Short crude oil trade review

Today I am going to do a quick review of a crude oil short trade that I entered on 1/25/16 and exited for a loss on 1/26/16. While I was in the trade only for a day, I have a couple of important takeaways that I would like to share. First let me explain the details of the trade.

Crude put in a vicious 15% rally in two days to finish last week’s trading. Many were, once again, calling for the bottom in crude. The following trading day, crude quickly reversed, dropped 10% and put in a nasty engulfing candle. After touching the middle band and reversing, I received a short signal. I entered short oil via SCO (proshares ultrashort bloomberg). Below is the daily chart of USOIL on the entry day.

3 (16) entry copy

The following trading day, we gapped up on news of a potential OPEC deal. I decided to exit the trade because of the strong adverse momentum to my position. I took a small .5R loss.

From this trade I can draw two very important lessons:

1) Position sizing is crucial to trading success. In this trade, oil was overextended to the downside and this last potential bear flag was the 3rd pullback in the new downtrend leg that started in November of last year. When trades are overextended, there is a high probability of a snap back rally, which has to be accounted for when positioning. Additionally, the last pullbacks in trends have a higher rate of failure, the pullbacks in the beginning of trends have a higher rate of success. That is why when I entered short on the breakdown of the first pullback (1) , that I have highlighted below, I had confidence to use a relatively tight stop which allowed me to use an increased position size. In this last pullback (3) , my initial stop was extremely loose, which caused me to have a light position size.

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2) Most entries are based at major inflection points. What does this exactly mean? In many cases, this is the reason why you can be stopped out of a trade in only a couple of days after the entry. Markets fluctuate between a state of momentum and mean reversion. When I entered this bear flag, I was assuming the rally that caused the flag was a continuation pattern to the downside (momentum). Instead the market showed that this rally may be a some sort of failed breakdown, signaling a bounce (mean reversion). Think about your entries, when you enter a breakout, that is  major inflection point. If the probabilities are in your favor, the market will break to the upside and exert range expansion (momentum). Consequently, the market can quickly close back below the breakout zone and return back to equilibrium (mean reversion).

Hopefully these couple lessons served as a valuable learning experience.  If you have any questions do not hesitate to reach out to me. Thanks for reading.

 

 

10 things I learned trading e-minis in 2 weeks

I recently began day trading S&P e-minis to supplement my longer term trade system that uses daily/weekly charts. I am prepared to lose money in exchange for the experience of trading intraday. I also plan on trading for a living, therefore, active trading can provide better opportunities for cash flow in comparison to a longer term trend following system. Here are 10 things I have learned trading actively intraday in two weeks:

 

  1. Limit the amount of bad trades I make. This sounds so obvious but on smaller timeframes reaction speed has to be a lot quicker. I don’t have the privilege to take my time and contemplate what is in front of me. Day trading may try to force you to make really bad trades sometimes. Trades that you know aren’t that good yet you take them anyway. Those are the ones that will have the biggest impact on your P&L.

  2. Very similar to my last point, day trading makes you think you should always be going for the home run trade. The home run trade that rarely happens but the one you hope happens every time you enter a setup. Like most, I find it better to focus on using my edge to make small gains in the market. The only days I look for home runs are trend days where the market can open on lows and close on highs.

  3. More so than any other trading style, day trading makes you always want to play the reversal, trying to buy the lows or sell the highs. My worst trades have come when I try to fight a trend. I have limited my exposure to counter-trend trades in only the highest probability setups. My most successful trading has come from finding the established trend and buying pullbacks/breakouts in the direction of the trend. Not only is my probability of success higher because I am not fighting the trend, statistically speaking, buying pullbacks with trends has the highest win rate of any of the trades I take.

  4. Gaps provide great trading opportunities. A lot of work has been done on gaps and patterns that they provide. Through my research I have found that Monday has the lowest probability of a gap filling with the rest of the week having a significantly higher probability of filling, Thursday being the highest. I like getting my trading day started by playing the opening gap because some days it almost feels automatic. Furthermore, I get to start my day with a winning trade, which is a positive for my psychology for the rest of the trading day.

  5. If the market is moving too fast/choppy for my style I try to just sit out. Not every market has to be traded or can be actively traded by a human being for that matter. Trying to trade these days have been chewing on the gains from my profitable days.

