Don’t Pet the Scorpions

scorpion-petFortunes were won and lost tonight in KaloBios Pharmaceuticals (KBIO) during the after-hours session. I’ve never traded the stock before so I’m free to sit back, enjoy the circus and pen my thoughts. If you have any interest, these are some of the traders you’re going to get to know soon.

The big loser who was short and may have blown out his account and financially crippled himself for years to come. You may not actually hear from this trader for various reasons up to and including suicide. I actually feel sorry for this trader due to the magnitude of this unforeseeable event. Almost, that is. The high level of risk in shorting a low float biotech stock puts it about on par with petting a scorpion. You have to know that. 

The trader who fortunately covered his short just ahead of the close. Uh huh.

The trader who has no position but is fuming mad at what’s going on. This is someone who had a long position but sold cheap or for a loss and missed out. Their anger will remain fixed in place until price has dropped below where they sold.

The trader who sold way too early and is kicking himself for it – a common stigma of top pickers.

The trader who will hold to the very top, then ride it back down (to zero if necessary) vowing to sell at the top as soon as it gets back there again.

The trader eager to sift through and suggest other losers in order to find the next overnight multi-bagger.

KalosBio Pharmaceuticals (KBIO) Historic Weekly Chart

KaloBios Pharmaceuticals (KBIO) Historic Weekly Chart

I can feel sorry for all of these traders in one way or another, but there’s one trader above all who I feel sorry for more than any other: the big winner. That’s the trader who (maybe) looked at a chart like the one above and figured it was a buy despite the secular downtrend and loss of more than 99% of its peak value. The company just laid off 61% of their workforce before announcing they were shutting down operations and ending their clinical programs. They’ve never brought a drug to market, suffered numerous trail setbacks, lost a partnership with Sanofi, lost their CEO, fired their CMO, and is in debt. Despite all of this, traders still actively bought shares in the company, traders who stumbled ass-backwards into a fluke event that will richly reward their dumb luck and serve to encourage them to repeat the process of this bad behavior all over again somewhere else.

I suppose I use the term “trader” here loosely when “gambler” suits the theme better. As long as you know the difference then I sincerely congratulate you on your win.

What Once Was, Is: A Brief Reminiscence on the Wisdom of Jesse Livermore

reminiscencesI finally got around to reading “Reminiscences of a Stock Operator” by Edwin Lefevre, the thinly disguised biography of Jesse Livermore. I’ve read many books related to the stock market and trading, but I always put this one on the back burner because it was written in 1923 and covered experiences in the stock market during the late 1800’s – early 1900’s. I always thought, “I’m sure it’s a charming tale, but I’m interested in newer information that can help me in the modern market.”

As it turns out, I was in for a profound lesson. While reading the book, I cannot recall how many times I read some piece of wisdom which I was able to correlate to trading experiences I’ve had in the present. Many times I thought incredulously, “Was this really written about experiences which happened over 100 years ago? I recognize the same things happening now!”

Let me share a favorite excerpt as an example:

“The public ought to always keep in mind the elementals of stock trading. When a stock is going up no elaborate explanation is needed as to why it is going up. It takes continuous buying to make a stock keep going up. As long as it does so, with only small and natural reactions from time to time, it is a pretty safe proposition to trail along with it. But if after a long steady rise a stock turns and gradually begins to go down, with only occasional small rallies, it is obvious the line of resistance has changed from upward to downward. Such being the case, why should anyone ask for explanations? There are probably very good reasons why it should go down, but these reasons are known only to a few people who either keep those reasons to themselves, or else actually tell the public that the stock is cheap. The nature of the game as it is played is such that the public should realize that the truth cannot be told by the few who know.

Many of the so-called “statements” attributed to insiders or officials have no basis in fact. Sometimes the insiders are not even asked to make a statement, anonymous or signed. These stories are invented by somebody or another who has a large interest in the market. At a certain stage of an advance in the market price of a security the big insiders are not averse to getting the help of the professional element to trade in that stock. But while the insider might tell the big plunger the right time to buy, you can bet he will never tell him when is the right time to sell. That puts the big professional in the same position as the public, only he has to have a market big enough for him to get out on. Then is when you get the most misleading “information”.”

