How 2008 Scarred My Trading, Intra-Uterine Insemination, And Why Gary Numan Is The Ideal Trader.

I am sure that there are people out there who get turned on by bathroom fixtures, but that has never really been my thing.  And losing my ass in the market doesn’t rank high on my pleasure scale either.  So I think it is safe to say that I reached the nadir of 2008 sitting in a restroom at the doctor’s office, watching the markets implode on my Treo, while a plastic cup with my name on it mocked me from across the room.

The markets have been on a tear lately, with the SP 500 Index up the most on a monthly basis since 1974.  Yesterday the market ripped higher on news that the European debt crisis was “fixed”, and from what I could see on the streams everyone, and I mean everyone was killing it.

Yet I have only one swing long position open in WLT (which I featured in a recent “Trades That Didn’t Suck” video), and it’s up a measly five points.  In fact I haven’t had a true swing position open for months and have been limited to taking bits and pieces out of the market by day trading. 

Day trading used to be something I did as a complement to my core swing trade positions, but this market has forced it on me like the fruitcake at my Grandma’s house on Christmas Eve.  However as I watched the market soar into the triple digits yesterday, having missed the major move off the bottom, I realized that even more so than this recent market action, my trading is haunted by the ghost of 2008.

I often hear people ask, “well if so and so knows so much about trading, how come he isn’t a rich millionaire living in MC Hammer’s old house?”  (You know the one with the front gate that says “Hammer Time”).  The answer to that is complex.

Perhaps they are comfortable just making a steady, consistent trading income.  Maybe they get nervous when they scale their size up past a certain point.  It could be that they went through a nasty divorce and spend most of their money on alimony and child support.  Or perhaps they just have a good ole’ fashioned coke habit.

Point is, lots of the things that happen in our lives away from the markets can affect the way we trade.  Yet we all pretend they don’t, and that we trade as emotionless and clinically as Gary Numan in that video for “Cars.” 

In my “Trades That Didn’t Suck” videos I walk through what my thoughts were during a recent day trade, but I do it from the island of a calm Friday evening, usually after a few pints of Guinness.  If you watched me when those trades were live, you would see me wringing my hands, squirming in my seat, and at times even talking politely to my computer screens.  And when things in my personal life are out of whack, it can seep into my trading psyche even more so.

All of 2008 seemed to be that way for me.  My wife and I were very eager to have our second child, but for some reason nature was not helping us out, and we decided to do intra-uterine insemination (IUI) which is one step short of IVF.  You can Google it for the gory details but let’s just say it involves, a lot of shots, a turkey baster, and some bclund “love juice”.  That later part provided by me, on demand, in the comfort of the doctor’s office bathroom.

Now here is the really weird part.  As men we spend the better part of our adolescent years acting like we don’t “do it” and avoiding detection when we do “do it”.  But in the IUI scenario, I had to walk through a waiting room filled with ladies, take a sample cup from the receptionist, and go down the hall past all the nurses to the restroom.  And EVERYBODY knows what you are going in there to do.

This was my fourth time in that bathroom, one time more than is recommended with IUI, because if it doesn’t happen by the third time, chances are it ain’t going to work, and you go on to IVF. 

My recent trading had been about a successful as the procreation process.  The markets were like roaring seas, heaving back and forth in triple digit moves on a daily basis.  I was not as adept at day trading as I am now, and my swing trades were getting no traction, moving in my direction for a day or two, then gaping against me along with the overall market.  And this IUI process was screwing with my head and made it even harder to get back on track.

We had appointments daily when we got near the timing “zone”, and they were always early in the morning when the markets were moving fastest.  Aside from being stupid, it was also nearly impossible to trade or manage positions from my pre-smart phone Treo while in the waiting room.  Add to that the fact that IUI was not covered by our insurance, and was “cash on the barrelhead” each time we left the doctor’s office (ultimately totaling about $30,000), and my mental plate was full.

Here I was in that cold, sterile bathroom, watching the market tank 600 points, convinced that everybody on the other side of the door was snickering at me, and having one last shot at it before we would have to go to IVF at $25,000 a pop.  Astronauts and Super Bowl quarterbacks don’t know the pressure I was under.