  6. Stay off StockTwits. I used to love being on StockTwits during the day when I was not actively trading intraday. However, after the first couple sessions of day trading I quickly realized it is better to tune out all the noise. Better to focus on what I should be doing and my own trading style.

  7. I will only add to a position if the market already validated my thesis. If I see we may be in a trend day and the market starts to move up, I will add to my position with each successive pullback.

  8. I have found that my best trades are when the market quickly moves away from my entry and never comes back. That is what is so different about day trading opposed to trading the daily chart. I would maybe have to wait a couple of days to see if I entered a valid trade but on lower timeframes I can receive gratification in seconds.

  9. When I am in a position and my stop is in, depending on the trade, I try not to watch it tick for tick. Constantly sitting in front of the computer all day will make you want to do something while you should just be reacting to what is happening. For example on the choppy days I will play Xbox, learn basic blackjack strategy, go on YouTube, anything to distract me from overtrading.

  10.  I can’t emphasize this enough. My greatest asset in day trading has been my ability to sit and not do anything. If I only place 3-5 trades in a day I know I am trading well, the days where I try to make 20 trades is where I know I am doing something wrong. Most days I strive to make a couple nice trades, make my money and get out. I have already had a couple days where I am up big and then try to do too much and give it all away.

Fighting adversity

Let me start off by saying that I have been involved with financial markets for almost 3 years now and I have been actively trading my breakout trend following system for about six months. I must say, this current market environment can be really tough. I have been reviewing my trades for the past month and a lot of things pop out to me. For the past month I can split up my losing trades into two categories. My first loss is a trade where I followed all my outlined rules, had an unrealized profit and then the market quickly reverses and I end up taking a loss. My other loss is a trade where I tried to force my trading strategy, thereby breaking a couple of my outlined rules and then realizing a loss. I really wanted to dig deeper into each one of these kinds of losers to see how I can improve.

The first loss is a result of trading a trend following system. As part of my trading system, I am ok with a small gain turning into a small loss. However, some of the losers in this category had a decent profit at the peak until it was quickly taken away. It is easy to say that I should have locked in the profit but as a trend follower, I must have big winners. I noticed a lot of other traders on StockTwits have the same issue. The market would give them a decent sized profit for it to be ripped away. I was slow to realize that in this kind of market, you have to take profits when they are on the table. This is also not an easy environment to be trading with a trend following strategy. It made me realize that I needed to have a shorter term orientated strategy, where a trade may only last one day opposed to my usual holding period of weeks or months.

My second loss is a result of not having a shorter term orientated strategy to implement. I was forcing my longer term trend following strategy in an environment that trends for only minutes or hours. I use a daily timeframe for this breakout trend following system. Therefore, the day after my entry, my trade could have potentially had a solid gain. However, as part of my system I am obliged to let the trend continue. I obviously learned my lesson because Mr. Market was not rewarding this kind of trade.

So my solution for this kind of environment is to use a swing trading style that I will begin to test with small position sizes. I have seen a lot of the breakouts that I have entered becomes false breakouts which would have turned into an awesome swing trade. Ideally, I would love to have both a swing trading and trend following system to trade. Markets are either ranging or trending and I would have a strategy for each condition.

I will post some trade review follow ups to my swing style when the time comes. Good luck to all and happy trading 🙂

Changes to my trading system

I am very excited to announce a couple big changes to my overall trading strategy. When I began constructing my very first trading system, I designed it so that it did not require a lot of attention. 99% of the time I would either be waiting patiently for a valid setup or already sitting in a profitable trade. The most work I had to do was enter/exit the positions and log the trades. It gave me the ability to live my life without having to constantly keep my eyes on the position because essentially, everything was already set in place. It aims to capture large moves in stocks/indexes/commodities using the weekly for trend identification and the daily for entries/exits. In my last post, I mentioned the trading rules for that system, which require me to do nothing when there is nothing to do! Which I am perfectly ok with, because that is what makes the system profitable. As you can tell in the volatile markets as of late, a system like that does not generate signals. So I have had time to just sit around and watch the markets all day. Markets are fractal and after studying short-term price movements, I have found most of my signals work pretty well on lower time frames too. obviously the biggest difference is the pace of the trading environment which is not be underestimated.

In my boredom, I decided it was time to try something new. I already had constructed a system that is for the most part hands off. Therefore, I started looking into more short-term trading strategies that would require me to be more hands on. So now I am in the process of finding a new short-term trading strategy using these lower timeframes. I will be testing some of these strategies using live trades with small position sizes just because I do not really believe in paper trading. That being said, I am ok with paying some tuition to Mr. Market as I formulate these strategies.