Does this sound like it’s over 100 years old or does it seem very familiar to you? I don’t know if there’s a better earlier foundation laid for trend trading, following price action and tuning out noise explained in just these two paragraphs. There is so much more to be found in this book too.

There is truth in the axiom that history repeats itself again and again in the stock market. Those who forget it are bound to repeat it.

If you haven’t already, read this book as soon as possible.

Diamond in the Rough

It’s hard not to follow-up on my GoPro (GPRO) post from ten days ago in light of today’s post-EPS beat down.

I did, in fact, assume the 6.5% risk proposition I indicated in that post and initiated a test buy. With that I received the benefit of today’s 7% gain, however that is likely to be far offset by the loss I’m about to take which appears imminent based on after hours trading. While volume looked promising during today’s run into the close, it turns out today’s buyers were just a bunch of knuckleheads like me who overlooked the bigger picture of the price trend and rolled the dice. While my risk was well-defined, a fat lot of good that’s going to do me when price gaps below my stop.

Gambling isn’t trading. I’m putting myself in the penalty box for a while.

logo-dmndThere is a silver lining for me though – Diamond Foods (DMND). After posting a chart setup of DMND this weekend I took a position in it on Monday. Yes, I know all about the accounting shenanigans that damaged the stock, but I don’t really care. Those same shenanigans didn’t stop DMND from nearly tripling from its 2012 low. Whatever the story was that dropped the stock’s price in the past changed to influence price to move higher from there, and last Friday’s range break on high volume seemed worth a try. It’s a rare treat to buy a stock just days ahead of a buyout, so you can imagine my delight at learning that news Wednesday morning. Not a tremendous premium, but I’m not complaining. My quick gain in DMND should be enough to balance most of my loss in GPRO.

There is an extremely valuable lesson to be learned here, and it’s all revolves around price action.

I’m just a guy trading from home. I’m not in a position to know that DMND was about to be bought out, but someone somewhere knew and it’s a fair bet to say that particular someone probably did at least some of the buying on Friday which was responsible for spiking the volume and pushing price high enough out of DMND’s range to be noticed. Fortunately, I noticed that price action and acted on it to my benefit.

On the other hand, I failed to give the same regard to GPRO which has ridden a solid downtrend from mid-August, selling right into earnings. In this case, it’s not what you see but what you don’t see. GPRO dropping nearly 60% in two months glaringly indicates the absence of “smart money” buying it. If smart money isn’t buying, why would I? GPRO’s downtrending price action was as plain to see as the opposite action of DMND, I just chose to overlook it. Today’s blast higher on volume merely provided a nice high dive platform for shorts.

Price tells the story. Strength follows strength which is what led me to DMND. Buying GPRO’s weakness was a counterintuitive mistake, and I should have known better.

Releasing the Pressure to Perform

performance-gaugeIn the simplest of terms, a trade can be boiled down to the basics of being a 50/50 proposition. Your position is going up or it’s going down. You’re right or you’re wrong, maybe for a little while, maybe for a long time, or maybe permanently. Add to those 50/50 odds a dose of trading knowledge, tools and experience and the odds should then be skewed in your favor, yet so many still fail to find lasting success. Perhaps the most vexing aspect of trading failure comes when a trader realizes that regardless of how simple trading may have seemed at some point, and despite everything that should work to his advantage to beat the markets, he’s still in the loss column. The more a trader thinks he knows, the higher his expectations become. When performance fails to meet those expectations, frustration takes hold.

I speak from experience, of course. I’m about to begin my fifth year of trading and I am still in the loss column overall. I’ve read books, studied successful traders, gathered a great deal of trading experience first-hand with real money. I’ve executed magnificent trades. I’ve endured gut wrenching failures. Sorting it all out, the end result is that I’m still not where I want to be, and I’m certainly not where I thought I would be after four years of plugging away at it. It can all work to increase pressure to obtain results which can lead to overtrading, revenge trading, and all other manner of ill-conceived and rash decisions.

