticks) are two studies:

1) Donchian Channel (for situational awareness)
2) 21 EMA (for situational awareness)

On lower studies are two studies:

1) RSI (for situational awareness in executing entries and exits)
2) Super-secret proprietary indicator (SSPI) used for triggers.

A quick note on SSPI. It is a momentum oscillator, trend identification histogram developed by myself.

Here’s how the trade sets up:

Daily trend defines the major trend, and its strength the probability of continuation. Smaller time frames indicate if a countertrend is underway or if the trend is firing on all cylinders.

Trades are entered on the 5-min chart using the SSPI. For example, if daily, 60, 30, 15 all show a downtrend, wait for a counter rally in the 5-min to begin petering out before entering.

The way trades were closed for a loss was when the 5-min closed and the SSPI showed me to be on the wrong side of the trade.

On Jan 27, I got long the NZD/USD (Kiwi) pair. The daily trend was down, but a strong counter rally was underway in the 60, 30, and 15. The 5 showed the counter rally was taking a breather — perfect time to enter long. I knew a Fed announcement was coming so I was monitoring the situation. The announcement came, and nothing. Fed keeps rates at 0.25%. Okay, now let’s get back to our regularly scheduled counter trend rally. Next thing I see is RED. Big RED candles and heart palpitations commence.

My SSPI was designed to keep me out of whipsaws so I needed to wait for a 5 min close to trigger me to close for a loss. Meanwhile, losses are piling up in triple time. I wanted to throw my system out and close for a 60 pip loss, but I’ve been down that road too many times, where I close a trade at the absolute worst price before it moves in my direction. So I wait. I ask myself, what the hell is going on here? (confusion not a good sign), It’s got to stop this f#$%ing free fall, right? (hope, another bad sign). Finally, my system tells me to go to guns and close the trade. It’s over. Using RSI and 1-minute charts I wait for retracement from solid red so I’m not the greatest fool. It comes. Execute. I’m out. 52 pips. Holy hell, what just happened?

Some well-meaning readers may suggest I create a rule to remain flat in currencies during Fed announcements, but I don’t believe in rules. Rules are a way to surrender your responsibility to some ink on a piece of paper that glares at you as it rests near your monitor. And anyways, you’ve been breaking rules your whole life. What makes you think you won’t find a way around your new rules? As far as I’m concerned, they’re useless.

No, I’m not gonna make a stupid rule. I’m gonna stop trading today. Trading when you’re confused, upset, angry, disappointed or generally pissed-off is random trading, and we don’t like to do that anymore than we like eating glass.

Two days later I look at the charts with my studies again. You’d be surprised what you see when you don’t have the stress of a trade on. Right before my eyes, the RSI warned me that there was an oversold condition underway, way before my trigger. So easy as pie, I have a new stop loss exit procedure:

Exit a trade for a loss when SSPI indicates your on the wrong side of the trade, or if RSI moves to an oversold/bought condition against you, whichever comes first.

Tuition well spent.

not that it matters, but after the fateful exit, the Kiwi fell another 100+ pips in the next ten minutes, and closed the week about 125 pips below my exit.

Smoke of the day … El Mejor Emerald

January 29, 2009

I’m not the only one smoking today. S&P 500 up 3.3%. And it’s the sixth up day in a row. And there was no gap fill.

El Mejor Emerald is quite a value at about $3 a stick. I like that funny wrapper-less foot. They call it a shaggy foot and it’s a novelty, but it’s great if you don’t feel like burning a box of matches getting your cigar lit.

Honduran wrapper with Nicaraguan filler. Smooth and medium-bodied. For the price, you’d expect to be spitting your guts out, but that is not the case with El Mejor Emerald. I hate to say it, but it is a gem.

MNX double diagonal

January 28, 2009

A little history …

I put on the FEB/MAR double diagonal spread in MNX on Jan 7, 2009 for $0.00 credit.

It has the following short strikes in FEB:

121 put and 127.5 call

I have the following long strikes in MAR:

116 put and 132.5 call.

As you can see, there is $5.00 risk on the put side and $5.00 risk on the call side, so margin requirements for this trade is $500.

There are 22 days to FEB expiration so now is the time to start ‘thinking’ about rolling out my short strangle into MAR.

Currently, it’s marked at $4.75 credit. I have an offer of $5.01 in right now.

After the roll, the resulting spread will be a plain vanilla Iron Condor with a total risk of $5.00 (put side and call side evenly balanced).

Do you see where I’m going with this? If I get a $5.01 credit for $5.00 risk in MAR, I basically have on a risk-free trade with the potential to make $501.

According to my analysis, if volatility remains the same, a strangle roll on Feb 13 will be worth around $5.00 if MNX is trading between 119 and 131. Anything closer to the middle yields more.

MNX is a European-style cash-settled index meaning there is no choice for early exercise and there is no stock being traded. It is a mini version of NDX, which tracks the Nasdaq 100.

Time is on my side, and I need MNX to stay above 121 and below 127.5.

Welcome to Milk Trader

January 28, 2009

Milk traders, welcome!

How do you know you’ve reached the right blog?

–You know you’re a milk trader if you control a micro account.

If you control more than $10,000 in a trading account, may I recommend you listen to CNBC for trade ideas. When your account dips below $10,000, then please come back. When milk traders reach a 10% profit or more, money comes out of the account.

–Milk traders do not trade stocks.

Why? Because there is no leverage in stocks. And since we control micro accounts, we need all the leverage we can get. So what do we trade? Liquid markets in futures, forex and options where capital outlays are less restrictive and leverage is 50 to 100 times.

–Milk traders are skeptical of smart money.

We believe Cramer is a blowhard and Warren Buffett is an historical anomaly. We couldn’t care less what EBITDA stands for. Instead, we use statistical and technical analysis to put ourselves on the high probability side of a trade.

–Milk traders NEVER random trade.

There are two good reasons for this: a) we can’t afford to, and b) random trading is for dumbasses, and we don’t want to be dumbasses.

–Milk trading focuses on four major markets.

Our focus markets include stock indices, commodities, foreign currency and treasuries. Within these major markets, there is a plethora of futures, currency pairs, ETFs and cash-settled options. And plenty of trade ideas.

Enjoy, there’s more to come.

…and I shall lead you to a land flowing with milk and money.