“Are you doing okay in there Mr. Lund”

“Yeah, yeah, I’m fine.  Hey do you have anything out there that…well….could help me out?”

“I’m not sure what you mean”

“Come on, you know.  Like some ‘reading’ material.”

“No sir, we don’t really do that here.”

“Look, it doesn’t have to be Playboy.  Just give me an US Weekly or People.  Anything that has J-Lo in it”

“I’m sorry sir….”

I mean at that point I would have even taken Martha Stewart’s Living.

Suffice to say, I was able to deliver.

I realize now that the recent market action triggered something in me that reminded me of those trying days in 2008.  It made me lose faith in longer term price action, and kept me out of this tremendous move off the lows.

2008 was a tough year and a lot of bad things happened in it. I battled the markets in a Herculean effort and although ultimately my losses we not too bad, the emotional imprint they made on my trading did it’s damage.

But it’s over, and the good things that came out of it are still with me.  Like a better respect for risk, and the ability to modify my trading style based on the market environment.  And now that I have exercised the ghosts of that market, I can adjust my trading to catch the next swing leg when it presents itself.

Oh…and in 2009 we had a healthy, happy baby boy.

 30K….??? Yeah, he’s worth it.  But I’m only paying for community college.

Chevy Chase, The Netflix Of Comedy.

The other day I was watching Ellen (my wife Tivo’s it okay…), and she had on the cast from the new movie Tower Heist.  While watching the interview it struck me that Eddie Murphy is no longer funny.  In fact it dawned on me that he has not been funny in almost 23 years (the last time being in the movie Coming to America, circa 1988).  What was worse was that in addition to not being funny, he was actually unfunny…physically sucking the humor out of the room with every goofy face he made.

I believe that Ben Stiller, who was sitting next to him and is funny, was aware of what was happening, as he was uncharacteristically low key, I think in an attempt to be respectful to his one time comedy hero, and not make him seem even more unfunny by illustrating the “comedy gap” between the two.  This was very disturbing to me because I remember Eddie as the fresh, ultra-hip young comedian who kept SNL alive with his great sketches, and then created even more comedic genius with his albums and movies.

I have a name for this condition that has afflicted Eddie, I call it the Chevy Chase Syndrome.  It is named after the onetime funny man, who was the first comic that I noticed had gone from very funny to actually unfunny.  Since I am a trader, I have illustrated what I mean in chart form.  Take a look.

Now I assume that Chevy was born somewhat funny, but he really began his breakout with the movie The Groove Tube and expanded on it with Saturday Night Live.  Then his career (and funny quotient) really took off with his first wide release movie Foul Play.  Classics like Caddyshack and National Lampoon’s Vacation kept Chevy’s humor on a bull run.

But as you can see, the first hint of trouble came with 1985’s semi-bomb, Spies Like Us.  I actually fell asleep in the theater when I went to see this movie.   If not for the fact that I was drunk at the time, (my friends and I had snuck a twelve-pack of beer into the theater), I might have been tipped off that we were near the apex of Chevy’s comedy career.

It looked like a rebound for the Chevster with the classic Fletch, but this turned out to be a climax top, as the near unwatchable Three Amigos came next.  This top was confirmed when three sequels in a row failed to be even as remotely funny as their original movies.

After that the final comedy slide came, when C.C., on the way to killing his own career, almost killed Demi Moore’s in the horrific Nothing But Trouble, and actually succeeded in killing Daryl Hannah’s in the Invisible Man.  Even the most die-hard Chevy fans had to admit that the final nails were in the coffin with the disastrous Chevy Chase Show.  His work since has just served to bury that coffin as it pales in comparison to his previous work and is un-chartable.

I have always been amazed by this syndrome.  Remember, we are not talking about comedians who were not funny to start with, like say Bill Maher, but comics who were off the charts funny, and then ended up off the charts unfunny.  Let’s look as some others who have this syndrome.