Pressure From Within

Pressure is the key word of my day here. To my advantage, my trading capital is discretionary. If I lose it, I am not in danger of harming my financial future. That doesn’t mean I feel good about losing, but it does mean that I don’t have the pressure of having to count on it to get by. If, on the other hand, I set out to trade for a living and had to rely on trading success to earn my income, failure to do so would create a tremendous pressure situation. I’m relieved just knowing I’m not in that position. It’s good to not feel that type of pressure. It’s good to not feel any pressure.

I do feel pressure through different means though, and unfortunately it has been brought on by my own doing in broadcasting my trade performance here and on social media. For those who manage money or otherwise offer their services for personal gain I can understand why they would make their performance known, however I trade solely for my own interests. Whether I win or lose shouldn’t matter to anyone else. My results offer no value to anyone beyond me, and trying to meet or exceed my own expectations publicly creates unnecessary and unhealthy pressure. In order to remove that pressure from my trading I’ve decided to withdraw my portfolio performance updates here on my blog. It makes no sense to invite that pressure upon myself and serves no one’s purpose other than my own. I’d rather spend my blog time writing something that does offer value to others as well as myself.

Pressure From the Great Unwashed Masses

Laying yourself to bare exposes you to other forms of pressure as well. Ever post a trade you had high hopes for that went wrong? A market forecast that unfolded the wrong way? Doing so can create pressure to be right. Pressure can prompt a trader to hold a bad trade too long in the hopes of it turning around, add to a losing position, or search for reasons to justify why what isn’t working should be working. Someone coming along to point out how wrong you are only exacerbates a bad situation. Trolls and hecklers can fuel a fire of frustration that will go a long way in distracting and derailing traders from going about the business of trading. It’s a lot easier to cut a losing trade when no one is peering over your shoulder.

Pressure on Display Just Tweets Away

Seeing a problem others are having can help identify and address it to correct a similar problem within yourself.

I’ve been watching two traders who I know are surely feeling self-imposed pressure right now. One trader has emphatically been expressing his opinion that we’re at the onset of a bear market. That may very well be, but his opinion has only become louder during the S&P’s 11% climb during the past four weeks. After each leg up he posts a variety of different charts or indicators which best suit contradicting the move. He quotes other’s opinions who support his belief while contrary opinions are dismissed. It appears evident to all but himself that the pressure to be right about his bear market call has overwhelmed his bias. It’s almost painful to watch.

Another trader has spent a long time repeatedly expressing deep conviction in a stock which has now lost a tremendous amount of value. I sometimes wonder if he’s still holding on to it, then on an up day I’ll see him mention it so I know he’s still in. The chart of this stock was a screaming sell a long time ago. I feel bad, but what can I do? His conviction may be proven right at some point in the future, however it is certainly not so in the now. His desire to be proven right after so publicly expressing conviction is obviously greater than recognizing and realizing a significant loss. The last thing I ever expect to hear from this trader is, “sold for a loss.” It would be so much easier and wiser to just sell and take the loss without feeling the pressure of meeting other’s expectations.

Wiser Men Before Me

If it isn’t a sign from the trading gods then maybe it’s my subconscious mind showing me the way in dealing with removing pressure from my trading practices. I’ve recently studied writings and advice from others who have shown me the wisdom in shedding this unnecessary burden. I’ve already demonstrated to myself the benefit of being discreet. This past week I put on a short trade which has begun to go against me, however with only my eyes on it the pressure that can come from feeling the need to be right is not present. The process of the trade may now run its course without an unnecessary outside influence.

I feel as though I’m turning a corner in my trading, and the need to implement changes to my process are evident. This is the first step.

A tip of my hat to the wisdom of Jesse Livermore and Peter Brandt, among others.

A Technical Case For GoPro

Down, down again, and down some more. GoPro (GPRO) has sunk nearly 44% in the past two months, and if you’ve been holding on riding the pain train all that way you’ve got to be wondering if there will ever be an end in sight. Or if you’re looking for a reversal for an entry, maybe you’re wondering when it’s going to happen.

Maybe the time has come.

GoPro (GPRO) Daily Chart - October 16, 2015

GoPro (GPRO) Daily Chart – October 16, 2015

In the eyes of Fibonacci, projecting 61.8% of the three price points in the above chart – 98.47, 37.13 and 65.49 – calculates out to 27.58. Although price has recently been as low as 26.68, the lowest closing price for any day near this projection was 27.60 on October 8. A two cent margin of error is pretty good there.

