Determining Stop

url: http://www.smbtraining.com/blog/traders-ask-determining-your-stop

Dear Bella,

Where would your stop loss be for the lot you added when the sellers won at 76? More importantly, how does one determine the right spot to place your stop loss or your “line in the sand”, so to speak?

I also traded BIDU today and I had 76.50 and 76.00 marked as key levels. I missed my short at 76.50 and I was waiting for another short trade if the stock gets below 76. More specifically, I was waiting for sellers to come in and hold the offers at or below 76 to get short. I would get out if the stock trades gets above 76.00. If the stock trades in my favor, then I will exit only if I see a Reason to Cover. At least, that was my OGT. When the sellers initially won the battle at 76, the stock traded down to around 75.20ish but then got back above 76 again, and I exited for a loss, as per my trading plan.

I took the SMB Foundation program a couple of months ago, and as I recall, I was trained to exit whenever the level I’m leaning on is violated. I realize that simply hitting/paying whenever a level is violated can lead to shakeouts pretty often, so I’m working on giving my trades some breathing room. The question is, how do I determine how much room to give my stocks to avoid getting shaken out while at the same time, protect myself against large losses?

Bella Responds:

These are the plays to master. After the close these trades that work best must receive most of our attention. We must review them and find places to add size while controlling our risk. So I love how you are reaching out to me about this set up. Because this is one that will pay the bills.

We are all different. We have different buying power and trading experience. A different tolerance for pain. We process information differently. The set ups that make the most sense to us, our A trades, our different.

For me the add at 76, had a stop of half above 30c and the the rest if BIDU held above 76.50, since this was the important long term technical resistance level (or right above 50c if it didn’t look like it would hold there on the tape).

But the key to this exercise is for you to go back and determine the best stop for you. I was holding until the next significant technical support area. Your play might have been a shorter time frame. If so your stop might have been tighter.

Blog Share --- Support & Resistance?

I am back from ZhuHai and have read an interesting post.

Forget Support & Resistance, Areas of Volatility in High Frequency Trading

url: here

Support and resistance can be seen as the entire basis of technical analysis. While most technicians would distinguish between these two levels based on expected buying or selling pressure, T3Live's Sean Hendelman sees them quite differently as a high frequency trading practitioner:

"Support and resistance are one in the same. Namely, points of increased volatility. These areas increase the uncertainty of future direction and therefore volatility."

Short-term Support in the Past

Traders have long used support levels as areas where they expect buyers to step in and hold because there were buyers at that level previously. Price levels exist because people, consciously and unconsciously, create them. Traders and investors remember their entry prices, or at least they see the cost basis on their brokerage statement. These prices are therefore breakeven levels for many with a vested interest in that price.

Often, by expecting others to be buyers at the level, technicians only work to further solidify the existance of support through their own buying. The idea of a vested interest is also why breaking a support level is seen as a sell signal. Those that accumulated expecting the level to hold ditch their positions and eager shorts enter believing no buyers remain.

Support in the High Frequency Trading World

Support and resistance have become far more elusive and the risk of entering trades based on them has drastically increased in the last 18 months. Short-term technical levels are now extremely fluid.

Volatility increases opportunity and the wild oscillations around technical levels grant HFTs the ability to profit by beating manual traders in and out. Consider the 2008 crash with the VIX reaching a high of 89%: short-term traders were offered incredible opportunities as volatility soared. Think of a large whole number in AIG as a microcosm of this type of uncertainty and volatility. The high frequency trader jumping in and out in microseconds, even nanoseconds, can scalp pennies back and forth.

Two unprofitable scenarios now occur much more often at support levels with the influence of HFT: 1) rapid breakdowns and 2) false breakdowns.

A trader does not risk to a level, he risks to whatever price he receives upon exit when the level breaks. As high frequency traders are typically first to the trade in the downdraft when a support level breaks, the price to exit is often much further away than anticipated. By the time he has hit the bid, the manual trader has lost far more than his pre-determined stop.

False breakdowns occur when a support level is broken but the stock does not continue lower, at least not within the trader's timeframe. How often does today's discretionary trader short the low only to find the stock subsequently swept higher? High frequency traders will buy new lows and force weak hands to cover as the stocks pushes back through the short price.

The high frequency trading world has very different interpretation of support and resistance and given their speed, it is tough to compete in that world.

