Tips Are For Waiters

Looks like I am going to be moving over to the new site so this should be the last post. The new URL is

www.tipsareforwaiters.com

I won’t be updating this blog anymore so if you subscribe by feed , please be sure to change it to the new one.

A very quiet day with little in the way of volume today has me thinking of leaving early. Trading off of chart patterns in a thin market can be pretty tricky so I am going to stay away from making any major adjustments to the portfolio. A chart that looks to be setting up here is Excelis (EXLS). I bought and sold this one for a quick trade last week and am now watching it again as it looks to be setting up a nice, albeit small, flag pattern (some might even call it a 1234 pattern). I am thinking of buying a placeholder here and add if it comes down some more. It if continues a northward trajectory, my placeholder will help pay for a nice dinner. Their earnings numbers are pretty good also.

If you missed it, Captain Kirk mentioned Bulkowski’s chart pattern resource a couple of days ago and it is an excellent area to explore. You can find all sorts or chart setups and their chances of success. You can even download a chart recognition software and use it with TC2000 to scan all stocks for the patterns that you are looking for. I have not tried it yet, but I will look into it this weekend and let you know what I come up with.
Like most of you out there, I will be out the rest of this week. I will be posting the Portfolio Review on Sunday so make sure you check in. Ciao.

Long: None, but have a bid in for EXLS.

1:43 PM

The following is a Worden Report article on trade management.  Although I do not use this exact method, it may of value to some readers out there so i am posting it.

The Worden Report (Tuesday, April 11,2006)

We Dub Thee Sir Pareto

             Sir Pareto has drawn upon the “Pareto Principle” in building a highly practical approach to trading. He says that he believes money management is the real Holy Grail of trading. So I suggest the many of you looking for help on money management get busy and read this. We welcome Sir Pareto to the Roundtable of Knights Who Think for Themselves. A cool bottle of Veuve Clicquot Ponsardin has been retrieved from the moat. -DW       

              

Hi Don,

I have been trading for over 14 years as a professional options market maker, futures local, and stock market maker on the exchange floors.  For the past few years I have been an off floor trader trading a variety of different instruments and with all my experience I believe that money management is the real Holy Grail of trading.  Let me explain what I mean.
 
I have come to realize that Pareto’s Principle comes into play with trading and investing.  For those not familiar with Pareto’s Principle it is the famous 80-20 rule where 80 percent of your success comes fro 20 percent of your resources.  I have found that this holds true with trading and investing, 80% of my profits come from 20% of my trades.  So out of every 10 trades or investments, 2 of them will be very profitable and the rest are breakeven or minor losses.
 
Because I do not know which 2 out of 10 trades will be profitable, I use specific money management techniques that most people do not focus on.  I like to get trades to pay for themselves as fast as possible, in that way I can let part of my position to work for me for a long time and maximize the gains.  I also ensure that most of my other trades are stopped out for breakeven or even minor gains.  Here is how I accomplish this strategy.  I look for entry techniques where the trade will give me a quick initial pop in the direction I am trading.  When I get the quick initial pop, I reduce my position significantly and use the profits from the quick profit to finance my stop loss.  An example helps explain this strategy.
 
For example, I purchased 1000 shares of SNDK on the breakout above the previous swing high at 59.86.  I got filled at 59.94 and put my initial stop at 59.48 for a risk of 46 cents on 1000 share or $460.  I know from my trading experience that this kind of breakout, if it could get above the $60 mark, would run for $.50 to $1.00 before consolidating so I put in 2 sell orders.  I placed one order at $60.49 for 300 shares and the other at $60.99 for 300 shares.  Both were triggered and I banked $165 + $315= $480.  After I locked in the profits, I moved my stop on the remaining 400 shares to 58.69, which is below the low of the breakaway gap day.  So now my risk on the position is (59.94-58.69) x400=$500.  However, I already banked $480 so my actual risk is only $20.  I then placed orders at $62.99 for 100 shares and at $64.49 for 100 shares in case we got continuing follow through.  By doing this, I am scaling out of my position, but I am keeping 200 shares for a core position.  Both orders were filled on April 6th and I banked $305+$455=$760.  I am leaving my original stop in the same place for the remaining 200 shares.
 
