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crudeoilvolatility

Trading oil may seem exciting and where it’s at because the oil market is mentioned in the news every day. Trading it may make you feel like you’ve elevated your status as a trader.   Like many commodity futures contracts, the black gold can be volatile. And while you may find that exciting, be sure your account — and your nerves — can handle the volatility.

A good litmus test is to look at the 20-day Average True Range, or ATR. The ATR does what it says on the tin: it gives you an idea of the average range the price can move on any given day based on an average of the last X days (in this case 20). I like to think it gives me a idea of a contract’s personality.

Looking at Crude Oil: Light Sweet Crude Oil (West Texas Intermediate) The ATR is currently $2.14.

Now given that the standardized contract size is 1,000 barrels, you can expect the average daily non-directional movement to be $2,140 – a potentially large swing in your equity.

Is your account big enough to trade the contract? Consider what I mentioned in an earlier post entitled Meaningful Risk?.

Risking 1% of your account equity, position sizing accordingly would suggest that in order to trade this contract, you’d need capital in the region of $214,000 if you were to place your protective stop 1 ATR away from your entry price.

If you aren’t sufficiently capitalized and you emotionally must trade oil, then you might consider looking at the options offered by ETF’s (Exchange Traded Funds) in the US or in Europe / Australia consider CFD’s (Contracts For Difference). You can also consider trading the mini contracts if your style is suited for commodity futures.

Then there is the question of the thickness of your stomach wall you have for this market. A brief snapshot of the fundamentals surrounding this market at the moment suggest you’ll need a thick one:

* Slowing of World economy: China slow down, European mess
* An understanding of how OPEC works
* The Middle East and the escalating tensions with Syria
* Israel / Palestine bombing in Gaza
* Upcoming Israeli elections and the ongoing problems with Iran
* Iran and its ongoing problems with it seems just about everyone else
* Iraq’s production

If you take all of this into perspective, you may see that by trying to up your status, you concurrently up the probability of taking a destabilizing financial loss. Know yourself.

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Monster Beverage (chart above) got hit to the tune of 14.7% one day last month on news that the FDA is investigating a possible link to five deaths. Time will tell whether the allegations are true or not, but with the stock now trading about 50% off it’s high, wouldn’t it be nice to be able to find out about the FDA allegations ahead of time?

With the two tools below, any speculator dedicated to his daily “home-work” could have been well ahead of the news.

Tool #1: A bar chart with price and volume, no MACD, RSI or other indicators required.

Tool #2: Education, knowledge about the importance of supply and demand dynamics.

Looking at the chart above, the blue markings identify large distribution days going back to late June, it is clear that smart money has been bailing out of the name, selling on massive downside volume and increased downside volatility is a classic sign that institutions are bailing out.

Selling short, or simply getting out of a name when the “smart money” is aggressively selling is one way to be ahead of the news, one way to “hack” the system if you will.

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This week Frank and I speak about the effect of Hurricane Sandy on the energy markets, including the delivery problems in NY Harbor.

crudeoilhurricansandy

December WTI – NYMEX Crude

gasolinehurricansandy

December NYMEX Gasoline

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appleselloffiphone5

I just got off the phone with a good friend who I know is an investor and a financial advisor, not a trader. He’s in denial about what’s happening with Apple. He’s in love with its products, spiritually identifies with Steve Jobs, and he thinks that what everyone is feeling about Apple will not change or go away. Although he had TREMENDOUS difficulty expressing their edge to me in a clear and concise manner, he has what I call “blind conviction”…much to the detriment of his investor clients. He thinks it’s intellectual…

He has a few hundred dollars of unrealized capital gains per share, so he uses the flaccid excuse of “I don’t want to sell before the year-end because I’ll give my clients a tax bill.” I reminded him that that manner of thinking wiped out hundreds of millions of unrealized capital gains taxes between March 10, 2000 and December 31, 2000. Coincidentally, he and his clients got killed in 2000 when the tech stocks crashed.

When I wear my coaching and mentoring hat, I see for a fact, that the most enduring illnesses of the marketplace is how investors and traders can intellectualize their actions and inactions without fully understanding that it is their emotions that are controlling their behavior. Something magical happens and the feeling of being so correct (intellectual, but random) overshadows and semblance of sensibility to do the first thing that both investors and traders must do: protect capital.

When I mention this, he tells me “I’m diversified” in such a matter-of-fact tone that if you overheard the conversation, you’d think he invented the concept. I told him that diversification is risk reduction, not risk management. He’s confused the two.

He does not want to hear that the Samsung Galaxy S III is a better device that the iPhone 5, or certainly more popular. He doesn’t want to hear that the Nexus 7 has better features than the iPad Mini. It’s as if he’s possessed, and this type of blind faith can a) get you killed; and, b) vaporize cash faster than Jon Corzine did at MF Global.

It utterly stops me in my tracks that individuals can be so disjointed within themselves. That their intellectual mind can be so dislocated from their emotional mind.

I think to myself that they must have some type of self-hatred…to do all this work…to take the risk of putting the trade on…and then be lucky enough to get the gains they’d hoped for (it’s usually random)…to enjoy the moments of glory…but to not acknowledge that all big moves end and protect your capital.

Traders and investors alike need to find that place — the protective stop price — where they will be financially and emotionally stable in offsetting their positions and in doing so protect their capital. If you don’t have that “place” I think you are a reckless joyrider.

PTJ is known for saying “prices move first and the fundamentals follow.” That may very well be the case with Apple right now.

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Guest Post

You all too often hear that 80-90% of those who try to make it as traders fail.

There is no question that it is a very tough profession and for some perhaps not a good fit.

I wonder about this statistic though.  Many professional traders failed their way to success. They failed forward as it’s said.

After all, so much of trading is learning to take losses and building the emotional capacity to trade your plan without deviation.

Perhaps the statistic changes to being slightly more favourable each time a trader gets back in the ring for another round.

Admittedly it takes a particular kind of resilience to do this.

One thing is certain finding good training and mentoring can help you to short cut some of the steep learning curve. It’s very important to find someone you trust and who’s approach gels with you.

You also have to be open to the possibility that you can be a successful trader.  If you aren’t, you have pretty much guaranteed you aren’t going to achieve what you want.

rogerbanisterfinishline

Breaking the four-minute-mile used to be considered scientifically impossible. Then Roger Banister broke the barrier in 1954.  His achievement opened up the possibility that it was possible to others.  Over the next few years many more people broke the barrier.

It took one man to show that it was possible.  That was all that was needed to allow others athletes to make the mental shift and open to the possibility they could do it too.

Read the Market Wizards books (listen to Michael’s Jack Schwager Hedge Fund Market Wizards Video Interview) and read around this site for countless other examples of those who have achieved what you want.  Ask yourself are you open to the possibility that you can do it too?

Be sure that you aren’t getting in your own way of being a trader.  You may need to open up the possibility that you really can.

What do you think about the statistic?  Does the failure rate decrease the more someone perseveres?  Let me know what you think in the comments.

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