Added on to this chart is a Price Momentum Indicator which shows stabilization during the past four weeks and is currently positive and turning up.

Make no mistake – GPRO still looks like a falling knife. While this chart is anticipatory as opposed to being reactive, the level of risk necessary to try a reversal in GPRO from this technical level is obviously optimal. From Friday’s 28.52 close, a stop under 25.58 risks 3.3%. A stop under the 26.68 low risks 6.5%. Not bad either way.

Profit projections? Pick your favorite resistance point:

  • 50 DMA at 39.83 = +39.6%
  • 200 DMA at 47.97 = +68.2%
  • 50% DT retracement = +61.6%
  • 61.8% DT retracement = +77.6%

Those are pretty damn good risk / reward propositions in any book.

Food for thought. Good luck trading this week!

In Pod We Trust: Six Podcasts to Enhance Your Trading Edge

podcastI don’t know why it took me so long to discover podcasts, but I finally began listening to them earlier this year. For trading purposes, I find podcasts to be an enjoyable means of accessing useful and valuable information in a format which offers a personal touch that goes a step beyond what reading books and articles offer.

Additionally, I like to read, so at times when my wife is home watching television it’s difficult to concentrate when I’m reading. When noisy conditions are present and I’m unable to read I always have the option of putting on my headphones and listening to a podcast without distraction.

During my podcast journey I’ve discovered a number of favorites I routinely listen to which excel at delivering a variety of subject matter including trading, investing, market and economic conditions, psychology, and a host of other topics covered in interviews with renowned experts in their fields. Through discovering podcasts with libraries of past episodes available to download, I’ve been cherry picking subjects of interest and binge listening all year. I’ve found that shared information and experience gathered from podcasts has been very useful in helping to improve my market and trading knowledge.

Here are my favorite podcasts listed in alphabetical order. If you’re new to podcasts or looking to expand your podcast base, these are well worth checking out.

  • “Better System Trader” hosted by Andrew Swanscott. Featuring expert traders, getting them to reveal their story, tips and research and then breaking it down to actionable insights you can use yourself.
  • “Chat With Traders” hosted by Andrew Fifield. Targeted towards entry-level traders as a staple for progression, but also aimed to entertain veteran traders who understand the greats never stop learning.
  • “Fireside Markets” hosted by James Osborne. Thoughtful conversations on the markets and investing with a long-term focus and a diverse group of guests. Conversations surround the investment marketplace, financial products, investment strategies, trends in finance, retirement plans and the intersection of Wall Street and Main Street.
  • “Masters in Business” hosted by Barry Ritholtz. A look at the people and ideas that shape markets, investing and business.
  • “The Must Follow Podcast” hosted by Sean McLaughlin. StockTwits is the largest social network for investors and traders. Meet smart traders & investors who participate in the StockTwits community. Hear their stories and learn their process.
  • “Trend Following With Michael Covel” hosted by Michael Covel. Trading, economics, human behavior & entrepreneurship – all passionately explored. Bringing brutally honest insight, perspective and wit together from the brightest and most accomplished minds within markets and beyond.

iTunes is OK for listening to these, however I prefer Overcast which offers a syncing platform to listen to podcasts through free apps or online. It’s worth buying the paid version for the Smart Speed, Voice Boost and Playlist features which you can try first in the free version.

Expand your mind. Feed your brain. Check these out!

A New Direction For Me and a Book Recommendation For You

We all have the advantage of following experienced traders in social media whether it be via Twitter, StockTwits, blogs, published articles, or what have you. There is much that can be learned from these individuals. Beyond that, I’ve personally been fortunate to have had some direct contact with a few traders who have far more to offer than I do, so for that I am forever grateful. Those insights, combined with what I’ve learned elsewhere and through my own trading experience, makes for an invaluable opportunity to take further, more efficient steps toward success.

