Pseudo-Seasonal Stock Trading

As I write this, a long position I have in TASR is up over 6% just half way through the day. I’m trading it based on my Band-to-Band system (details here).

Taser International makes, well, “tasers”. Turns out that’s a brand name for what is generically known as an ‘electroshock gun’. And why is their stock up? Because two police officers were shot in Ferguson, Missouri. It seems that often when some significant news event involves either the shooting of a police officer or an “unarmed black male”, TASR (and other weapons-related companies) spikes. It’s “pseudo-seasonal” in other words.

Now, setting aside the somewhat questionable ethics of this for the moment, could the average retail trader trade something like this? I don’t mean can you “trade the news”…of course you can, but you’ll probably lose as the move is made before you get in, and the profit lost before you get out.

No, what I mean is: can you trade the “anti-news”?

I got into the TASR position because of technical considerations, not because of any news event. Or rather, the news event that triggered my technical signal was of a disappointing earnings report, not a ‘real’ news event. I got in at the right time, BEFORE the real news happened.

So…could you time the position entries so that they occur in between news events, so that you’re already long when the news event happens?

For example: what if you evaluated the frequency of news stories involving the words “shooting” and “police officer” or “black male”? What if you determined that these stories made the national news with a certain frequency, and with a certain minimum spacing between the events? Could you then wait X days after the last news event to enter a position, primed for the next one? Or calculate the average price drop over time after each news event, and put your buy order in after the price dropped the required amount?

I realize this particular news topic is less than savory, and I’m NOT suggesting you trade it. But it’s current and it’s what got me thinking about this oddball idea. It’s sort of like seasonal trading, but different. It’s more of an anticipatory news-event trading system.

I don't have any photos of tasers or weapons, but I do have a photo of an apple. Beautiful model holding it is an extra bonus.
I don’t have any photos of tasers or weapons, but I do have a photo of an apple. That a beautiful model is holding it: extra bonus!

What if for example you knew approximately when Apple (AAPL) was going to make major product announcements – which is not too difficult to figure out – and then shorted Google (GOOG) a few weeks before. Since they’re competitive in many areas, good news for Apple could be bad news for Google and vice versa.

I haven’t checked to see if there’s a correlation or not, but you get the idea. Google was down 2.7% for the five day period after the Apple Watch was announced (September 9, 2014). But that’s just a single test.

Whenever you hear about a significant news event, it might be beneficial to consider a) is the news event cyclical or “pseudo-seasonal” in some way, b) how could I have gotten into the position before the event occurred, and c) what companies or industries are effected positively or negatively by the news?

What are some other news events you can think of that could be traded in an anticipatory or “anti-news” manner? I’d love to hear them, so leave your idea in the comments. Or contact me privately if you don’t want your brilliant idea to be public knowledge. 🙂

Position Size vs. Commission Size

I guess I won't be buying that Rolls Royce just yet.
I guess I won’t be buying that Rolls Royce just yet.

“Best Swing Trade System EVAR!!” I yelled. (In my head, where I do much of my yelling.)

Unfortunately, it turned out to be the best system “evar” for someone other than me.

I had been working on codifying a system that incorporated the ideas discussed in this previous post (here). I came up with a pretty awesome system that backtested very well. And I’d started tracking current trades on paper, as well as entering into one trade using the new system.

But there was a fatal flaw. It turns out this system was making its money on nickels and dimes rather than on the big momentum bursts I had aimed for. Oh sure, it captured those too. But the bulk of the earnings over time came from little 1% and 2% moves.

“Hey what’s wrong with that, if it’s making money?” you ask. Well nothing…if you can make money that way! The problem though was that I had picked position sizes that were, shall we say, “aspirational” in nature? In other words, my system was using $6000 position sizes by default, but a more realistic position size for me is $2000 or so. This, unfortunately, made all the difference.

