Rebel Traders – Analysis Without The Hype

I’ve written before about the importance of understanding your time frame when choosing a trade.  You don’t pick a momo stock for a long term investment, and you don’t pick a very slow mover to daytrade.  When choosing a stock for investment purposes, you take a long look at their balance sheet and their growth prospects, taking into account the economic and sector outlook.  For swing trades, you want to be aware of the economy and sector strength, picking your entry and exit based on technical analysis.  With daytrades, knowing what sectors are moving and having real-time news feeds are important.  These trades are quickly affected by news, rumors, press conferences, etc.  Of course, technical analysis and proper money management apply to all time frames.

 I’m bringing up this topic again, because the volatility, the uncertainty, in the markets makes trading more difficult.  Being more clear on your time frames when trading a particular stock can ease the pain a little bit.

The financial problems affecting the market have been brewing for some time.  The volatility we’ve seen lately is only the beginning of the consequences of massive credit expansion, not the end.  What may be ending is the ability to continue to patch the hull of a sinking ship.  This may indeed be the time that quite a few will have to suffer the financial consequences of their decisions.  It is only then that we can rebuild a stronger ship.  What does this mean to you, the trader/investor?  It may mean you will want to change the time frame for your stock trades.  It may not be the best time to buy a particular stock for long term investing, but it could be a good swing or daytrade.  Or vice versa.  There is no way to tell how long this volatility will last, but it will eventually calm down.  That doesn’t mean everything will be fine in the financial world, but it may make trading a bit less manic. 

Our reason for writing this blog and starting our service was to help people hang on to their money.  Yes, we want to help people, through education, increase their profits.  But, Chuck and I have seen traders who chase stocks all over the street, only to end up right back where they started.  Or worse, they have eaten into their capital.  Emotions are always a part of trading, and right now those emotions are running very high.  We had no idea that only two months after the inception of this blog, that the credit market would seize up.  For us, that meant helping people make sense of what was happening even more important, as this is no ordinary event.   To ignore what is happening, to try to put a positive spin on it, is a disservice to any thinking, rational human being.  We do not believe the world is coming to an end, even though the financial upheaval will make trading more difficult, it is not impossible. It may seem to some that we are “missing the run-ups” by being so bearish.  I actively trade every day, but we do not have an interactive site yet, and I will not make daytrading recommendations until then.  As for swing trades, some active traders have been a bit critical that we have not been taking more positions.  Some traders are willing to accept more risk than others.  We won’t criticize those traders for taking the risks, that’s their choice.  We have chosen to be more prudent, as preservation of capital is paramount, and we don’t take money management lightly.  We take our business seriously and do not assume (as some other sites seem to) that our readers simply have money to burn.  I always bristle when I hear someone say that a trader should never invest more than they can afford to lose.  If you are gambling at a casino, then that saying may be true. Whether one can lose some money and still survive is not the question.  But we’re not gambling here. The question, for me, is WHO in the world would go into trading with the idea of possibly losing all of your capital???  Lose your capital? Why would you do that?  This is why money management is so important. 

I know what it’s like to live under various financial conditions.  I know what it feels like to wonder where your next meal is coming from, as well as the comfortable security of earning a living and being able to pay my own way in life.  That’s what money is all about, isn’t it?  Having enough to be able to pay for your needs, anything more than that is gravy, right?  I know very few people who don’t have at least a little worry about having enough money in the future to take care of their needs.  I’ve also come to learn that those who don’t need to worry, NEVER had a cavalier attitude about money, either.

I said in my earlier post that construction problems were now spreading into the commercial sector. The durable goods data confirms this as capital expenditures has declined.

Keep your stops in place on any trades you have active. Remember, good traders and investors will always put a tourniquet on a loss. Never let a trade take you more than 8% in the red. 8% is the absolute maximum. Personally I try to limit my losses on a swing trade to no more than 4% (and sometimes even less depending on where support levels are).

Please…. never invest or trade on hope. That will erase your money. You invest and trade with a plan and that plan is to ALWAYS limit your losses. When a trade or investment does not work out you sell and move on. Don’t keep holding it and think it will get better. What if it does not get better.. then you have an investment that starts out at a loss of say 10%… you say “no problem” it will turn around, then your down to a 25% loss. Now you say I can’t sell here because it is too big of a loss to sell here. I’ll just hold on and one day it will come back. Then your investment is down 50%. Never tell yourself I will hold and wait for a turnaround. Because you don’t know if it will. Don’t trade/invest on hope… Always have a plan and get out before your losses get bad. No matter how much you like a company or their products you never let that influence your investing smarts. If you go red you cut the loss and limit the risk to your capital.

So many investors fail because they fall in love with companies and think the companies will never do them wrong. Or they let their investment brokers tell them to keep holding on to a bad investment. Just like financial advisers were telling investors during the Enron collapse. Listen to your own logic and discipline, it is your money… not theirs.

