Saturday, February 21, 2009


Back in mid-2008, I had a friend who lost over 60%. I offered to sit next to him for one afternoon while he was trading and I made sure he was free all day. This was in early September. I told him to initiate short positions and "leave them alone for a few days". He closed out the positions within minutes. He started freaking out because aswing trade was going 5-6% against him.

I told him to re-add all the short positions. I then told him to come over to the window where a large metal pipe was running, and I handcuffed him. You can imagine how berserk he went, calling me all sorts of shit while at the same time feeling hopeless. I uncuffed him after the close. If you're thinking "What the hell am I doing with handcuffs in some dude's room", well, chill the fuck out and keep reading.

This is sort of extreme, but it's also a personal experience. Many years ago, I used to handcuff myself during trading hours to avoid impulse trading and succumbing to my emotions. If I had to go to the bathroom or eat, I had to call my neighbor to unlock me. I did this for two full weeks and it was one of my most profound experiences in my trading career. Psychologically, I had no choice but to withstand the pain and I forced it upon myself like a madman.

Now that I have students, I can't cuff them, but I tell them to completely walk away from the computer if they get urges. Since I am primarily a swing trader, I can withstand bounces and giving up large gains in anticipation of closing out trades for 20%, 30%, even 50% or more. In fact, I could be eating a sandwich and watching Youtube videos while my gains fade away because I have my trade's purpose and goal always in mind with the end result in focus. The psychological aspect of trading must be your foundation, for without it, you will not succeed as a trader.

It doesn't matter what system you trade, what programs you use, or what you subscribe to in your search for the holy grail, or "THE" answer to trading. I found that keeping it simple was the best way for me. If you notice on my daily charts, I hardly ever use technical indicators and only rely on candle charting, price action, volume, and moving averages to make an informed decision. That is really all you need to find the best set-ups that produce highly successful and high probability trades with the greatest time value of employed capital.

I use the most unconventional methods in my trading as well. Many times, I do go 100% all-in, but in the best of circumstances. I believe I will be all-in this week, switched around from long then to short, mid-week. What I do may be risky, but I am so conditioned to take calculated risks that it is second nature to me. In addition, I don't involve myself in conventional portfolio theory or asset allocation. That is a waste of time for my resources. I trade to get the biggest bang for my money in the shortest amount of time. I don't fool around with 1-2% movers. That's a waste of my day.

Everything I said above may or may not apply to you. What someone might do may not be appropriate for you and your tolerances. Most people are conservative and cannot or or are unwilling to employ the strategies that I use, all of which are 100% discretionary and technical and for some, proprietary. It is important for you to figure out what kind of trader you are, what your style is, how your personality fits, etc. This will not come overnight, but rather over months and maybe even years. You must know yourself before throwing your hard earned money in the market.

With that said, there are 4 stages of Learning:

  • Stage I - Unconscious Incompetence: You have no idea what you know or don't know.
  • Stage II - Conscious Incompetence: You admit that you don't know, and you want to know how.
  • Stage III - Conscious Competence: You finally know how, but only if you think things through.
  • Stage IV - Unconscious Competence: You fully know how and you instinctively take action.

During Stage I or Unconscious Incompetence, the trader doesn't know what's going on, and doesn't know much about trading except for the fact that you could make millions! Also, these traders have no trading plan whatsoever. In fact, they don't even know that they need one! Finally, the trader is unaware of the important aspect of trading psychology. We've all been here, done that.

During Stage II or Conscious Incompetence, the trader is all pumped up and excited about the potentials of trading. These traders look at charts all day long and flip through research reports. Finally, they open up a brokerage account anticipating great riches. This group probably reads 1 or 2 books, gets some kind of newsletter subscription, and they think they're ready to run circles around the Market Makers. Not so fast. Unfortunately, these traders lose a lot of money and they realize that all the services and subscriptions and advice they got are no use to them This is also where the individual trader gets a taste of the emotions that come with trading (fear & greed).

This is also where traders test various strategies. Stage II is especially difficult because the trader suffers disastrous losses and may become depressed or overwhelmed. His personal life may be severely affected. It is at this point that they decide to either move forward or quit trading. This is also where positive and negative judgments and thoughts are formed ("Am I too stupid to trade?, "Trading is too hard for me"). The trader has lost money, is afraid and confused, and has jumped into a financial and emotional abyss. You hear the statement, "90% of traders lose money", right? This is the stage where it happens. Even if they can afford to take the financial losses, the psychological losses are excruciatingly painful for the new trader.

