Trading Rules

Due to an overwhelming request for my trading rules, I figured I would just post them up here for an easy to reference spot.

1)       Never short a dull market.

  • Historically, the biggest bull runs in the market have been on exceptionally low volume.  If the market has had low volume, don’t short.

 

2)       Risk is more important than reward.

  • Never enter a trade without understanding the risk.  See pic below.  Need I say more?

risk

3)       Trading is a Marathon, not a race.

  • How do you eat an elephant?  One bite at a time.  Big accounts are grown very slowly.  Consistent small gains allow you to increase your portfolio at a healthy rate.
  • Trying to hit home runs results in a bunch of strike outs.  However, getting on base 10 times in a row will score you a run, eventually and consistently.  Less stress.

 

4)       Never trade with your emotions.  Use a system and follow your rules.

  • Trading with your emotions leads to failure because you fail to establish stop loss points and you start throwing bad money at good money.
  • In fact, technical signals are what we use to capitalize on emotions of other traders.  If you fall victim to the trap yourself then others who are better at following technical signals are profiting from your emotional stupidity.

 

5)       You missed the entry, your order didn’t fill.  MOVE ON.

  • Don’t try to chase the stock or worse, watch the stock while it explodes in front of you when you knew the entry was perfect but your order just didn’t get filled.   This type of action just plays with your emotions.  Remember emotional turmoil is what leads to bad trades.  Rule #4.
  • When trading options it’s extremely important to utilize limit order fills.  The spread is exactly what you are trying to take advantage of.  Hitting a market order on options immediately results in a loss.

 

6)       VOLUME always precedes price.

  • Volume is the second most important indicator to watch in the market.  #1 is “price” for the obvious reasons.  But volume helps predict an upcoming move.  Stocks do not rise in price unless demand exceeds supply.  Vice Versa, Stocks do not fall in price unless supply exceeds demand.  Volume is a direct measurement of supply and demand.  Indirectly, the direction of the price with volume, a trader can predict whether the volume is an increase in supply or an increase in demand.
  • When trading, try to take positions where volume is above average.  I prefer to target 50% above average volume.

 

7)       NEVER average down a position or add to losing positions!

  • In my trading career of 10 years I have done this countless times.  Oh man, this stock is even cheaper… It can’t go any lower.  Buy some more…..as the stock continues to cascade against you.  If you have a bad entry you take your spanking like you deserve with your stop loss order.
  • Many historical examples of losers becoming even bigger losers exist.  Dip buying 7 of 10 times results in a loss.  I have kept a journal for two years.  76% of my bad trades came from trying to buy into weakness.

 

8)       If you do not have a stop loss, do not take the trade.

  • Plain and simple.  This rule is in place to preserve existing capital.  There will always be losers and winners.  The key is to keep the losers very small.

 

9)       No setup = No Trade

  • Simple.  You are following rules to a system.  Why else would you create these rules?

 

10)   Trade a system that you know and that is successful for YOU!

  • Flipping back and forth from catalyst plays, earnings, day trading, options gambles etc. will only cause you more and more headaches.  Trade a system that works for YOU.  Every trader has a different strategy.  Eliminate the noise of other traders and stick to what you know best.

 

11)   Make sure you are held accountable for your trades.

  • Holding yourself accountable is extremely important for successful trading.  Ignoring your mistakes is not holding oneself accountable.  It’s like playing golf by yourself, if you continue to take mulligans off the tee box your score card doesn’t reflect the actual game play.
  • Many traders ignore their losses.  They are painful and don’t want to be remembered.  Which in reality; is opposite thinking.  Remember Rule #2?  Risk is more important than reward.  You need to understand how to eliminate risk entirely.  By learning from your losses you can develop a strategy that will hold you accountable for losing trades.
  • To hold myself accountable, I provide a list of profit and loss to my wife every month.  She scans through the account for the losers.  If she sees a big one, she asks what I did.  Most times, it’s pretty obvious. I usually broke one of the above rules.

 

12)   MENTAL capital trumps real capital.