Sub Prime made the headlines again after the market closed. It is being reported that a comment made by Bear Sterns is that two of their hedge funds with ties to the sub prime mortgage business are now essentially worthless. Reportedly now worth less than 10 cents on the dollar. I said last week that we have not heard the end of the sub prime woes and I’ll say it again here. The sub prime problem has yet to fully propagate into other areas/sectors. There will be more headlines concerning sub prime in the months to come.

The financial sector needs to be watched closely as it is a heavyweight in the markets. Where the financials go the rest of the market follows in time. We must get some good earnings reports from the big finance giants in the coming days and weeks to lift the sector. Today there was profit taking ahead of what I see to be apprehension on the part of the traders of more bad news on the financial sector front.

Today On2 Technologies (ONT) hit my stop and my trade was closed automatically. I sold my shares at $2.55. A shame too, because I am still bullish on ONT. But rules are rules, discipline in trading is the ONLY way you will survive and win the game for the long term. If you never set limits (stop loss) for your investments then you are on the road to a financial disaster, for you are relying on hope and not a plan. All winners on Wall Street will tell you the same thing, they have a plan on when they exit their trades/investments, no ifs, ands, or buts. Preservation of capital comes first.

Remember that you have to earn more gains to make up for your losses. Lets say you have a stock that you bought at $20 a share last year, and the current price is $10 a share. You have lost 50% of your money on that investment. Now in order to get your money back (break even) that stock now has to increase 100%. That is why the experts and pros always cut their losses quickly and within a set limit. It is easier to make up for the loss if your losses are kept small.

RebelTrader portfolio swing trade BIG (retail sector) is lagging. But looking at the sector chart I’m seeing what is looking like a bounce coming soon. So I’m still bullish on BIG as long as the sector is still bullish which it is, just in a pullback currently. The $RLX chart is telling me a rebound is near.

RebelTrader portfolio swing trade Western Digital (WDC) is in a good spot right now as that sector is in a breakout mode. Will keep WDC for as long as I can squeeze a gain out of it. NetGear (NTGR)is also on a good run and will keep an eye on it so as to not let the gains slip away if the broad markets turn sour.

GRP, the oil service sector company is set to rebound according to the oil services sector chart. I’m watching the $OSX and I see a bounce from the moving average to be the most likely event to happen.

The remainder of this week will be wild in the markets I anticipate. Be sure to have a seat belt on! Any bad earnings reports from large companies are going to be felt in the markets more than usual.

With the markets getting attention again with the new highs achieved today. I want to share an article I wrote some months ago. It highlights how one must remain in control. Don’t get caught up in the excitement of the markets, or of any particular stock for that matter. Here it is:

The stock market is alluring with its vast amounts of money being exchanged
every second.

The sights and sounds of the floor of the stock exchanges inspire in us the
images of a fast paced nose to nose horse race, the fever pitch of a baseball
game, the feeling of rolling the dice in Vegas. It is sexy, it is powerful,
and it is addictive.. It conjures up within us all the dreams of being
instantly rich with the roll of the dice or the well placed bet on which horse
will win..

For stock traders and investors the dreams of fortune come from “winning
the game” of stocks. The problem is that there is no one throw of the dice or
one pull of the slot machine handle.. In Vegas you can loose everything on
one roll of the dice.. In the stock market you can not approach your plans
of being wealthy the same way you would roll your dice on the tables in
Vegas.. You have to control yourself, plan your next move, and strike like
a tiger when the time is right. And more importantly you have to sit on
your chips and only gamble with a percentage of your chips at any one
time. That is how we manage our portfolio and protect our
capital.

Because in Vegas if you bet the farm and the dice don’t stop spinning in
your favor.. you’ve lost the farm and your out of the game with nothing. In
the game we call the stock market.. there is no “blowing on the
dice”… there is no “come on baby…daddy needs a new pair of
shoes”… For if that is your approach to the stock market then you have
already lost the game.. for you are relying on
hope… not a strategy.

Walking up to play the stock market game requires a whole different
mentally. Sure the attraction of fame and fortune is what brings many
traders.. But the ones who win are the ones who come into the game with the
plan of not winning. Yes.. I said that correctly.. Let me say that
again.. the winners in the stock markets are those that plan every move,
every step, every trade with the intention of not losing any money.. Accept
little looses and let the winners add up. If you run into the stock market
expecting to win big in the first few weeks… you will be out of the game
in no time.. Your approach to the stock market game must be to take bits and
pieces at a time.. Don’t go for the gusto in one shot… that is the
wrong attitude and will drive you to make bad trading decisions. Winning in
the long run requires careful and precise moves… such as a chess game.
Don’t let the lure of the ‘big money’ drive your trading decisions. That
will lead you to the soup lines. Instead make it your plan to NOT lose any
money, then the money you gain will add up slowly. This will also allow you
to remain focused on your trading style and remain disciplined to that trading
style.