Adapting Trading Strategies

Running stops is as old as trading itself. Floor traders on the NYSE used to run stops intentionally for bucket shop owners so the shoe string margin players would be wiped out. Squeezing out larger, weaker players is a tactic used since the day Wall Street was paved. High frequency traders' manipulations around technical levels are just today's modern application of an age-old strategy to beat others at the same game.

Short-term traders had it easy for a long time, buying breakouts and shorting breakdowns to make predictable profits. But this strategy in a more range-bound tape coupled with high frequency traders can be disastrous. Avoid the temptation, don't battle the machines. Let the machines kill each other and don't step in the ring.

Traders must anticipate moves to much greater degree and they must be happy with the size they have accumulated once the trade gets under way. Adding through levels can and will destroy many potentially profitable trades as HFT throws the trader in for a spin.

Blog Share -- Sleep As It Relates To Effective Trading

Sleep is one of the great scientific mysteries. Although scientists understand that humans require sleep on a regular basis they do not fully comprehend why this is the case. Most adults require 7-8 hours of sleep each night in order to have optimal cognitive functioning the following day. Just as important as the “how much” is the “when” with respect to sleep.

Our bodies have a 24 hour “clock”. During this 24 cycle the body has varying levels of hormones and body temperature. Ideally, sleep begins six hours before the body reaches its temperature low point. This corresponds to around 10:00pm. You may have noticed in the past that when you retire at an early hour that you not only will awaken very early but will also feel totally refreshed. This is a result of your sleeping during “optimal” hours.

The two areas that will most likely be impacted to a trader’s detriment due to a lack of optimal sleep are focus and cognitive ability. Short term traders cannot afford to lose their focus during the day. It can very easily be the difference between a positive and negative outcome. I’m sure that most of the experienced traders who are reading this blog can vividly recall times that they missed an entry or exit because of a lapse in concentration simply due to fatigue (or maybe not so vividly).

Cognitive impairment generally slows down our reaction time as traders as we are slower to recognize patterns. These types of handicaps may cause more harm to our bottom line than trading on a slow or unstable trading platform.

Some Sleep Tips For You

1. Develop a habit of going to sleep each night at a similar time. After awhile you will begin to awake at the same time every day and this will provide you with information on exactly how much sleep you require.
2. If you are a night owl and need to drastically change your sleeping habits I would suggest taking a gradual approach of getting to bed 15-20 minutes earlier each week until you are going to sleep at the desired time.
3. Eat dinner no later than 7:00pm
4. If you are feeling hungry close to bed time try and drink some water instead of breaking out the ben and jerry’s
5. Avoid coffee or sugar close to bed time (overall not great at any time but really can interfere with sleep if consumed in the evening)

If none of the above works for you then I guess you can just start trading the Asian markets (US and Europe markets for us~)

url: http://www.smbtraining.com/blog/sleep-as-it-relates-to-effective-trading

Blog Share (SMB Capital)

http://www.smbtraining.com/blog/ten-mistakes-by-bp-a-trader-should-never-make

Ten Mistakes by BP a Trader Should Never Make

May 30th, 2010 | By Bella | Category: General Comments, Mike Bellafiore's (Bella's) Blogs

1. No Exit Plan. There was no exit plan for if the rig (RIG?) exploded. Before every trade we must decide where and how we will exit BEFORE entering the trade.

2. Live to Play Another Day. It is not definitive that BP is a viable company going forward even with 6.08 Billion in quarterly profits. 1) When will the spill stop? 2) They have a larger rig whose safety was questioned on 60 minutes. 3) What will be the economic penalties imposed on them by the surrounding states whose ecology and local economy they have ruined? Will they pay tens of billions in economic penalties under federal law? The workers who lost their jobs? The future illnesses they have created? This is two decades of lawsuits ahead. 4) Why would anyone buy a BP product after the ruination they caused through their incompetence and greed? Will we all really forget this spill? I know I wake up with a touch more stress first wondering if BP has minimized the spill. 5) Will the spill find Florida? A new round of political invective will hit if this occurs.

3. Attention to detail. Now there are reports that 12,000 barrels a day are leaking from the blow out and not the 5,000 first reported. Do you think a trader would be out of the money in a position and not know how many shares he needed to dump?

4. A lack of assistance from the oil community. Why the (insert very angry expletive deletive here) (and repeat this very angry expletive deletive as many times as you wish while discussing BP, the oil industry as a whole and the spill) isn’t EVERY expert from EVERY oil company, EVERY useful piece of equipment to clean the spill down in the Gulf RIGHT NOW?

