Tag: guest blogger

6 Key Components of Winning Trading Strategies

Posted on by The INO.com Team

Today's Guest Blogger is Chris Dunn of Emini Academy. Chris and the Academy specialize in identifying high probability trade setups in the fast-paced e-mini S&P futures market. Today Chris is going to share with us his key components in a winning trading strategy.

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Over the past 8 years, my team and I have been able to test over 200 different trading strategies and systems in the e-mini, currency, and equity markets.  We've used and abused everything from standard indicators, to fully-automated trading systems.  As a result, we found 6 key components that would repeat themselves in most of the winning strategies.
Continue reading "6 Key Components of Winning Trading Strategies" →

Inflation/Deflation Uncertainty

Posted on by The INO.com Team

Our government continues to CRUSH the value of the dollar so I asked Adam Katz from PlusEV.ca to break down the current situation. I've read the article and it provides a great view of what's going on, how we got here, and the nuts and blots (his words not mine). So please enjoy the article and COMMENT as Adam Katz and I are looking forward to your thoughts!

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I have received many emails over the past few months proclaiming that inflation is an obvious result of the current government intervention and that the dollar's days are numbered. As a nuts and bolts kinda guy, I like to step back and analyze the situation from point A to B, instead of staring at fancy charts which can usually be used to prove just about anything.

Before I get into the discussion, let me say that the focus of this article is timing more so than theory. To argue that we will never see inflation after the tricks central bankers have been pulling would simply make no sense. Yet, I was surprised last year to see some really good traders position themselves for an inflation trade in the middle of serious disinflation. After all, what the Fed was doing MUST have been inflationary! Right?

Firstly, what are the ingredients for credit expansion?

1)    Central banks expanding the money supply
2)    Banks lending that money out
3)    Credit worthy borrowers

Now we all know that we can place a big fat check mark next to (1), but what about the other ingredients? Putting money into the banks is easy; getting it into circulation is hard in a ‘fairly’ transparent system. Consider for a moment Zimbabwe, a country that has suffered unimaginable inflation. Do you think Robert Mugabe is subtle about expanding the money supply? He has the luxury of simply handing out money to his cronies and directly flooding the money supply. In countries like the U.S., such actions would be very difficult. China on the other hand can simply make large loans to government held businesses and thus expand the money supply.

The U.S. has been creative. For example, the AIG bailout after the Lehman collapse resulted in a transfer of government funds from AIG to large investment banks in the form of margin calls. When AIG’s credit rating was downgraded, they were forced to post margin with their counterparties. Yes this saved AIG, but it also saved those banks that were using AIG to hedge their risky trades with CDS contracts. The capital found its way into the banks, but never made it any further.

Now people are complaining. The stupid banks that made stupid loans have been bailed out. So why aren’t they lending? Why aren’t they making loans to borrowers who are not credit worthy? I hope my sarcasm wasn’t missed. To encourage banks to make bad loans is the most irresponsible thing that we can do. The point of the bailouts was to prevent financial collapse, not to continue the fundamentally flawed system.

Now we are seeing the economic follow through effects of both a credit and a housing bubble bursting. What is likely is that the credit worthiness of borrowers decreases and so will the banks willingness to make loans. Money won’t flood the markets – in the developed countries.
In the emerging markets, currency devaluation and sovereign defaults are alive and well. In fact, even Switzerland, the icon of monetary responsibility has engaged in devaluing their currency. If that’s not symbolic of the end of an era then I don’t know what is. My point is that the U.S. will continue to be a safe haven. As long as threats of further economic downside looms, the U.S. will continue to be perceived as the safest option – on a relative scale. Inflation will strike emerging markets long before it hits the U.S.

And when that happens, the U.S will be able to afford to allow their currency to weaken on an absolute basis because on a relative basis it will appear stronger than many of it’s peers. When risk appetite picks up, as it has done the past few days, the dollar will weaken. In the future, that pattern will coincide with the banks making more loans, and inflation will become a threat. However, that’s unlikely to happen any time soon, at least according to Meredith Whitney. She estimates that banks will cut $2.0 trillion of credit-card lines in 2009 and a total of $2.7 trillion will be cut by the end of 2010. That doesn’t bode well for inflation advocates, at least in the short term. This gives the Fed more than enough time to shrink the amount of funds that they have made available to banks and calls into question further asset price deflation over the coming 18 months.

I will leave you with the following basic economic concept: It is unexpected inflation, not expected inflation that causes havoc in the economy. With the current outlook of low or negative inflation for years to come, a sudden shift to high inflation would be devastating for the economy.