The first simple strategy I am considering is almost the foundation of market structure in volatile markets. Volatility compression which is followed by a volatility breakout. Bollinger bands do an excellent job of showing this. Watch as the bands pinch during the compression. When the market breaks out the bands open up and the market quickly moves into a new range.

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Another possible strategy is RSI divergences.

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Another thing I came across was a trading strategy called ichimoku. It looks extremely busy but it is actually pretty simple after you know what to look for. I will have to do much more research and become more familiar with ichimoku before I risk real capital.

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Incorporating these new strategies means that I have a lot of new mistakes to make and learn from. I am prepared to log all of my trades and find out which ones have the best edge in the market. One thing I know for sure, no matter what strategy I decide to trade I will be cutting my losses short, letting my winners run and controlling my risk. The rest will eventually fall into place!

Trading rules

This was my first year trading using my own system. I have learned more than I could ever imagine. I have accumulated this knowledge not only from my own mistakes but from many of the great traders that I follow/look up to on twitter/stocktwits. I thought it was neccessary to reflect on my trading this year and make a list of rules that I believe are critical to my trading success. If you have any other rules or changes to mine I would love to hear them!

Rule 1: We strictly use price to make decisions. (Only price pays) The indicators we use are just for clarity and confirmation. We do not use fundamentals, news or analyst estimates to make decisions on entries/exits.

Rule 2: We are extremely picky with our entries. No one is forcing us to trade so we only take the best entries. We also do NOT chase trades; we will wait for the trades with the most favorable risk/rewards.

Rule 3: We only enter on confirmation of a break. We do not buy in a range and hope the trade goes in our anticipated direction.

Rule 4: We only trade when there is a valid entry according to our parameters. We do not trade just to trade.

Rule 5: We do NOT fight trends. If we stay with the trend it increases the probability that the trade will go in our favor, which increases the probability of a winning trade.

Rule 6: We are ok taking a small loss. We are ok with letting a small gain turn into a small loss/breakeven. We are NOT ok with letting a large gain turn into anything but a large gain.

Rule 7: We honor our stops; whether it is a predetermined stop or a mental stop.

Rule 8: We realize that our best trades are when price quickly moves away from the entry and never comes back.

Rule 9: We believe that we are trading our best when we are not actually doing any trading. When we are constantly trading that means the market is whipsawing us. Usually our best trades don’t require us to take any action.

Rule 10: We do NOT trade if the market environment does not fit our strategy. We sit on the sidelines watching until the market trends in a way that matches our approach.

The future for Bitcoin

In the wake of everything going on in the world, Bitcoin is a topic I really wanted to discuss. I remember when I first heard about Bitcoin a couple of years ago; the media made it seem like a complete scam. I wasn’t really interested in learning more about it for that reason. Additionally, I had just started my journey into markets so I already had my hands full. It wasn’t until a couple of months ago that Bitcoin started to peak my interest. I had a much better understanding of financial markets and economies so the idea of a crypto currency started to make more sense to me. However, the details were still a bit blurry to me.

Fortunately for me I already had a connection to Bitcoin. Enter Tom Ferranola, VP of Gelfman Blueprint. Gelfman Blueprint is a New York based Fin-tech Company and they serve as a high frequency Bitcoin hedge fund. They are averaging a return of   7-9% monthly on their HFT! I invested with Gelfman Blueprint because they act as my exposure to the future of Bitcoin. I see tremendous value in this technology as financial systems around the world are becoming exposed in their practices.

“The deflationary value is very key to why I am long Bitcoin as an investment. The fact that there will one day be a finite amount leads to the assumption that price must expand as the market expands. As the world becomes even more digital, I believe Bitcoin will be viewed as a modern equivalent to gold. And that is not even considering the growth of block chain applications and Bitcoin as a financial Internet platform.” –Tom Ferranola

Personally, Bitcoin is not only a growth investment but I use it as a hedge as well. Bitcoin is my hedge against financial turmoil and meltdowns. When the Greece crisis was at its boiling point the price of Bitcoin took off. People in Greece were using Bitcoin as a way to protect their capital and send it overseas. The scary part is what happened in Greece could also happen here. My own trading system as of right now is focused on stocks and commodities, so it is comforting to know a percentage of my overall portfolio is allocated to a noncorrelated hedge.