Once the heat of the race takes over your emotions then mistakes will be
made.. And the ones who remain cool, calm, and in control of their strategy
will be the ones taking your money when you get wrapped up in the heat of the
money. Remember… when we perform technical analysis of the charts
and apply the understanding of greed & fear it is WE that will
be taking the money away from those being caught up in the heat and
excitement of money.. The stock market can be a vicious game.. the
money made every day by traders is not mysteriously printed
somewhere… For every dollar someone makes… someone has lost.. And
in order to be on the winning side.. remain in control.. don’t let the
excitement and lure of big money take over your emotions.. For if you do
then those that sit on the side lines; disciplined and waiting to strike; will
be there to take the money from you.

As of the market close, July 12th, 2007 the current open trades:

WDC 4.4% gain (open)
AKS 3.8% gain (open, average cost $38.58)
ONT 3.3% gain (open, average cost $2.77)
BIG 2.9% gain (open, average cost $29.91)
GRP 2.2% gain (open)
ALGN 1.2% gain (open, average cost $25.29, multiple trades)
NTGR -0.9% loss (open, average cost $38.79
WWAT -2.2% loss (open, multiple trades)

JDSA -5.3% loss (closed today)

Multiple trades means this is the second time a trade is being attempted on that stock. The gain/loss calculation takes into account the gain or loss from both trades!). Gains/losses are calculated on the average cost where the stock play has been to scale into the trade.

Money management stems losses and keeps the winning trades in play. You do NOT have to win every trade. That is not possible by anyone. All one has to do is win more than you lose over the year and your ahead. After each trade is completed you put that cash right back into your capital for use in the swing trade methodology, increasing your buying power as time goes on. Remember, take your trading capital you set aside for swing trades and divide it up into 10 parts. And each part is what you use for one swing trade,one stock. So no more than 10 stocks will be owned at any one time.

Where you read that I scale into a trade with a 1/3 or a 1/2 that means I have taken that one 10% part and cut it into more parts. This way I enter into the trade a little at a time until the whole 10% part is loaded into the one stock. This is done to protect capital. The more the trade works the more you add until it is loaded. The scaling into a stock is even more important in times of extreme market volatility where it can change direction in a flash. Under normal conditions entering a trade is usually in 1/2’s and in some cases (depending on the situation at the time) will enter the trade with the entire 10% part all at once.

For the new members of the site please read this earlier post. Click me!

If you are new to the concept of swing trading please, I encourage you strongly to start out by paper trading and reading some books on swing trading. Never put all of your money into one trade, ever! That is financial suicide. Practice how to manage your capital and it’s 10 pieces for swing trading. Get a feel for how swing trading works and the concept of compounding your gains into the next trades.

In 90 minutes those that were betting on the long side have already lost. In a short period of time we have been up and then quickly those gains were in one swoop taken off the table and house won that round.

Volatility is high yet again. Continue to stay on the side lines and watch from a safe distance. This is not a market to be trying to get in a swing trade yet. There will come a time that we will spot an opportunity to squeeze in under the mayhem. But right now.. lets watch.

If you feel the need to be “in a trade” right now then you are not adhering to a disciplined plan. To be trading just for the sake of trading will lead your capital down a hole fast. The real winners in the markets are those that wait for the right moment to make their entry.

Corn Products International (CPO) which entered the FP80 portfolio on June 11th got a boost this morning from Zacks. Today Zacks profiled CPO in their morning newsletter as a strong buy citing the good earnings reports and projected EPS growth.

While this is good news for CPO and certainly highlights that CPO has a good long term investment potential we are mostly swing traders here which means we capitalize on short term quick profit moves in price. The average swing trade holding is anywhere from a few days to a few months.

The concept is to keep taking quick gains and roll them over into the next holding. Our goal is to achieve much higher gains on an annualized basis over what you would achieve by just “buy and hold” strategy.

Is is important to remember that with any type of investments (swing trade, position trade, buy and hold, etc.) that proper money management is critical to success. You always protect your capital! With swing and position trading you divide your capital into 10 pieces (if your new to swing trading then don’t try to get too aggressive and divide up your capital any more than the 10 pieces.. over time you can adjust this but stick with 10 for now).

The whole purpose of this is to exercise money management. You only risk a total of 10% of your capital set aside for swing trades on any one stock. And for every 10% you put down on a trade you maintain a stop loss on the trade (stop loss is where you sell your shares in order to protect your money if the trade goes bad). The value you use for a stop loss will vary depending on your tolerance for pain vs. the reward potential your after but the recommended value is between 2% to never more than 8%. In other words for every trade you enter you NEVER let that trade become a loss of more than 8%… ever. No exceptions!