This is a national emergency. This spill is a war on North America. The spill is destroying our ecosystem. Just today there is a new article with evidence from a local professor finding patches of oil beneath the surface yet to inflict harm but certain to with the next hurricane. As traders we form alliances, mentor/mentee relationships, friendships with like-minded individuals, and partnerships so we are all stronger. The oil community is just one big solo trader on an island with only one set of ideas.

5. Where is the hedging? So the top kill didn’t work. That was an all-in strategy. Why aren’t there supertankers in the Gulf trying to suck out some of the oil right now as a hedge?

6. Transparency and Risk Control. At your trading firm could you have hidden positions 10 times the risk known to your firm. Today there are reports there is a second leak that is spewing 120,000 barrels a day into the Gulf.

7. Overanxious. The drillers moved too quickly. This created the spill. As traders we wait for our set ups where our risk is one and reward is five. We never enter a trader too early.

8. Lack of backtesting. Drilling so deep underwater needed more backtesting. Back testing is required for all new trades.

9. Responsibility. After you make a horrible trade you must accept responsibility. When the hacks from RIG BP and HAL went before Congress they fell all over themselves placing blame on the other. President Obama scolded: “I have to say, though, I did not appreciate what I considered to be a ridiculous spectacle during the congressional hearings into this matter. You had executives of BP and Transocean and Halliburton falling over each other to point the finger of blame at somebody else.”

As traders we look in the mirror identify our mistakes, journal about them, discuss them with our peers, visualize a better approach, and improve. Blaming the market makers, algos, trading platform, firm, the guy who sits next to you, does not make us better traders. If we engage in this lowest common denominator behavior the market will eliminate us.

10. Purpose. BP (and too many other companies) have decided like soulless, amoral, selfish, irresponsible, incompetent, small, insecure, greedy, unintelligent, visionless hacks that their only purpose is to make money for their shareholders (corporate executives?). Today I read this quote from an energy CEO: “What I worry about as an energy CEO is what effect this will have on energy policy,” he said, noting it may lead people to look more seriously at electric cars, or complicate plans to pump carbon underground. “This BP thing has tentacles.”

They still do not understand. How about if an energy company’s purpose was to provide clean energy so as to preserve the planet entrusted to us, mainly through technological advancements driven by a revolutionary company, at a low cost improving the economic purchasing power of most citizens, and for the benefit of their shareholders. Now that would be a company everyone would want to work for and would dominate the energy sector.

As traders our job is not to make money. It is to become an elite performer, which then leads to profitable trades. As traders we seek to maximize our moments as the best of ourselves improving the quality of our lives. This is our purpose for trading.

Blog share

Readers Share: Are You Ready to Trade Professionally?

May 14th, 2010 | By Bella | Category: Mike Bellafiore's (Bella's) Blogs

Reader Mike sent me this email:

Bella,

I know you will never remember me but you interviewed me about 4 years ago. During that interview you told me I was not ready to be a trader both financially and psychologically. I remember leaving that interview calling you many many not so nice things saying that I will show you. Since that date, I’ve lost just under eight thousand dollars (that’s a lot for the little that I make) mainly cause I was not financially or psychologically prepared for what it will take to win at this game. About a year and half ago I was telling my wife about that interview and it dawned on me you were right and the only person I spoke with in the industry that was being honest to me and was not just looking to take my money. I wanted to thank you for that, even that it took me a long while to realize it.

Since my self realization I have moved into the Forex market where I can learn to trade at a micro level and have learned a lot about my own personality. Now I’m learning to work on my own personal discipline, actions, and mainly my arrogance towards the market and it’s players. I’m starting to show a lot more profitability in my trading and look to be taking your training late fall ‘11 or spring ‘12 to compete for a position within your firm.

A few years too late but thank you for your wisdom and honesty,

(name redacted)

Bella Responds

Thank you for sharing your experience with me. I have said this same thing to many people over the last four years and I am sure they had a similar reaction. If you are not financially and psychologically ready to become a professional trader, sitting next to the great Steve Cohen would not help you (well unless he reached over and entered some trades for you). Your trading can be the mirror image of your personal development. If you are not a disciplined person, then your trading most likely will be undisciplined. If you struggle being patient as a person then you will as a trader. If you crave action in real life, you will overtrade.

I am very impressed that you have recognized some areas you need to improve as a person to become a better trader. We all must do this work. And I hope that for our readers one clear messages resonates: You can change! Reader Mike did!

website: http://www.smbtraining.com/blog/readers-share-are-you-ready-to-trade-professionally