And it made the difference because of commissions! As an example, a .5% profit with a $6000 trade became a losing trade at $2000. And no, you can’t make it up in volume. This system broke because my actual commission/position ratio was much higher than my system was designed for.

I gotta say, this was a crushing blow. Not because a system I’d been playing with turned out to have flaws. But because it was The System…you know, My Edge. The System I Would Use To Slowly Get Rich. I felt really stupid after this, and in fact was kicking myself all weekend about it.

I’ve since come to terms with the problem, and I’m making sure that my other systems work well with my current portfolio, not my future portfolio.

So word to the wise: make sure any system you’re using will work with your particular circumstances. Don’t start using a day-trading system that gets excited over a .5% move with a $10,000 position and a deep-discount broker, if you’re investing $1000 at a time with a $9.95 commission each way. You’ll go broke fast.

The smaller the investment, the more time needed to make gains that offset the commission. And conversely, the shorter the trade, the larger the capital needed to consistently make money. Simple as that.

Revisiting my “short squeeze” trade (INSY)

The vertical line shows my exit, early in the day before it dropped for three days straight.
The vertical line shows my exit on Dec 19th 2014, early in the day. It continued to drop for three days straight.

About a month ago I was in a pickle: my swing trade of INSYS Therapeutics Inc (INSY) had met its profit target quite significantly. You can read about it here the night before, and here on the day I closed the position. Rather than just closing the trade at the open of December 19th as my rules dictated, I hesitated. The reason I hesitated is that INSY was the potential beneficiary of a “short squeeze” (see that first post for an explanation of what a short squeeze is).

In the end, I put in a tight stop-loss which was triggered almost immediately. So the end result – a gain of 15% – was not significantly different than if I’d just sold at the opening bell.

But look at that chart! Over the three days starting when I sold it, the stock dropped over 14%. Ouch! Can you imagine what I would have done if I’d decided to let it ride? Since I would have moved outside my ‘system’, I would have panicked at that first big drop and no doubt given up much of my gain during that big drop. Oh sure, I could have just waited it out and made even more money later. But I know myself well enough that that wouldn’t have happened.

My discipline has gotten better since then. 🙂 In fact I currently have a double-short oil ETF that I bought with the intention of a medium-term trade of a few months. Right now it keeps hovering above my trailing stop, and my wife keeps saying “sell! sell! You’ve made so much money!” But I’m sticking to the rules I established when I started that trade. Oil might go back up, but just as easily, oil prices could fall to $40/barrel before they’re done. I’d feel silly giving up the extra profit. But even more so, I’d feel silly having broken my own rules.

A part of me wishes it would finally drop below the stop, so a) I can write about it on this blog, b) oil will quite mucking with the overall market and c) I can move on to the next trade.

Stick to your rules. If you have an overwhelming, concrete reason to break your own rules, then do so. But if you just are getting itchy or second-guessing the market, then ignore those feelings. And stick to your rules.


5 Steps to Position Sizing (Your Capital ≠ Your Risk)

Don't ride that pony all the way into the ground.
Don’t ride that pony all the way into the ground.

Ok here’s something I didn’t understand when I first started getting serious about trading. Your “risk” is not the same thing as your capital, i.e. the money you throw at a stock.

If you’re a buy-and-hold investor, you’re used to thinking about risk as whatever money you have invested. That’s because you’re going to keep your money riding on that one pony until either a) you cash it out at retirement, or b) it cashes you out when the company goes bankrupt.

So when I started reading books that talked about portfolio management, I was really puzzled by how many of them used risk to determine position sizes. For example, you often hear a good rule of thumb is to have each position’s risk be no more than 2% of your account.

Well stupid me, I thought that meant no trade could be more than 2%.  I had started with about $5000 to play with, to test this new ‘active trading’ lifestyle. So I quickly did the math: 2% of $5000 is $100. I’d lose most of my money on commissions if all my trades were no larger than $100! So I just ignored this advice as something millionaires use as a rule. Because if you’re a buy-and-hope investor, everything is at risk.