Billy Crystal

Richard Lewis

Robin Williams

Daymon Wayans

Paul Rodriquez

Robert Klein

Al Frankin

George Lopez  (though if he was ever funny is up for debate)

Dan Ackroyd

Martin Lawrence

I often wonder if this is just an inevitable fate for those that once burned so bright in comedy.  Some that may have been genetically pre-disposed to the syndrome left us before we could ever know for sure like Sam Kinison, Bill Hicks, or Chris Farley.

And yet there are some who have been immune to it.  Steve Martin has not had any blockbuster movies in a while, but anytime you see him interviewed, he is still damn funny.  Same with Albert Brooks.  Bill Murray has continued to come out with great movies and is still funny.  Larry David stays consistently funny.  Carson was funny til the end.

Who may be afflicted with this disease in the future?  It is hard to say, but Tim Allen seems to be showing the early signs of it.  Jerry Sienfeld might be a carrier too.  And I am starting to see that all too familiar pattern with Dennis Miller as well.  I am praying that Norm MacDonald doesn’t have it.

I think guys like Steve Carell, Dave Chapelle, and Ricky Gervais will never get it, but who knows.  It is a terrible fate for a comic, with the only thing worse being the Woody Allen Syndrome, where you go from extremely funny to just plain pathetic.

(Note: Who else do you think has been afflicted with the Chevy Chase Syndrome.  Let me know and I will update this post with them).

“I’m A Lawyer. No, I’m A Trader. Damn, I’m A Lawyer Again” – Trading Using Chart Based Stops.

Back in the 90’s, when internet stocks were going berserk, I had a friend who was just out of law school and had decided to dabble in the markets.  He had a small account, and he decided to put it all into AOL (America Online).   As he started making the rounds to interview for a job, he noticed that his stock was taking off, moving up almost every day.

His account started to grow, and he bought more and more AOL.  His account value hit $250,000, then $500,000, and then $750,000.  It seemed as if he could do no wrong with AOL, and he had stopped interviewing with law firms, and decided that he was just going to live off the profits in his trading account.

His account continued to climb higher, and one day I asked him when he was going to take his profits, to which he replied, “When it hits one million dollars, I am going to close it out, and travel the world.”  This was a young man in his mid-twenties and one million dollars was a ton of money to him.  His account value finally hit a high of $970,000 just before the long running internet bubble began to burst.

After the first substantial decline, he told me that if it just got back to $750,000 he would sell it.  Well you know the rest of the story.  He repeated that mantra with $600,000 and $500,000 and $400,000 and so on.  He took his position all the way back down to below his original account value, and thus began knocking on doors of law firms to try to get the job he never thought he would have to get.

The takeaway from this harrowing tale is that when setting stops and targets for trading, they have to be chart based, and not money based.  The market has no idea that you exist, and thus its movements have no relation to how much you are up or down on your position.

The movements of the market are related to areas where there is support and where there is resistance; that are based upon the number of buyers and sellers in those areas.  So if your $ target on your position puts the price above resistance, you many never get that price, thus not locking in your profits.  Likewise, if your $ stop is above support, you make get taken out, just before price turns and rallies.

The key to converting from $ based stops or targets to chart based ones is to start by “reverse” sizing your position.  This takes away the emotional aspect of the trade, and allows you to trade better, and off of what is happening in the market, instead of what is happening in your head.  Check this post for more info on reverse position sizing.

If you want to learn more about investing, trading, and the markets, all while helping to kick pediatric cancer’s ass, check out my book, Trading: The Best Of The Best – Top Trading Tips For Our Times.  It includes over 200 market tips from 60 active traders and investors, and all proceeds go to the McKenna Claire Foundation to help support research for a cure.  Just click the banner below or go directly to Amazon by clicking here.

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Let’s Talk Music- Jesse Cook: The Best Guitarist You’ve Never Heard Of.

If I were to say the words “Spanish guitar” or “modern flamenco guitar” to you, you might think of the Gypsy Kings.  You would certainly have a vision of a Latin or perhaps Mediterranean person or group associated with this style of music.  But what if I were to tell you that perhaps the best modern flamenco guitarist performing today, is in fact the whitest, dorkiest, Canadian guy you’ve ever seen?  Well it’s a fact.  Jesse Cook is that dorky white Canadian.