A recent discussion I had with an accomplished trader (and I use the term “trader” as a generality – perhaps “speculator” is more appropriate?) presented me with a fork in the road of sorts where I was compelled to stop, perform some serious introspection, and evaluate where I’ve been, where I wish I’d have been, and where I ultimately want to go with my trading. From the gracious help I received, I was able to glean a great deal of value which I was able to use in getting a better perspective of what has been wrong about what I have been doing as well as discerning what can be done to improve and succeed. Some things in regard to strategy and approach I already knew but had cast them aside, and other things I knew but had never really opened myself up to thinking about deeply. Still other things were brand new to me. Having some fresh insight to combine with my experiences and apply it to what works for me has me feeling positive about the direction I’m now planning and preparing to transition to.

With a new direction comes change, and with it there are many elements involved. I’m excited to do the work necessary to achieve my goals and relay them here. Writing about it always helps work out thoughts and imprint them in my mind. Those thoughts will trickle out here from time to time as I contemplate them.

One thing I always bear in mind is that no experienced trader of any level has any obligation to do anything to benefit anyone other than themselves, and without them making themselves accessible I know I would be nowhere near as knowledgeable or encouraged as I am about my trading. In turn, whatever I can pass on that may benefit another is a pay-it-forward act I’m always happy to do.

In that regard, beyond the esoteric personal thoughts I’ve laid out, I’m going to offer up some assistance to you fellow traders by recommending a book I’ve just read, one which I’ve never heard of before that was pointed out to me by someone who has benefitted by its teachings. The book is titled, “The Perfect Speculator” by Brad Koteshwar. Some editing flaws aside, the book is a quick read outlining a proven method of speculating, and it offers a plentiful amount of useful advice on other related aspects of the market as well. I bought a Kindle version on Amazon for just $2.99 and read it in two days, and that’s with a LOT of highlighting. I expect to read this book again to better absorb it and also keep my highlights handy as a reference.

“The Perfect Speculator” has a few diagrams included in the book, however they are very simple in nature. Unlike some graphic intensive trading books, this one is not particularly necessary to own in print form. The cheap Kindle version will do just fine if that is an option available to you.

Here’s a quick link to “The Perfect Speculator”

If anyone chooses to follow-up on this recommendation I would be interested in hearing your thoughts after reading the book.

Price Always Knows the Story


Two friends were waiting at a bus stop facing one another in conversation. Although the sky was clearing, a storm had passed through earlier in the day which left behind a large pool of water nearby in the roadway.

As the two spoke, the friend looking north suddenly jumped to his left well away from the street. The other friend, facing south watching him, remained where he was thinking, “what’s he doing going that way?” Just then a southbound truck passing by hit the puddle, sending a torrent of water splashing over the friend who remained near the curb, soaking him from head to toe. Recovering from the surprising event, he said to his dry friend, “I didn’t see that coming! Why didn’t you let me know?”

His friend replied, “You were looking right at me the whole time. Although you didn’t know why I moved the way I did, I knew. Instead of wondering why I was moving, had you just followed my lead you’d be fine now.”

Today with the indices red and the biotech sector down further still, Juno Therapeutics (JUNO) went strongly against the grain, leaving many bewildered watchers muttering, “What’s going on? Somebody must know something.” Later in the day the catalyst that fueled Juno’s 8.5% gain on double volume was revealed. Indeed, somebody knew something. Isn’t it always the case, though, that somebody somewhere always knows something?

Juno is a great study in following price. Unless you’re the smart money who’s in the know ahead of everyone else, someone who is the smart money will be acting on what they know which will eventually be reflected in price action. Because of that, price already knows the story, you only need to follow its lead. Knowing why price moves in the direction it’s moving doesn’t really matter; its action is telling you the only story you need to listen to.

Don’t get soaked watching price without following its lead.

Take the Signal You’re Given, Not the One You’re Waiting For

signals-99Did you take a beating in August? I did, as my recent portfolio update indicates. I’ve gone from +10% to -24.5% during 2015. Although lagging in both recognition of the changing market environment and sluggish flexibility, I finally did catch on and took my losses which would be worse now if I had held my positions. I now have the advantage of being virtually all in cash while enjoying the pleasure of seeing quality stocks I want to own again being discounted by the market. This is the perfect time to get shopping lists ready to buy when the time is right.