But of course, this is not what your risk should be. At least when it comes to “expected risk” or “defined risk”. If you are using predefined stop-loss points – as you should! – then this risk amount is simply the amount you’re willing to lose on each transaction.

I know this is blindingly obvious to anyone who’s been trading for very long, but it was a crucial point of misunderstanding for me.

So a simplistic but practical way to calculate the size of your next trade is this:

1. Determine how much of your entire portfolio you want to risk on a trade. This should be a pretty constant percentage, not something you make up as you go along. The actual dollar amount will fluctuate with your account size. So let’s say 2% of your account is your maximum loss per trade

2. Pretend you have $10,000 when you add up all the current value of your stocks and the cash sitting in your account. 2% of that is $200. That’s the amount you are willing to lose on a trade before closing it and moving on to something else.

3. So you take a look at a stock, say for example Apple Computer (AAPL). As of this very second it’s trading around $107.62. How many shares should you trade? You need to address your stop loss before you can figure that out.

4. After looking at the chart, for whatever reason, you decide that anything below $97.93 is too low to continue with the trade. Perhaps you decided based on trend lines or Average True Range multiples, or you pick a simple percentage below your entry price. Or maybe your street address is 9793 Apple St. For the purpose of this discussion, it doesn’t matter HOW you came up with your stop loss. But you’ve picked $97.93 as a get-the-hell-out price.

5. $107.62 – $97.93 = $9.69/share you’re willing to lose. Great! So take your total amount your willing to lose, and divide it by the per-share loss you’ve come up with. 200/9.69=20.63983488132095. So let’s round down to be safe, and call it 20 shares. Now go buy ’em! *

Of course, this is expected risk. Nothing prevents the stock from gapping down 20% from one day to the next, and no amount of hopeful stop-loss planning can prevent that. But that’s “unexpected risk”. I’m sure finance majors have official jargon for these types of risk, but I can’t be bothered to look it up.

You can however mitigate against this by not having all your eggs in one basket. Don’t put too much of your capital into any one trade, and don’t put it all into one industry, sector or even market. Diversify! If you’re properly diversified in your investments, only an alien invasion will wipe you out.

Too bad you invested in gold. The aliens eat gold for breakfast….


P.S. I’ve spent the better part of the last eight years making my day-job website pretty with beautiful photos and compelling client-oriented text. Here I can use the stupidest graphics and swear all I want, because I’m not trying to sell you something. If you don’t like it, draw me an alien and send it to me.


*This is not a recommendation to buy or sell, as is true for everything on this site. As a disclaimer, I recommend you never follow my advice, ever. Or anyone elses. In fact, don’t ever invest. Oh wait, should you follow that advice? Damn, now I’m confused.

Exited WWAV for a loss…

wwav failed system

This morning I exited a WhiteWave Foods (WWAV) trade for a -2.8% loss. No, it didn’t hit my stop of 2*ATR. So was this a panicky exit? You’re wondering why I didn’t stick with my system, right?

That’s easy. This particular trading system was flawed. Ironically it was the best system I’d come up with using ProRealTime. However when I finally was able to test it more thoroughly using AmiBroker, it turned out to be a dog.

I was willing to let this trade ride as long as other factors were in its favor. But given the lower highs and lower lows it was generating, I decided enough was enough. If I’d stuck with it, I might have yielded a -5.4% loss instead. Time to throw my good money at some other stock!

In case you were interested, the system used a mean-reversion idea with a detrended price oscillator. Basically, when the price is extended a good distance from a slow moving average in one direction, then heads that same distance in the other direction, it should bounce back again by a similar amount.

Which works great, except for all the times it doesn’t.

Perhaps there’s something to the idea, but I did a lot of curve-fitting on AmiBroker and still never got the system to where I’d actually want to trade it.

I guess the lesson here is: stick with a system that you believe in. But if you don’t believe in the system, you don’t get any points for staying to the bitter end.