When the trader makes a conscious decision to take his losses and move forward, then they have reached Stage III or Conscious Competence. Usually, traders look into the abyss and somehow make it out alive. Whatever their motivation, they decided to pull themselves out. In the process, they have also accepted a few things:

  • Trading is learned until the day you die. You never stop learning.
  • Whatever they did in life, how well they did in their past occupation, and their previous successes do not equate to success in trading.
  • Being wealthy or being really smart also does not equate to success in trading. In fact, some of the biggest losers are doctors, lawyers, engineers, scientists, programmers, analysts, business owners, CEOs, retirees, etc. Why? Because typically, these people have this desire to always be right and for some reason, they refuse to take losses until they are annihilated.
  • They cannot control the markets or "will" it to do whatever they want. More importantly, they accept that they don't need to "control the markets" to become successful in trading.
  • They must have a trading plan. Seriously though, seeking advice from traders/websites/brokers/programs/ etc. as a primary method to trade is like trying to drive to Cali from DC without a map by stopping along the entire way asking all sorts of people for directions. You might end up at Sir Stanford's gf's house in Fredericksburg, VA.
  • They must be psychologically prepared to trade.

Knowing where you are is important, because you now know where you need to be. Once Stage IV is reached, you must do several things:

  • Create a trading plan. Goddammit. Would you start a business without a business plan? I didn't think so.
  • Test out the various strategies and see what "fits". Are you a day trader, swing trader, position trader, a zombie buy-and-hold investor?
  • Do not abandon any plans just because they don't work. There's always a time and place for everything in such a fluid market.
  • Increase recognition and repetition. Practice, practice, and practice some more. Don't bullshit yourself.
  • Accept the fact that taking losses, is part of the game. If you don't like losing, stop trading immediately. I mean it. You 'll thank me later.
  • Do whatever is necessary to condition your psyche. Whatever is necessary, even handcuffing yourself.

After a while, you'll be able to understand odds and probabilities, differentiate for market conditions, learn to capture the meat of profits, scale in-and-out of positions, accept multiple & consecutive losses, learn to hold positions during heavy pressure, develop the "trader's intuition", place trades without hesitation and finally, become consistently profitable, week after week, month after month.

Hope this helps some of you out there.

Where are you within the 4 Stages of Learning?

Stage I - Unconscious Incompetence
Stage II - Conscious Incompetence
Stage III - Conscious Competence
Stage IV - Unconscious Competence

Current Results

Friday, February 20, 2009


It looks like I may lighten up on the banking short positions and add at least one unit of FAS as a hedge and also consider sprinkling in some REIT shorts. I am up slightly over +76% YTD, so my goal is capital preservation at this point, unless an absolute "can't miss" opportunity comes around. I guarantee you that there are and will continue to be massive opportunities to profit, despite the fact that we may go into/be in a depression. If you don't know how to short, then you are missing out.

I was especially disturbed by the FBI's announcement that there could be as many as 500 more cases that are either ponzi schemes or "similar-to" the ones of Madoff and Stanford and all the other retards (e.g. Sam Israel) that have already been captured, convicted, and possibly in nightmarish sexual situations. If this is true, then 2009 will not a positive year. Can you imagine hearing about ponzi schemes every week, every month for all of 2009 and beyond? It will be downright depressing.

Another thing that has come to my attention is the link between banks and drug money. Now, I just saw The International a few hours ago expecting a great movie. (Warning: Spoiler) About a third of the movie involves dozens of people shooting uzi's in a museum and a lot of people die. The ending was terrible. When I came back, this guy NDoubles tweets me this Reuters article on how drug money is keeping the banks afloat during this crisis because this money is the only liquid capital available. You can thank the drug dealers for supporting the banking system. How fucked up is that?

Technically, not much as changed on the charts, EXCEPT that I want to point out volume. Typically on consecutive down days, you want to see increased selling pressure and larger volume on the way down. This is not the case, which is the reason why I have to becareful here. Volume has remained flat forever and this is exactly something that I do not want to see. I need to see some major selling within the next 1-2 days or else I will have to cover the majority of my short positions. There is little conviction on the sell side and hardly anything on the buy side.

I continue to look at the money centers, regional banks that aren't at $1 already, and some REITs. Traditional names such as BAC, C, and WFC are preferred over GS, MS, and JPM. You want to be shorting the weakest stocks in the weakest sector, not the strongest stocks in the weakest sector. Get it? For regionals, I love STI, PNC, ZION, and BBT. Also, watch the insurers, such as HIG, MET, PRU, AFL, and PL. HIG is a lovable favorite of mine. This industry has much more room to the downside. As for the REITs, just pick a few. I like CLP, AIV, MAC, KIM, AMB, WRI, SLG, LHO and the like.

