Cast Sheep Can't Get Up Without Assistance

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An experienced trader never designs or alters a trading plan based on what he/she “thinks” is going to happen. Experienced traders confirm and place trades using top down analysis, market internals, risk/reward ratios, and proper position sizing.

Key is to initially get into those positions strategically and then let the market play out accordingly. Paraphrasing of Ray Dalio of Bridgewater-Always fear being wrong, no matter how confident you are that you’re right.

Here’s the rub. One never really knows what will happen in spite of what the “experts” who think that they are smarter than the market tell you. For example, in our Premium Portfolio, we have positons that have gotten 3-12 times their average true range (ATR) even after the big sell off last Friday. We had others that lost money using our risk parameters, which we stuck to with iron-clad commitment, never allowing more than 1.5 to max 2 times the ATR of risk.

You know the toughest battle traders have with themselves? Getting stopped out, sticking to their original plan, then either moving on to the next trade (possessing a short memory also key) or kicking themselves because they see that the instrument might have dropped a bit lower than the stop (often the same day) then rallies back either that day or the next. However, ultimately, the percentages are most likely in favor that the original stop was correct and the instrument will fall further.

I see this all the time. For example, total transparency here-I will highlight one amazing winner and one loser using the above discipline adding the inner talk that followed.

Yummy foods (YUM), we bought at $74.46 on February 16th. We took ½ off with a great profit when it hit 3 times its average range. We had a resting order at 5 times its ATR. We then trailed up the stop to exit pretty much at our first target or again, 3 times the average range. I could have said on the first red close February 23rd at 77.44 let’s get out; I think the move is over-but that is breaking the plan. Good we stuck to it regardless of my “thoughts.”

GDX a gold miner ETF, we bought after it cleared the 50 DMA and risked 2 times its ATR, which placed our stop at 20.13. Last Wednesday we got stopped out. On Thursday, GDX closed at 20.08 and during the session traded as highs as 20.38 making the voices in my head scream at me. “Did I get out too soon? Should I have waited another day?” Blah, blah, blah.

Lo and behold, last Friday, GDX gapped lower trading all the way down to 18.51. That’s more than 7.5% under the stop! Now, I look pretty smart! Oh yes, we lost money-but controlled, no disaster. Then compare that to YUM and well, that’s the life of a swing trader.

With all of that said, Friday was a sad day, particularly if you lost on several trades. A final IMPORTANT word though-all in, one should NEVER lose more than 5% of their entire portfolio in one day-if your losses still managed to outperform the loss of the S&P 500, congratulations-you will have a lifetime as a profitable trader!

S&P 500 (SPY) The 50 DMA is 206.13 and a good spot to anticipate seeing unless this gets back over 209

Russell 2000 (IWM) 50 DMA 119.48 and the January Calendar Range high is 120.56-so that is where I would look to see prices settle for the market to hold

Dow (DIA) Here’s why the 50 DMA is important-this landed on it at 177.87

Nasdaq (QQQ) Broke 108 now resistance and could see 105-106 next

XLF (Financials) Great start on Friday, not great finish. 24.15 the 50 DMA with support at 24.00

KRE (Regional Banks) 40.00 pivotal now with 41.06 the January Calendar Range High to clear and close above if good

SMH (Semiconductors) This kept us sober on Friday since it never cleared the resistance and weakened all day. Support at 55.00

IYT (Transportation) Unconfirmed warning phase

IBB (Biotechnology) Possible topping candle if confirms

XRT (Retail) I guess that topping candle last week was just that-

IYR (Real Estate) And the Fed hasn’t even raised rates yet-remember that precursor long after the fact I wrote about last week?

GLD (Gold Trust) Goodbye 115 hello 111

USO (US Oil Fund) Held 18 so with all the noise, still in a range-yet volume remains light

UNG (US NatGas Fund) Good basing action support at 13.00 with the 50 DMA the area to clear now for 2 days with volume in order to see more upside

TAN (Guggenheim Solar Energy) Possible topping candle now-Premium portfolio took the money

TBT (Ultrashort Lehman 20+ Year Treasuries) The culprit-firming rates with a gap up that didn’t look back

UUP (Dollar Bull) Wow!