I have have met Jesse a few times and he is actually more shy than dorky, and truly a modest man given the talents he possesses.  Hailing from Toronto, he has set a new standard in modern Spanish guitar.  I hesitate to single out any of his albums, because they are all phenomenal, but I have a fondness for his first three… Tempest… Freefall… and Vertigo.

The one problem I have with Jesse though is that he never seems to leave Canada.  If you go to his website, you’ll see he tours extensively in the northern provinces, but rarely seems to get to the States.  I have seen him five times over the last 10 years, and I’m convinced those are the only five times he’s been to Southern California in the last 10 years.  If you haven’t seen him check out what you are missing. (Check out the amazing finger work starting at 2:00).

By the way, I have nothing against Canada or Canadians.  I love Hockey (Go Ducks!), Molsen GoldenRushThe Kids in The Hall, etc…and some day I really want to visit Quebec, it is just that you don’t normally associate Canada with flamenco music.

Should You Care How Many Followers Someone Has On Twitter And StockTwits?

Last week I received a tweet from someone who was aghast that I had been publically taking issue with a rather well known “trader”.  His argument basically boiled down to this…

….he has 18K+ followers on Twitter/Stock Twits!

Well that’s it I guess? Time for me to fold up my cyber-tent and go quietly into the sunset with my paltry 608 followers (one of which is my mom, so that doesn’t even count). The masses have voted, and I have lost.

Come on, are we really playing the “quantity not quality” game here?  Is it really relevant how many followers someone has, and does that say anything about the quality of their tweets and if you should follow them?  I mean every time I tweet about how much I like my HTC EVO or about my ongoing battle with erectile dysfunction I am deluged with new follows offering me free smart phones and cut-rate Viagra.

In order to illustrate how easily someone can get twitter followers, I decided to conduct a quick experiment in the science of follower acquisition.  My goal was to see how fast I could go from zero to one hundred followers while putting in the least amount of time, effort, or quality content.

I needed to start with a name that would catch potential follower’s attention.  Things like @HardWork4Success and @10Years2LearnTrading probably would not get too much attention, so instead I chose @PornTraderChick.  I wrote up a quick bio and uploaded a photo of one of the most well-known porn stars of the past decade, Asia Carrera (a friend I know told me about that part as I would not be familiar with such things).  Stopwatch in hand, I was now ready to make my run at the century mark.

“..oh won’t somebody help me in the ways of trading?”

The first thing I did was Google “top 20 follow backs on twitter”.  I got an article entitled “Top 237 Users Who Will Follow You Back” which was already conveniently hyperlinked for easy follow access.  I was a bit surprised to see that President Obama was the number one name on that list, and thought to myself how cool it was that with his re-election campaign in full swing he took the time out to keep up with his twitter followers.  Maybe I will vote for him this time, especially since Mitt Romney only follows 235 people (what a snob).

I quickly followed the top twenty and turned my computer off and went to sleep. The whole process took me a total of two minutes and thirty-seven seconds.

The next day I had 32 followers, so I followed the new ones back and threw out a few quick tweets with hash tags such as…




Then once again I turned the computer off.  I repeated this process for a couple more days, never spending more than two minutes on it each time.  Next thing I know I had 201 followers, nine marriage proposals, and various offers to help resume my “career”.  It took me a total of five days (two of which I did absolutely nothing), about six minutes of actual work, and zero quality tweets.

” Thank you to all my new followers, the vast majority I am sure were not horney computer nerds.”

Now 201 followers may not be earth shattering, but imagine how fast I could build that number if I was putting real effort into it.  In fact, what if I hired a couple interns to do the job, I could probably get those numbers up into the thousands very quickly.  And then what if I changed my twitter name to @TradingStud, uploaded a different profile picture, and deleted my past tweets?  I could very easily assume a completely new identity, with a built-in following, and start marketing my Trading Stud pay subscription service.  I could say to people who questioned my expertise..

…hey, I have 18K+ followers on Twitter!