Adam Katz
www.PlusEV.ca

Why Bears Are Finding Such A Good Meal With The Dow

Posted on by The INO.com Team

With the Dow looking for new lows, I've asked Finance Fanatic of Crash Market Stocks to give us his take on the upcoming market. So read on and see why although future conditions may not be pleasant, the bears may make it out just fine.

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During the last couple of months, it seems as though the entire NYSE has become one giant day-trader’s gathering that we use to only see exist in the penny stock markets.  The new volatile Dow coupled with the addition of 2x, 3x, and even 4x leveraged ETFs, has helped gambling day-traders find a new place to hang out during the day.  A year ago, most would not consider companies like General Electric (GE), Bank of America (BAC), and Wells Fargo (WFC) as “day-trading” material.  However, today alone, they had a combined trading volume of 532.26 M.  Well, these are the times we are in today.

Although, currently, many people feel that it is pointless to try to value stocks “fundamentally”, I beg to differ.  As I look at the fundamentals, I see the market following them quite closely…Downward (See Below).

 

 

 

 

 

 

 

Sure, daily movements are volatile with the help of government intervention, but our down-trending correlation is right in line with the technicals of the market I have been looking at.  Here are just a few of the reasons I see a feast of bears for the coming months:

1) Housing market is still in the Pits

We should not be confident that anything is getting better as long as our housing market struggles. People underestimate just how important that number is. Housing values are the number one driver of consumer sentiment, because in most cases it is people's biggest investment. All across the county, most people's biggest "investment" (Their house) has lost anywhere from 20-60%, depending on the market. That takes a lot out of people’s expectations. Also, as we continue to be very sluggish in new home sales, we continue diluting the housing market with a mass surplus of available inventory.  At this rate, we could match the demand for housing without adding a single house for the next 10 years.  As long as our housing market remains in the gutter (which our most recent numbers have confirmed), I believe we are not done hurting.

2) Many retailers plan to go bankrupt this year

Think of hundreds of mini GM scenarios going across the country. Even though many of these retailers will not have the giant influences that the big 3 autos do, they still will do their damage. They have people that rely on their pension and laborers across the country. Also, it is easy to tell from recent months, without lending, many businesses in a capitalist market cannot survive.  For so long, most US retailers have been paying for their inventory with expensive debt, relying on strong and fast sales to pay off the inventory.  Well, with sales slowing the most we’ve seen in years (even with liquidating sales!), this debt piles up and retailers go under, like Mervyn’s. With the continuing loss of small and large businesses, I still see a significant downside risk.

3) Commercial real estate foreclosures

This could be one of the biggest factors. Look what the initial subprime crisis did to the market from 2007 to 2008. Well, commercial real estate is running about a year behind them. We have just begun to see foreclosures in the commercial market. These are going to pile up in 2009. The amount of debt that will be handed back to banks is unreal. Much of the commercial real estate that was purchased between 2003-2005, was done on 5-10 year, CMBS/Conduit loans that are very highly leveraged, with very low interest rates.  As these properties come up for refinance the next 3-4 years, I expect to see some serious foreclosures. In my opinion, it will be World War III when it happens, which makes me feel we're not at the bottom.

4) Government's Out of Bullets

After President Obama signed off on the latest stimulus, he fired off one of his last, long anticipated bullets that people hoped to have made a significant impact.  Unfortunately, the praise has not lasted as long as most had hoped.  With treasuries already oversold, the discount rate a 0%, two huge stimulus plans already passed, and a new “hope bearing” president now in office, I would like to think we’re almost out of ways to artificially ignite this market.  Sure, we may see some more “programs” announced, but I don’t see many silver bullets left.

With these and several other elements, I continue to be on my toes and very bearish in this market.  I have been finding much success in the inverse ETFs as well as put options on certain retailers and other companies.  Inflation is our next beast to tackle in my opinion.  Being in a bear market does not mean we are without hope of making money, we just have to be making the right moves.

-FINANCE FANATIC

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Crashmarketstocks.com is a site that focuses on macro-economic news and discusses new tips and strategies to help make money during a recession. Most entails different equity vehicles that are performing well in a bear market, but can feature any profitable vehicle.  Finance Fanatic is a specialist in the Real Estate market and has been engaged in equity markets for about 8 years now.  His degree is in Finance and Capital markets.

The Cheetah & The Trader

Posted on by The INO.com Team

Today we've asked Michael Bellafiore from SMB Training, to give us some advice for frustrated traders. Enjoy.