You can check out more by visiting gelfmanblueprint.com. Gelfman Blueprint follows a very strict AML and compliance policy.

Trading discipline

From a very young age, I was taught to act disciplined from my surrounding environment. If I misbehaved in front of my parents, they would punish me and take away my T.V privileges for the week. If I misbehaved in school, my teacher would punish me by making me stay inside during recess. You get the idea, my discipline was formed and reliant on external factors. Every time I made a bad decision it was expected that someone else was going to reprimand me.

Fast forward to now. My trading system, like many others, has certain rules and requirements that have been formed over time. Part of being a successful trader is actually abiding by the system’s rules and requirements. But what if you don’t? This is one of the biggest questions I have had to answer as of late in forming my trading system. What happens when I break one of my own rules? Part of any rule-based system is having consequences. In a perfect world, I would just vow never to break any of my rules but the world of trading is anything but perfect. I was stumped when I had to think of possible consequences for myself.

After quite some time of thinking I remembered an article I read about “discipline in trading” (wish I could remember who wrote it so I could give credit). I do not recall exactly but it had to do with the trader taking money from his budget when he violated one of his own rules. It was his everyday financial decisions that would be impacted. Obviously the monetary penalty is going to be fitted differently for each individual. It has to be significant enough that it makes you think twice about breaking a rule. At the same time, it can’t be an amount that would put you in any kind of financial distress.

The final decision I had to make was exactly where my monetary penalty would go. I came to the conclusion that the penalty should be donated to a charity with similar interests of mine. I am pretty sure the trader who wrote the article had similar intentions for his penalty also. It is a win-win! Hopefully I will learn my lesson, not to break any of my rules and because of my mistake someone less fortunate will be better off.

If any other traders have interesting discipline systems I would love to hear them!

What trading taught me about life

I have found that many of the lessons I have learned through trading apply extremely well into everyday life. I would just like to touch on the few that have really made profound changes in my daily behavior.

Discipline matters. Trading has taught me to be extremely disciplined. Many times that I am confronted with a problem, I will look to others for advice and guidance. In trading, you have to rely on your system’s rules to steer you in the correct direction. That is why I must adhere by my own trading rules. I do not have the opportunity to look to other places if I put myself into trouble. Additionally, the part of trading that requires the most discipline evolves around entry criteria. Just because you have available funds does not mean that it always has to be put into the markets. The hardest thing to do is wait for the perfect setup, having discipline helps. Just as in real life, money should not be spent just because you have it. Look how quickly some rich people can go bankrupt, that is a result of having no discipline. You have to be able to manage having a resource available and the intelligence to use it in a sustainable way.

Do not worry about what you can’t control. This may be the most profound difference that trading has had in my life. I remember when I first started trading I would have to watch the one minute charts to keep up to date with my positions. Every trader has had this experience. For some reason, it is comforting to watch a position as if it will really do anything. Now, once a trade has passed all my entry criterion, the trade is simply executed followed by a stop put into place. At this point in time the trade is virtually out of my hands. I just have to let the market take its course of action; I am just along for the ride. This relates very well to life. If you do everything you can control to the best of your abilities you should not have to worry about anything else. Intelligent people focus on what is important. That is, the actual decision-making process rather than what happens after that point.

Block out the noise. Learning to block out outside opinions is extremely important. Traders know that they do best when they focus on personal decisions. That is why I think my trading has improved now that I have a full-time job. It has helped distract me from the day in and day out market noise. For my trading style, noise is news and opinions. I do not have to think about Greece defaulting or when the Fed will increase rates, for my trading style it does not matter. I just have to block out everything and focus strictly on price action because price pays. I do not care why or how prices are going where they are going, I just go with the trend. Consequently in life, many people would live a better life by simply blocking out the noise created by other’s opinions. Focus on what you believe is important and you will get results. If you put in the time and effort, have strength in your convictions and do not let someone try to bring your ideas down. Do not worry about what people are thinking or saying about you because it does not matter. Lions do not lose sleep over the opinions of sheep.

In conclusion, trading skills are very interchangeable with everyday life skills. The three I like to stress the most are having discipline, focusing on what you can control and blocking out noise. If you can harness the power of these lessons your life will truly reap the benefits.

A lion doesn't concern himself with the opinion of a sheep.