The methodology here is that by controlling your loses to a small amount then the winning trades will make up for and surpass the ones that don’t work out. In the stock market you always pay more attention to the trades that are not working to protect your capital and you let the winners take care of themselves.. There will be much more on this topic over time.

You must be disciplined in order to be successful at the stock market. This goes for any type of trading style.. Even buy and hold investing must have a point at which you say to yourself.. this stock is no good and you move on. Dead money makes no money..

There will be much more on stop loss and money management in future posts. If you are new to the stock market and don’t have your own money management plan already established I highly recommend you read one of the books from Dr. Alexander Elder. Dr. Elder details how to properly use money management and teaches some aspects of the psychology of trading. And to be disciplined. There are many good books on swing trading and technical analysis. The books on the right hand side of this web page are all highly recommended. I have read them all ( and many more!) and they are highly recommended. Another good book to read is “Trading in the Zone” which focuses on the psychology of the trader and how to develop the discipline to win in the markets.

If you are new to the stock market and just starting out then I encourage you to read this article which I wrote earlier this year. It emphasizes how important it is to remain in control of your emotions in the market and to not let them get ahead of your thinking. Winners in the stock market are those with a plan.. ” Have a plan, trade the plan“

The stock market is alluring with its vast amounts of money being exchanged
every second. The sights and sounds of the floor of the stock exchanges
inspire in us the images of a fast paced nose to nose horse race, the fever
pitch of a baseball game, the feeling of rolling the dice in Vegas. It is
sexy, it is powerful, and it is addictive.. It conjures up within us all
the dreams of being instantly rich with the roll of the dice or the well placed
bet on which horse will win..

For stock traders and investors the dreams
of fortune come from “winning the game” of stocks. The problem is that there is
no one throw of the dice or one pull of the slot machine handle.. In Vegas
you can lose everything on one roll of the dice.. In the stock market you
can not approach your plans of being wealthy the same way you would roll your
dice on the tables in Vegas.. You have to control yourself, plan your next
move, and strike like a tiger when the time is right. And more importantly
you have to sit on your chips and only gamble with a percentage of your chips at
any one time. That is how we manage our portfolio and protect our
capital. Because in Vegas if you bet the farm and the dice don’t stop
spinning in your favor.. you’ve lost the farm and your out of the game with
nothing.

In the game we call the stock market.. there is no “blowing on the
dice”… there is no “come on baby…daddy needs a new pair of
shoes”… For if that is your approach to the stock market then you have
already lost the game.. for you are relying on hope… not a strategy.
Walking up to play the stock market game requires a whole different
mentally. Sure the attraction of fame and fortune is what brings many
traders.. But the ones who win are the ones who come into the game with the
plan of not winning. Yes.. I said that correctly.. Let me say that
again.. the winners in the stock markets are those that plan every move,
every step, every trade with the intention of not losing any money.. Accept
little looses and let the winners add up.

If you run into the stock market
expecting to win big in the first few weeks… you will be out of the game
in no time.. Your approach to the stock market game must be to take bits and
pieces at a time.. Don’t go for the gusto in one shot… that is the
wrong attitude and will drive you to make bad trading decisions. Winning in
the long run requires careful and precise moves… such as a chess game.
Don’t let the lure of the ‘big money’ drive your trading decisions. That
will lead you to the soup lines. Instead make it your plan to NOT lose any
money, then the money you gain will add up slowly. This will also allow you
to remain focused on your trading style and remain disciplined to that trading
style. Once the heat of the race takes over your emotions then mistakes will be
made.. And the ones who remain cool, calm, and in control of their strategy
will be the ones taking your money when you get wrapped up in the heat of the
money.

Remember… when we perform our technical analysis of the charts and
apply our understanding of greed & fear then WE will be the ones taking the money away from those being caught up in the heat and excitement of money.. The stock market can be a vicious game.. the money made every day by traders is
not mysteriously printed somewhere… For every dollar someone
makes… someone has lost.. And in order to be on the winning
side.. remain in control.. don’t let the excitement and lure of big
money take over your emotions.. For if you do then those that sit on the
side lines; disciplined and waiting to strike; will be there to take the money
from you.

While we are on the subject of discipline in how we evaluate our trades and holdings.. I have a quote that it worthy of being printed here:

“The lame man who keeps the right road outstrips the runner who
takes a wrong one. Nay, it is obvious that when a man runs the wrong way, the
more active and swift he is the further he will go astray”

… Francis Bacon, English philosopher 1561-1626

What this means is that as traders if were in a bad trade then don’t make it worse by trying to run faster (add more money to it). Slow down, take your money out (change your sneakers), and find the right road (put your money in the better stock). And let the correct path guide you to riches..