At this point, even if I get stopped out on the original shares, I have made money on this trade.  I am leaving my stop at the original location because it makes sense.  Always make sure that your stop location is in a location that makes sense to you, meaning that if the price got back to that level, you wouldn’t want to be in the position anymore.  Don’t just place a stop in a location based upon a monetary value, your stop may get hit and you may still like the trade.  That is why I use profits from exiting some of my position to finance my stops.  That way, I am not worried about losing money on the trade while being able to leave my stop in a great location.
 
Now that I have my core position of 200 shares at this point, I don’t mind if the trade pulls back, because I can always trade around my core position, meaning that I could add some shares back on a pull back.  However, I still don’t know which of my trades will be the most profitable so I just let my remaining shares work for me.  Eventually, if SNDK keeps moving up, I will move my stop to lock in a profit but I will only do that when I can find a logical place to put my stop.  Sometimes, I hang onto the remaining shares for a few weeks or months.  The trade has been paid for and I let my winners run.
 
To sum up my money management and trading rules, I look for situations where the trade follow-through will finance the remaining position.  I enter a larger position so that I can quickly unwind part of the position at a profit, which I then use to finance my stop loss.  That way, if my stop loss is hit, I will get close to breaking even.  The whole key is to not get greedy and to look for situations where the trade will trigger follow-through.  If I get in a trade and I do not get any follow-through in a short period of time, I will exit the trade and preserve my capital.
 
I keep detailed records on my trading and I have found that on 10 trades I have this distribution of winners vs. losers.
 
Trade distribution
2 losing trades, Average loss = $463
6 breakeven trades, Average gain = $24
2 winning trades, Average gain = $976
 
So out of 10 trades, I am generally making about $1170.  The key is finding trades that will pay for themselves since I don’t know, out of the 10 trades, which ones will be the 2 big winners.  Usually, the trades that turn into the big winners surprise me.  I have found that the trades that I am expecting to be big winners actually break even most of the time and some of the trades that I am lukewarm about turn into the most profitable trades.  Such is the nature of investing and trading.  Don’t try to predict, just get in to the right trades and let the market pay for your position.  At that point, you shouldn’t care what happens, some will work, some won’t and some will break even.

Thanks for producing a great product.

Mike

I sold some ICE calls I had from a while ago at the close today. They were way in the money and I wanted to lighten this position some. Only sold about 15% of the position and am looking to keep the rest for now. I also added some CKSW at the close today. I am looking to build this one into a more meaningful position as it looks like it is getting ready to make a strong move higher.

The markets did not do much of anything today but there was some spectacular action to be had if you were looking in the right places.  NVEC, NYX, GOOG, EFUT, and FMCN all provided some decent entries this morning.  After the bell, it looks like the market likes Dell’s press release regarding their preliminary revenues.

Also, if you missed it earlier, I have a new blog at www.tipsareforwaiters.com   I will slowly transition out of the wordpress hosted site into that one.  For now, i am writing the same posts at both places.

Have a good evening.Long CKSW, ICE (stock and puts), GOOG, FMCN

I did a short post earlier when I added FMCN.  They reported some nice numbers yesterday and the stock has gapped higher on the news.  Revenues increased 213% and their sequential revenues increased 20%.  Earnings came in at 55c/s vs. expectations of 49c/s.  More importantly, they said that they expect revenues to be in the 67-69 million range next quarter with EPS around 62-64c/s.  Analysts are going to have to go around raising next years numbers on this news and I would expect the price to follow suit.  This stock is thinly followed so more ratings initiations are also possible.  The chart is showing a conclusive breakout of the downtrend today and the volume is extremely high.  This one might be headed to 90 if it can do the three dollars a share I expect it to do next year.  One thing to keep in mind is that this stock trades thin.  If your stop is too close, you will get whiplashed pretty quick.  I would give this one a bit of wiggle room while it gets discovered.

Long FMCN

1:55PM

I am in the process of moving this blog over to a new location. I have transferred over most of the stuff from here already. I will be posting the same posts at both locations for as long as it takes me to iron out the new site. The new web address is

www.tipsareforwaiters.com

Edit: I screwed up the earlier post as Pankaj pointed out in the comments section. Just copy and paste the new address for now.