Plan your trades, trade your plan

I think every trader can relate in terms of their initial motives to begin trading. I hear two very common reasons for traders starting out. They either believe that trading will be an exciting activity or that trading will be an easy and quick way to make money. Similarly, I first became interested in trading because I thought it would be a nice way to make money while attending college. It sounded like a great gig! I wouldn’t actually have to do any hard work because my money was working for me. So I started buying some stocks based off of analyst recommendations and news articles. Unfortunately, analysts on CNBC only tell you when to buy and not when to sell. I was in a trade based off of someone else’s idea, so when things went wrong I had no idea what to do. After losing some money I decided it was time to do my own due diligence and craft my own trading plan.

After nearly two years on this journey my trading plan is finally coming together. It was definitely hard to refine the abundance of information in the beginning, but I feel as if the dots are finally starting to connect. As the dots have started connecting, my plan has taken the discretion out of my trading, evolving my plan into a much more systematic one. I have found that the more work that I perform to take my own judgments and decisions out of my plan the better. I have made it very easy to find a legitimate trade set up, trade the set up and to exit when the times comes. But even more than the actual process of trading, my analysis is extremely organized. Reviewing your past trades is the only way that you can truly improve as a trader. It started by first enhancing my trading log, and let me say that it has done wonders. I have worked hard to standardize my trades, which has resulted in increased consistency and simple, yet effective, post-trade reviews. Despite every trade being unique, they are all logged exactly the same way.

As I mentioned earlier, the more work done to have a plan going into a trade the better. Removing senseless stupid human errors from a trading system can go a long way. One last thing I would like to mention, planning your trades does not mean anything if you don’t trade your plan! You must have the discipline to follow the system, that is key. Overall, this process begins with building a robust trading system firsthand that you believe in and not relying on others to get by. As I always say, it is hard enough to know what the market is going to do, make sure you know what you are going to do first!

 

Taking a step back

Being so close to something on a constant basis can make you miss the big picture. In trading and in life in general, I highly advise that people take a step back to keep moving forward. Taking that step back can help you to achieve a much clearer perspective on your goals and ambitions. Then moving forward with a fresh mind, you are more likely to make better decisions. Decisions that will make beneficial changes in the long run because your view has been widened. Even if it is once a month or even once a year, take that step back to reevaluate what you exactly are trying to accomplish and if you are taking the proper steps to achieve it. You will also most likely have that eureka moment where all the dots finally connect at once. Just think about a detective on Law & Order. The entire show they are finding clues to find a suspect, caught up in all of the drama. Usually when they finally take that step back do they realize what almost seems to have been in front of them the whole time. So take some time to meditate and reenergize your life, you won’t regret how enlightened you will feel!

As traders we are faced with this problem all the time. We put ourself in a tough position by being so involved in the markets day in and day out. Closely watching daily price action and getting sucked into the major news events of the week. However, I do feel as if most traders are aware that it is beneficial to view their given timeframe on a longer one. That is why as part of my trading process, I have incorporated using the weekly charts as a preliminary check on a trend. When I find a breakout on the daily, I will switch over to the weekly to confirm a positive trend. Taking that step back to view the overall trend can significantly increase the chance of the trade going in my favor. The weekly helps filter out the noise that can accompany only viewing a security on a daily timeframe. It also helps to provide a clearer indication of trend changes and the overall strength of a trend.

 

Notice how nicely Apple has traded since the start of 2014. This gives a textbook representation of how the weekly can block all of the noise. Forget about the S&P 500 9.7% drop in October, forget about the bending iPhone 6s and just forget about anything news or fundamentally related to Apple. Price action from the beginning of 2014 has simply been volatility contraction, breakout, trend, volatility contraction, breakout, trend .etc. To this day it looks as if Apple is setting up very nicely for another solid breakout after the last volatility contraction.

apple

 

Here is the weekly for oil. The weekly helps magnify the devastating drop in oil. On the way down there was not one spot I would even lightly consider trying to catch oil at the bottom. But notice how nicely the weekly defines the textbook double bottom in oil (not to say the bottom is officially in). Oil creates the first bounce, followed by a bounce that pushes farther through support that then reverses and closes above support. As I mentioned on my last blog post, that is actually the candle that gave me a valid failed breakdown entry on oil. Price moved quickly away from the entry and we have not seen red on the weekly since. (sorry for jinxing it to those still long oil)

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