As for entering more shorts here, I don't know that yet. It depends on what develops during the day. It's almost too late to be entering a lot of stuff here. We are near the 2002-2003 bottom, so extra caution is advised in anticipation of a bounce. This is why I will not hesitate to cover or hedge at this level. Also, the Bill Miller bottom on the DJIA has been penetrated. Nice going, slick. I await your next prediction. I'm going to take it easy today (it being a Friday and all).

Don't forget to try the Free Trend Analysis. It's FREE, so give it a shot!

Thursday, February 19, 2009


Nothing has radically changed. I am still short financials and will be looking to add more. We are still forming a small multi-day continuation flag. As for today itself, we formed a doji, or indecision day, but it's not a major reversal pattern due to the lack of accompanying volume. It looks more like a continuation to the downside. As a swing trader, I could care less about intra-day moves unless something major happens - all of which seem to occur after 3PM.

At approximately 1PM, I even mentioned that it was going to be a doji day (on Twitter). My obsession with doji is the fact that it's one of the most highly predictable intra-day patterns. Just fyi, doji days are the worst days to be day trading, so don't. They are the best to enter swing trades, so please do.

Bill Miller needs to stop calling bottoms. We are a ball sac hair away from touching the DJIA November lows. What's he going to do? Call a 3rd bottom? lol. Birinyi also called a bottom [I uploaded their report here]. Listen up people, stop calling these bottoms! The Bill Miller bottom is about to be tested and I'm not sure if it'll hold. There is too much bullish sentiment still lingering.

In addition to financials, the REITs are also great shorts.

Don't forget to try the Free Trend Analysis. It's FREE, so give it a shot!

Tuesday, February 17, 2009


You must look at Gio's post on the LOL pattern. It is the failed WTF pattern! When the clock hits 3:00PM, the market turns into the Wild Wild West. Anything goes.

We have some major technical problems. Swing traders may initiate scaled-in short positions with more favorable risk/reward this week. I mentioned in a previous post that the market was flagging with a bias to the downside. I also mentioned that the market was churning either at (COMP) or below (SPX) the 50-day MA which was "technically extremely bearish". This is the end result. I refused to take any 3-day weekend risk, so I was unable to bask in this glory with the short sellers.

The biggest danger to shorts is if the market decides to bounce off the lower bollinger band's range (797.30) like it did back in mid-January. The safest entries would be to short on the initial breakdowns of any rallies from here and to scale-in positions. Unfortunately for bulls, the only things that kept the market propped up were gov't statements, rumors from Charlie, banking CEOs buying up their own worthless stock, etc. There is no substance in these sorts of things, you know, when the entire world is about to blow up. The fundamentals are so shitty that even a technician pays attention.

Although volume was a bit weak today, if/when we get additional down days, the volume should increase and the candles O-C ranges should get larger. I want to see a real sell off and a lot of intra-day activity. I can't tell you how bored I am these days watching the lack of trading taking place. I know you're bored out of your mind too. What do I expect? A healthy environment for short-side swing traders to initiate positions this entire week. The BKX (Bank Index) is at an ALL-TIME low and about to get even lower. The financials are the biggest money makers.

Keep a close eye on Eastern Europe and other emerging markets. Some of these countries are in serious danger of defaulting. We are also on the brink of economic disaster. If shit hits the fan, I will purchase a dairy flat in New Zealand. In the very end, we will all be bartering goods and services anyway. I hope I'm kidding.

Stop the bailouts - Sign the petition.

Don't forget to try the Free Trend Analysis. It's FREE, so give it a shot!


Alex Dalmady's report (the Stanford Financial fraud whistle blower):

Duck Tales

Monday, February 16, 2009


I am back from taking a full week long break. I think all the negative news was starting to get to me. When you wake up in the morning and read the WSJ and IBD, you mostly find bad news. When you turn on CNBC, you find more bad news. Finally, while reading your favorite blogs, you come across even more bad news. I had to stop that news flow for a few days and just get away from it all. I am back this week to resume my regular trading activities.

Take a look at the SPX and COMP below:

We are in long-term symmetrical triangles. What the market is figuring out right now is whether it wants to go up 20%+ or down 20%+. Ultimately, I do believe we head lower, but not before some major whipsaw to flush out more traders. In the short-term, you can see that the market is forming a multi-week flag. On the SPX, it is between 800-870. On the COMP, it is between 1430-1600. I don't even bother using the DJIA anymore as it is skewed quite a bit.

One important thing to note is the 50-day MA. Currently, the SPX is trading below it while the COMP is churning above and below it. Both are technically extremely bearish. Take a look at the REITs as the vast majority of them are either breaking down or setting up for a break down. This is in addition to my favorite sector (financials).

In other news, something like this really scares the shit out of you.

Enjoy your break today.

Don't forget to try the Free Trend Analysis. It's FREE, so give it a shot!