One of the phenomenon’s of Twitter is that people confuse the concept of “followers” with the concept of having a quality referral network.  That is something that traditionally takes years and sometimes decades to develop, and depends on individual interaction in order to deepen the quality and the value of your real world “followers”.

There is no doubt that Twitter allows you to build solid connections with quality people, and in fact can help speed that process up, but it also allows for an easy accumulation of less desirable followers whose only benefit is a numeric one.

@PornTraderChick really made the number of followers “rise”. Get it…”rise”. You get it?

StockTwits is a different story because what they do is “curate” the content of their streams.

Curate is derived from the Medieval Latin cūrātus, equivalent to the Latin cūr or to care for; but basically it means keeping the crap out of the streams.  I don’t know how they do it, but if I had to guess, I would say it is 75% algorithmic and 25% good old fashioned hard work by the editorial staff.

However it is done, it is so efficient and seamlessly that you actually forget how spam free they are.  This curating process raises the quality of content and makes it harder for someone like @PornTraderChick to build a following, since auto-follow hash tags and “hugs and kisses” would never make it into the streams.

As wacky as it may seem, on StockTwits you actually have to produce quality content to get a larger following. Go figure!

Don’t get me wrong; at the end of the day, the quality of someone’s tweets should be the number one factor in deciding if you should follow them and there are people at both ends of the follower scale who fit that bill.  But all things being equal, when selecting whom to follow, I would assign much more weight to someone who has a large following on StockTwits (relatively speaking), than to someone who has a large following on Twitter.

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Billionaires I Have Known (…And Do You Really Want To Be One?)

Billionaires have been making headlines lately, what with the Forbes 30th Annual List out and all the wackiness from the Occupy Wall Street protests.  Well I have a confession to make.  I am not a billionaire.  Truth be told, I don’t even have a 100 million dollars.  But for some reason, I always seem to be hanging with billionaires.

Once I was just standing out in front of a restaurant, waiting to meet a friend of mine for lunch when I looked next to me, and one appeared (billionaires are sneaky like that).  It was George Argyos, former ambassador to Spain.

Contrary to popular belief, billionaires do not levitate nor do they give off an eerie Jesus-like glow, in fact they often look pretty normal.  George actually looks a lot like my high school Algebra teacher Mr. Ross, but with a better suit. I thought about approaching him to say hello, but it was just like when I used to try and pick up women in bars; I couldn’t think of a good opening line.  I contemplated saying “Hello, Ambassador Argyos, my name is Brian Lund, and I am a big fan of your work on implementing the treaty of Talacaloco”, but it just seemed too forced.   Instead I stood there in awkward silence for a few minutes until my friend arrived.

When we went inside to eat,  as fate would have it, George sat at the table next to us.  I gave him that knowing “nod” that only two people with a shared history can understand, but he pretended not to see me.  I am pretty sure he was eating a ham sandwich.  Possibly with mustard.  George is a nice guy but I probably won’t hang out with him again.  He is a little boring, and besides he is only worth 1.75 billion.

I swear, George Argyos was wearing this exact suit when I hung with him. (I remember the pinstripes).

John Arnold, the former Enron trader, and wunderkind oil trader, is the youngest billionaire I have chilled with.  We were at a club in Houston, and I was with my brother-in-law and his friends, all former Enron traders as well.  John was in the VIP section, but had a round of drinks sent over to our table.  Later I was waiting in line for the restroom and he and his posse’ passed by me on the way to the exit.  I was a bit lit up at that point in the evening, and I yelled out, “Johnny Baaaaby! The Grey Goose was the BOMB!  You the MAN!”  In retrospect I probably should have asked where he thought WTI Crude was heading.

"Hi, I'm John Arnold. I'm young, smart, and a billionaire." Hate..hate...hate...!!!!

Some of the billionaires I have hung out with are more interesting than others.

Henri Samueli and Henry Nicholas are the co-founders of Broadcom, and when I hung with them they were each worth a cool 10 billion.  I owned a company that coordinated projects for interior designers, and we were hired by the firms working on each of their respective homes.