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I had an interesting conversation with a young trader from another firm today. This young trader pops into my office from time to time and talks trading. He is a very bright and competitive young man. And he is struggling. He killed it in October, but over the past two months he has dug himself a huge P&L hole. I have been hearing a lot of stories like this lately.

A trading friend of SMB Capital told us that one of the best ten traders we know gave back his whole year last month. While I was getting breakfast today a few nervous young traders from another firm stopped me to ask how our guys were doing lately. They relayed that many in their firm were "decidedly negative". I have heard that a few Tier I day trading firms recently restricted trader losses going forward. I was at an awesome holiday party recently, with incredible views of the NYC skyline, and one of the best traders on the Street was practically crying to me about how badly he has been trading.  I felt bad for the guy.  I spoke with two energy traders this week at the Reebok Club who offered that they were probably going to be fired.  The reason for their likely termination: failure to cease losing great amounts of money. I know that for SMB, last month presented a challenge to some of our traders.

Personally, I don’t have a bad month. I have traded through enough markets that I have developed a trading system for myself that allows me to profit no matter what the market. Last month I was positive. And, I will share what I said to that young trader who was worried about his future. You need more experience. You need to see some more markets. You need to make some adjustments. You need to go back to the basics.

One of our bright new traders, a graduate of the best undergraduate business school in the country, who has been struggling, made a list of plays that he will focus on this month. Great work here… But there were a few plays on his list that I didn’t even understand. They were technical plays that I did not use. And I will share what I told him. Trading is about finding weak stocks and getting short at levels that offer an excellent risk/reward. Trading is about finding strong stocks and getting long at levels that offer an excellent risk/reward. Do not make things so complicated.

Continue reading "The Cheetah and the Trader" HERE

Navigating the Q's

Posted on by The INO.com Team

Today I'd like to welcome Allan Harris from AllAllan.com. Over the past few months Allan's blog has become a daily reader for myself, along with many others in the office. His analysis and ability to read the markets is uncanny. Allan decided to do an experiment, on his own, following the Q's...I think you'll find the results VERY interesting. But be sure and visit Allan's website for more details.

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There is no greater feeling as a trader then the feeling you get having successfully navigated an options trade in the QQQQ. This is how I do it, using Market Club Triangles.

I consider Market Club triangles as serving to alert me to breakouts in the underlying tradable, a 3-day breakout for daily charts, a 3-week breakout on the weekly charts. I only use weekly charts because there are less whipsaws and signals generated on weekly charts also serve to confirm an intermediate term trend is in place. Market Club does a great job of monitoring my portfolio as well as market indexes, etf’s and individual stocks for these 3-week breakouts.

Here is a Market Club chart for the QQQQ with the weekly Triangles going back about one year. Notice that there are whipsaws, but more importantly, note how many tradable trends are caught using the automated triangles:

Below is my Excel worktable analyzing these signals. I stated with the Buy generated in September 2007 and finished with the Sell generated on September 2, 2008.

Note that there were a total of eight signals for this 12-month period, about one signal every six weeks. There were 5 net winners and 3 net losing signals.

A Buy & Hold strategy generated a loss of about 12 QQQQ points, or about 24%. A Sell & Hold strategy gained those 12 points, or 24%.

Using the Triangles returned about double the Sell & Hold strategy.

Using the Options made this whole exercise worthwhile, generating over 500% for those eight trades.

Winning 5 out of 8 trades is only a sampling error away from four out of eight wins, or a 50% win ratio. How does something so close to a 50% win/loss generate 500%?

This is an observation that a lot of wannabe traders miss: The magic here isn’t so much pinpoint market timing, it’s that age old trading rule of letting profits run and cutting losses combined with a decent market timing model.

In the case of the Q signals and returns, I’ve used a 50% stop loss rule, meaning all trades that fall 50% based on the underlying options are closed out. All trades that do not fall 50% are held until the next signal. That is why all of the losers are 50% (worst case basis) in the table of trades.

As for the winning trades, the returns above are based on a conservative assumption of losing one month of time premium for each trade and a beta of 60% for just-out-of-the-money calls and puts. Actual real money returns may be a little better or a little worse, but these assumptions capture a fair value for the strategy over the course of the past 12 months.

Finally, considering all of the angst in the market the past few months, look at how beautifully this strategy has bypassed all the fundamental and technical analysis out there and simply went short on September 2 and held short for the entire decline since then.

Consider the ease of trading like this, following the weekly triangles in and out of the Q’s and ask yourself, what other methodology would have navigated this market with as much success and as little sweat equity as the weekly Triangles?

Trading doesn’t have to be complicated, losing proposition. As I have shown, it can be both simple and rewarding.

Allan Harris

AllAllen.com