I’m not going to beat myself up for being in the loss column since some lessons I’m learning now are those which I’ve never really encountered before. The first trades I put on were in October 2011, so I’ve been trading for four years. I’ve accumulated a great deal of knowledge and hands on trading experience during that time, but all of that time has transpired in bull market conditions. I’ve never known a bear market while trading. Now that appears to be changing.

The most useful experience I can take away from August is best explained using Skyworks Solutions (SWKS) as an example. I had a profitable position going into their July earnings. It was a long-trending, highly rated market leader. Earnings are then reported with both top and bottom line beats and raised guidance. Perfect! Result? It’s sold off. That seemed counterintuitive and was frustrating to the point that I refused to believe there wouldn’t be a rebound, so not only did I hold, I added to my position when price hit the 200 DMA. Only after failing at the 200 DMA did I concede and take the loss. I tried to justify the success story of Skyworks to curve fit it to my beliefs while all along price was telling me what the real story was. It doesn’t matter how good a company is fundamentally or how bright the future looks once shareholders decide it’s time to sell. I was looking at technicals to determine what my sell signal would be. The fact that Skyworks sold off after it had confirmed everything was going in its favor was the sell signal I should have been paying attention to. I tip my hat to the smarter money that recognized this ahead of me.

Skyworks is not an isolated case by any means. It isn’t difficult to find comments on social media from similarly frustrated traders struggling to comprehend why their stocks are sinking after earnings beats leading to declarations of everything from “this is bullshit” to “markets are rigged” in response. I understand it because I’ve done the same thing before myself. I’d have rescued a lot of my lost capital over the past four years by following price instead of my own biases.

Markets are cyclical, and that becomes especially apparent when macro foundations begin to crack and crumble. Consider the market first, then sectors, then finally stocks within sectors when putting together your own shopping list and acting on it. Recognizing and regarding buy and sell signals from a bottom up approach will improve chances of success.

Complacency Kills


It has certainly been an interesting week. Reviewing my trade log for this year, my early entries were largely profitable while more recent trades have been decidedly unprofitable, so much so that my once 10.6% year-to-date gain has now slipped well into red ink. I decided to take a look at that log since I’m now way underperforming my expectations and trying to grasp how it could unwind so quickly for me.

Some recent shots across the bow took me by surprise, particularly positions in best of breed companies which reported earnings and revenue beats, and in some cases increased guidance, yet sold off. I’m talking about stocks such as Skyworks Solutions (SWKS), Tableau Software (DATA) and Horizon Pharma (HZNP). I suppose I was late to the party, and I suppose shareholders who arrived ahead of me took advantage of the situations to sell the news, and sell they have. It’s disheartening to be in outperforming, market leading stocks that deliver, yet they sell off. These are winning leaders after all, not penny stocks. I just wasn’t mentally prepared for that possibility until it was too late for me to act to prevent those types of winners from becoming losers.

In the past I’d have held those losers until they reversed, or until that sick pit of the stomach feeling that comes when hope pinned on a deep loss finally fades into capitulation. While I was caught off guard and slower to react than I would have liked, I did cut my losses to go largely to cash before they became much worse. Only then was I able to marvel at the market’s action this week; good, bad or ugly, I enjoy studying every aspect of it, and being in cash affords the opportunity to pounce on the bargains developing during this correction.

Complacency of success was the underlying factor in undermining my recent performance. Tunnel vision toward favorable outcomes led to unpreparedness and sloppy trade management. I should know better, and I do, yet here I am now in a hole I have to work my way out of.

My thanks go to all the veteran traders out there who spend time sharing their knowledge and experience through tweets, blogs, podcasts, etc., for the benefit of less experienced traders such as myself. A lot of advice and guidance provided recently about signs of cracks forming in the market has proved true. For example, I can’t estimate how many mentions of deteriorating market breadth I’ve read about over the past months, but I can say I didn’t give it nearly enough regard. Rich valuations, China and a host of other catalysts can be included as well. If I had treated these signals with the proper precaution I wouldn’t be nearly as deep in the hole I’m in now. I just wasn’t listening enough at the time, but I hear that advice loud and clear now.

One last thought to leave you with, a quote from Niccolo Machiavelli:

“Whosoever desires constant success must change his conduct with the times.”