I was at Samueli’s house one day, standing on his driveway working on a quote when he drove right past me into his garage.  I waved to him, and I am pretty sure he waved back, although his windows were tinted so I am not quite sure.

Nicholas and I used to chat a lot.  I remember on one particularly hot summer day, I was walking his house with his designer, when he emerged from his workout room.  He had a couple of bottles of water in his hand.  “Would you like one”, he asked as he walked past me towards the front door.  “No thanks”, I said.  “Okay, suit yourself”.  He was always saying crazy things like that.

Even though they were partners at the same company, Henri and Henry had slightly different personalities.  For example, Samueli built a multi-lot, modern style house right on the water, whereas Nicholas erected a massive Tudor style home high on a hill with a sex dungeon under it.  Samueli used to host parties where the captains of industry would get together and raise money for charity.  Nicolas used to host orgies where he furnished strippers and prostitutes for guests.  Samueli bought the Anaheim Ducks and Nicholas bought a warehouse and filled it with cocaine and ecstasy.  Neither one of them ever invited me to one of their parties, but my guess is that the ones at Nicholas’ house were more fun.

"Welcome to my sex dungeon. Coke or X?"

Donald Bren is probably one of the wealthiest billionaires nobody outside of Southern California has heard of.  He made his money in real estate, and could buy and sell Donald Trump four times over.  We met at Bloomindales’s one day about 10 years ago, when we were both in the women’s section, where I was looking for a scarf for my mother’s birthday.

Donny (as I like to call him), was being waited on at the counter by a sales associate, while his assistants busily conducted business on their cell phones.  I was standing behind him, and noticed that he was purchasing a very nice lady’s handbag, probably for his wife.  When the sales associate took it away to wrap it, and there was a pause in the action, I leaned over and said, “Nice choice”.  He was about to engage me in conversation, but his associates were jealous and formed a semi-circle between him and me.  No big deal.  I didn’t really like the handbag anyway.

The real "Donald"

Billionaires fascinate me and when I was younger I assumed that eventually I would become one.  I was told from an early age that I was “very intelligent”, and in my young mind that and time seemed like a sure recipe for landing on the cover of Forbes.  However as I got older I started to realize that I was often doing things that probably were not conducive to becoming a billionaire.

When I was twenty-one I spent a whole week during Christmas break sitting on my couch, drinking beer, and playing Super Mario Bros with my roommates.  Chances are not many billionaires have done that.

Other times when I was closing down a bar with friends on a Thursday night, I would wonder if any billionaires out there were doing the same thing as me at that moment.  I doubt it.

Sleeping in on the weekends is something I used to loved to do, but as I would lay there wrapped underneath my comforter, it would dawn on me that billionaires were already hard at work.

By the end of the week I was cracking open the "Beers of the World" box my cousin gave me for Christmas.

As time went on it became clear to me that I did not have what it took to be a billionaire.  I resigned myself to that fact, and proceeded to get on with my life.  For many years I didn’t think about billionaires or what their lives were like.  I settled down, got married, and started having children. And then something funny happened.  I began to think about them again.

When there was thunder and lightning outside and my frightened kids jumped in bed with my wife and me, I thought about being a billionaire.  If I was a billionaire would I have been there to experience that moment with them?

How many times would I have been on my private plane in route to a high-powered negotiation or in five-star hotel suite far away, getting ready for an early morning board meeting while a school play was going on?

That lazy summer vacation spent with the family driving up the coast to see the redwoods and camping out under that stars…would I have been there for that?

Those are the things that are important to me, and although I am not a billionaire,  I like my life because I have the life that fits who I am.

Life has its own filtering process, and often we spend the majority of our time fighting that process, trying to be something we are not.  Chasing some illusion of who we are or what we should be, instead of starting the process of becoming who we are meant to be.

Let me be clear, I am not talking about “settling” or giving up on your dreams, but about exploring and discovering what and who is important in your life, and then creating a life that puts it/them at the center.

Looking in on a billionaire’s life we imagine what it would be like to have that wealth and project the life we currently have on top of it.  We rationalize killing ourselves so we can “make it”, and once we do we think then we will focus on more important things.  But that is an oxymoron that rarely exists in the real world. Very few people have the single-minded, unrelenting, laser focused drive that it takes to become a billionaire, and then just “turn it off”.