FMCN reported some nice numbers last night and I bot some right now.

“Focus Media Reports Third Quarter 2006 Results
Monday November 20, 4:05 pm ET

Revenue Increased by 213.7% and Net Income Increased by 278.6% Year-over-year”

The full press release is here

Throughout the past year, we have all heard about how there is a huge shortage in OIL and how they are finding $1 worth of oil for every $2 worth that is consumed.  The argument was that the oil shortage would cause major economic damage due to inflation, and possibly even wars among nations.  With oil breaking down last week, even the most vocal oil bulls are sitting quietly wondering whether we will have a 4 handle on the price per barrel.  The implications of oil on our economy are too great for anyone to ignore what is going on here.

Looking at the chart of Crude Oil, we can see that it was trading in a nice steady uptrend up until the middle of July when the breakdown happened.  The first level of support for crude oil looks to be in the $55 region and it should bounce or at least consolidate over there.  For the $200/barrel bulls, crude oil needs to consolidate here for a while and then slowly make a fresh assault on the old highs.  If it breaks below $55 though, we may just get that 4 handle on oil.

Richard Rainwater, now a billionaire, called this oil ramp in 2001.  It is an interesting read on how his mind works.  I wonder what his thoughts are now.

9:12 AM

If you think this is boring, wait till we hit the tail end of this week. Historically, there are some very nice small cap movers this week and you really do not know which one is gonna move till it does. Keep your eyes open for a mover similar to the EFUT we had last week. If you spot one that has some momentum, hop on for a ride and make sure you do not wait till the music stops. Volatility in the major indices this week is gonna be low enough to lull you to sleep and I for one am looking towards a few cups of coffee to keep me awake.

The markets are basically flatlining today with neither side doing much of anything. Most of the institutional set is sitting by some fireplace south of the equator by now and that’s going to leave the mo-mo players to do their thing. With a lack of catalysts, I do not anticipate doing much this week other than add to a few exisiting holdings. The markets are pretty extended and I am not finding any new stocks that I would like to buy just yet. My list of potential adds is long, and I am waiting on a meaningful pullback to add them. As traders we are almost expected to be trading constantly but that really is not an accurate picture of most of the traders I know. Unless you are a daytrader, it is hard to get excited about this market at this juncture as it is by all measures extended and in need of a pullback. We need to exercise caution and exhibit some patience and let the trades come to us. Not forcing trades is a trait very few manage sucessfully, but the ones that do can show substantial outperformance.

Another trait that is important for us as traders is to know when to take profits. Although we all trade differently, it is important to have a plan for when and how to take consistent profits out of this market. Some traders scale out of positions while others sell all at once at a predetermined price level. There are many ways to take profits, you just need to know which one works best for you. I will try to touch on this topic abit more later this week. Barring any major changes, this should be the last post. Have a good evening.

3:17 PM

If the weekly newspaper Barron’s were listed on one of the exchages that this weeks paper criticized, and if it were to trade on its content rather than it’s earnings, i would be short it. They want you believe that the exchanges are overpriced relative to other stocks based on their forward P/E’s. They also complain that the exchanges have the highest P/E’s of any industry group. Well…duh…. Can you find that kind of growth in any other industry group? What would they like these stocks to trade at? 10X earnings…. or may be 15 X earnings…..Why don’t we forget the whole valuation thing and give all stocks the same P/E’s as the homebuilders industry. That would make it easier and then Barron’s would have nothing to complain about. The writers of Barron’s obviously have no clue here and I just felt like ranting about it. Not that anyone cares, but maybe the P/E’s are so high because they are growing earnings at such a torrid pace that by next year these very “expensive” stocks will look ridiculously cheap at todays prices. Take Intercontinentalexchange inc., ICE as an example. By my estimates, this company is going to do $4 a share next year. The way a I see it, you are looking at a stock trading at 25 times next years earnings with a ton of growth ahead of it. This 25 P/E would have been lower had the stock not moved 20% in the last week alone. Maybe these stocks are expensive because investors are beginning to wake up to the fact that these stocks might have a lot more to go.

Long ICE (stock , calls, puts)

9:50AM