Monday, January 26, 2009

A Trade In FAS

I started Friday in a very bearish frame of mind. I ended Friday marveling at the market's resilience.

Accordingly, I began Friday getting short developing markets via purchasing EEV, the double short emerging markets ETF. I focused on EEV early because I saw that Brazil and Russia were getting pounded. I have no idea if that's a valid reason to purchase EEV. Anyway, the point is that this trade nearly killed me. I lost a decent amount in it and was forced to reconsider my bearish mindset.

A trading buddy/thorn in my side pointed out that SPY had held 80 support. At around 11am, when we vaulted through SPY 82 on some bogus news about unemployment benefits no longer being taxed (HAH!) he advised getting long. However, how could I buy into that spike? So I decided to wait for a pullback.

Above you see a chart for SPY, which is what I was following to time my entries and exits. After that initial large spike, the market consolidated and tightened up, and SPY set up for a triple-top break just after 1pm. However, I only had a very small SPY position. Instead, I focused my long efforts on FAS (triple financial long... HAHA!) because I noticed it was breaking the downtrend on the 60-min graph. See below.

I was hoping for a more explosive break. But whatever, what made this trade good for me was the way I held and purchased on pullbacks. As long as uptrend didn't break, my plan was to continue adding on dips. My thought was that as long as it broke above the 60 min downtrend and held, that I was safe to add with the overall market rising. So I purchased FAS between the prices of $8.44 and $8.80, building a position of 5,000 shares which I exited an an average profit of 17 cents per share. So I made about $800 on the trade.

I actually got very lucky, as the trade came within a penny of my "pain threshold." But I'll take it... I can't tell you how many times in my career that I've been stopped out a penny or two below my level only to see the stock reverse and go in my favor.

Long time readers know about my early struggles with the hybrid market. My old trading strategy of trading many stocks at once, is somewhat dead because the market is just too fast and illiquid in many stocks now for my taste. I used to take many trades and just "cut losers and let winners run." It's just much more difficult to do this with any precision now given the liquidity issues on the hybrid. Stocks will trade through levels on a 100 share trade, and then shoot right back above it like it never mattered. So, going forward, I'll be looking to put on more trades like FAS, in which I pick a direction for the market and build into one to five names.

That's not to say you still can't trade many stocks at once. I know a few guys who do this very well. However, in order to do so, you need to widen your stop loss levels. I'm not really comfortable with that. When I learned to trade (10 years ago in March, sheesh) losing a quarter point on a trade was a big deal. Now a quarter point is static. But for me, old habits die hard... and so I've had to reduce my exposure to static... it was stressing me out too much.

But hey, if in a month the market rewards trading 25 stocks at a time again, I'll try and be there.


OBAT said...

Thanks for the insightful post DT. I think my trading might be evolving along those lines too. Reading your posts confirms that I am in the right direction.

Dinosaur Trader said...

Great to see you back, OBAT.


mdawsz said...

Good post. Thanks for sharing DT.