Hey, I'm just Bud Fox...without the blow and hookers and stuff.

Perhaps it is best summed up in the by the follow story;

A reporter goes down to the floor of the exchange to interview a very successful trader.  He says, “I don’t get it?  You have been doing this for 20 years and you are worth 100 million dollars.  Yet every day, you get up at 4:30am, take the train into the city, fight among the traders in the pit, stay late to examine charts, and take the last train out of the city at night to go home.  If I was worth 100 million dollars, I would be retired, sitting on a beach somewhere, enjoying my life.”  The trader pauses, looks straight at the reporter and says, “That’s why you’ll never be worth a 100 million dollars.”

So perhaps I will never be a billionaire, or even a hundred millionaire, and that’s okay.  I have family and friends that I love.  I have my health, and I love what I do, and you can’t put a price on that.

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The Most Important Concept For Successful Trading.


What is R?

Any sound trading methodology has to incorporate risk management, and one of the easiest ways to do that, is to use the “R” method.

“R” is a fixed dollar amount that stands for both risk and reward, and is best arrived at by using a percentage of your total trading capital.  It allows you to size your position in relation to your risk level instead of in an arbitrary way. For example, if you have $50,000 available in trading capital (cash not including margin), you might use one quarter of one percent (.0025), or $125.00, as your “R” factor.  This is the total amount you are willing to risk per trade and is expressed as 1R.

In the example below, A is a former support level that was broken, and now is a potential resistance level.  Price has been trapped between B and C level, and you are looking to go long if it breaks back above B.  You know that a reasonable stop loss would be just below level C, so you determine the price distance between you entry just above B and your stop just below C.  Let’s say that this distance is 50 cents.  You now take that distance and divide it by your “R” factor, which gives you a position size of 250 shares ($125.00 / .50 = 250).

You now know that if your trade fails and hits your stop-loss order, the most you can lose is $125.00 or 1R.  The goal then becomes to only take trades where you have the best potential reward for your 1R risk, ideally 1:3.  In this same example, the resistance level of A is a reasonable target for a successful trade, so you determine the distance between your entry just above B, to the target of A.  You then divide this number by your “R” factor to see if the trade is worth taking.  If the distance between A and B is $1.50 then you have a 1:3 risk/reward ratio and the trade is a good bet ($1.50 / .50 = 3).

The higher the risk/reward ratio you have on your trades, the fewer times you have to be right, and still make money, as this chart below illustrates.

Risk Reward # of Trades 50% WT 40% WT 30% WT 20% WT
1 1 10 0R (-2R) (-4R) (-6R)
1 2 10 5R 2R (-1R) (-4R)
1 3 10 10R 6R 2R (-2R)
1 4 10 15R 10R 5R 0R
1 5 10 20R 14R 8R 2R
WT =Winning Trades

You can see that if you only take trades that have a 1:3 risk/reward ratio, and you are correct just 50% of the time, you will have a 10R profit on ten trades.

Understanding how to use risk/return and position sizing allows you to make sure you are never over extended on a trade and allows you to always return to fight another day.

The Last Moments of Steve Jobs Life

Though I am not particulary religious, I pray to whatever higher power there is that the last moments of Steve Jobs life were filled with peace and bliss.  I would like to imagine that with his last mortal breath he felt a sense of serenity, a sense of calm, and a sense of fullfillment.  I wish this for Steven Paul Jobs the man, not the iconic image that most of us only know him as.  I wish this for his wife and his children, the family that he once told U2’s Bono were his “real pride.”

But as much as I wanted to believe this vision, with a design as elegant as the products he imagined and created, it didn’t ring true to me.  Perhaps I am greedy, but as I have thought about the passing of Steve Jobs over the past 24 hours, as much as I have tried to focus on the life changing innovations his genius spawned, I find myself feeling bitter about the loss of the things that were to come.

My parent’s generation were crushed by the loss of JFK, and the lingering sorrow of the great things he could have accomplished.  I find myself feeling that way about Mr. Jobs.  I wanted to watch decades more of  his “One More Thing” announcements, to see once again the unveiling of things I could never have imagined, but that he could in his sleep.

But then I felt guilty and selfish as I know that for his loved ones, the “One More Thing” they would have traded the world and all the Apple products in for would be one more day with their “dad” or “husband”.

My real vision of Steve Jobs last moments was one of  sadness for the loss of a family he loved, but also one of frustration.  I can’t imagine how painful it must have been to actually be Steve Jobs, with a mind, and heart, and soul that was otherworldly.  To be Steve Jobs with so many ideas, and so much left to do, knowing that the end was coming.  To be Steve Jobs and to know he would not be there to see the final realization of his dreams  and ideas.

And then it hit me….

In my limited way of thinking, I imagined his life as journey with a beginning and an end, but people like Steve Jobs don’t think in those terms.  In fact, there was no end to his dreams and ideas.  To lose him at fifty-six is a tradgedy, but no matter what the age Steve left this earth, we could have rightly wondered what he was left to accomplish.

With that said, I would now like to think that he understood that at the end of his life.  That he knew that leaving a life unfinished, meant that it was one lived always looking to the future, with infinite possibilities, and unending potential.  One lived to the fullest every waking minute, of every waking hour, of every waking day.  One that you should always live in eternal pursuit of “One More Thing”.

I hope that was the way that Steve Jobs left us.  And I hope that his loss to his family and friends and those that truly knew him is ever so slightly lightened by knowing that his life and the way he lived it was a greater inspiration and will benefit mankind more than anything else he did.

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Thoughts On Paper Trading (And What Sugar Tastes Like).

From time to time when I am at a social event, out playing poker, or rooting through the dumpster behind Arby’s, someone will ask me, “what do you do for a living?”  I usually respond that I do a “number of things”, one of which is trading stocks.

After that they generally ask me a series of questions about my trading style and how I feel about the market in general.  Often they will tell me about their own forays into trading and then say something like this…

“I have been paper trading for about six months now, and I am KILLING IT!!! I am thinking about quitting my job and starting to trade full-time.  By the way, where is the local Ferrari dealership?”

Since I like to see people in terrible pain and suffering, I always encourage them to “go for it!” (Just kidding).

I am no fan of paper trading because it gives you an artificial sense of detachment from your trades, both losses as well as wins, since you are not using real money.

Almost every person out there will change their “real money” trading methodology once they experience the euphoria of a winning trade or the depression of a losing one.

Occasionally I will find someone from a very “rules based” background (think engineers, airline pilots, etc) who will actually trade real money the same way that they paper trade, but for vast majority of people, they just can’t.

Ooooh...."The Rack". Yeah, real scary. Try day trading!

I have a lot of issues with Alexander Elder, as well as any author whom I suspect makes more money from writing books about trading than actually trading.  That being said, I remember reading  “Trading For a Living” and thinking the book spent too much time on the psychology of trading.

Being young and foolish, I also remember thinking, “what the hell does all this crap have to do with trading?  You buy a stock, if it goes up, you make money, and if it goes down, you lose.”

Needless to say, the point of that book was to try to save the novice trader from blowing their account out before they really began to understand how important emotions, mindset, and pre-conceived perceptions about the market are in their trading success.  Those who paper trade can never understand that.

It is like trying to find out what sugar tastes like without actually tasting it.  You can read about it, you can talk to friends about it, you can study its molecular structure, but until you actually take some and put it on your tongue, you can never know what it really is all about.

So to that would-be trader I suggest a better alternative, which is to trade with a very small amount of money.  Even if you are only risking $50 or $100 dollars on a trade I believe it will tell you more about your abilities in trading than any amount of paper trading.

It will give you “skin in the game” and focus your trading.  It also gives you time to build a methodology, which if proven sound over time, can be scaled up as your trading experience and account equity grow.

And for more (and better) books on the psychology of trading, try Trading In The Zone by Ari Kiev, and The Disciplined Trader by Mark Douglas.

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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in). Check out “The Best Of bclund” to get started.

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