  • Capital has two forms.  Mental and Real.  Trading when our mental capital is diminished leads to more and more errors.  Increased position sizes to make money back, ignoring risk, averaging down, chasing news.  All results of mental capital problems.
  • Build a system that keeps your mental capital preserved.  If you can’t handle big losses, take small position sizes.  If you get fearful when you miss the boat because a stock just took off, then take that stock off your watchlist.  You need to trade systematically.  There is always another trade out there with better risk to reward.

New 5K position $NEPT

NEPT_OI

Today there was some very unusual options activity on $NEPT.  9500 FEB $4 calls were purchased.  We will have to wait and see tomorrow if the Open Interest goes down or up based on that transaction.  However, there is an upcoming catalyst for $ACST.  $ACST is a spin off company from $NEPT.  $NEPT owns 50% of $ACST and they are in the business of Krill Oil Omega-3.  With AMRN recent blunder ACST might have the edge here.  Nevertheless, it’s possible that ACST might be releasing data before the FEB expiration.

ACST had guided they expect to release Phase 2 results 1H 2014.  In addition, there is a rumor that they are expecting to reopen a plant that had an explosion November 8 2012.  With these two pending news items and unusual option activity I took the chance and bought 60 $2.50 FEB calls in the money at $1.05.    I’m targeting a $4.00 price break where I will close out the trade.  If the news doesn’t come or the action looks weak I will close out the trade.  Additionally, if the open interest in the $4 FEB calls decreases tomorrow I might just close out the position for a flat trade or maybe a small profit.

Outlay = 60 x $1.05 x 100 = $6300 + commissions

NEPT does have a few good things going for it though,  upcoming catalysts and the chart looks great for a breakout.

nept

5K_01-23

Account balance $10,428.55 (+109%)

5K Update 21 JAN 14 (+89%)

Just an update in the 5K challenge.  I closed out a short position in GALE today for a total of +$1394 gains.  I covered the 1K short shares at $5.65 which was quite good (pat myself on the back).  In the process I was trying to write puts to give myself a free trade into OPEX.  In the process, I wrote the wrong strike and I got upset and just closed the trade.  I was intending to write the $5 Feb PUTS and ended up clicking the $5.50 PUTS.  The stock was in a flash crash and I was rushing to get the order in place.   I was so upset with myself that on the bounce I just closed out the PUT spread for a +$79 profit.  Emotional trade, I know.  It happens occasionally.  Need to be more like a robot.

gale

5K_01-21

 

My next trade idea will be coming soon.  The bio market is red hot and I am trying to sit on my hands this week.  Let the trades develop and not rush into any new ones.  I see tons of overbought stocks.  I would like to short them but some still have great momentum carrying them.  The setup has to be there.

Account value stands at $9452.43 (+$4452.43 +89% ROI)

1/20/14 Update

Took a pretty big hit on AMRN Jan $2 calls last week.  I, along with many AMRN folks, did not see the double delay. My 5k game plan was simple; load up on AMRN Jan 2 calls knowing I will either lose premium if negative outcome OR have a multiplier if positive outcome. I am still bullish on AMRN spa. The FDA would have issued a CRL at this point. Anyways, there are so many blogs on the AMRN debacle so I’ll save my breath. I sold the calls for more than 50% loss.

Net loss of $2000 on the AMRN play.

Total Account after AMRN: $3200

My next play is a non-biotech, PLUG. I have purchased 150 Feb $6 calls for .10 ($1500 outlay). The chart looks hot and the retail hopium is off the charts. I am looking at a price target for sell trigger of 4.75-5.25

plug

I will be watching closely so as to preserve value and not let Theta degrade this play. If it doesn’t move this week, I will exit.

5k

 

ARIA momentum trade

Tried a trade today in ARIA and this just faded quick right after entry.  Very disappointing.  I cut the trade as quickly as I could.  The momentum and volume looked like it was there and then all of a sudden nobody was bidding up the stock and I just took the loss.

Here is what I was seeing in the trade.   Broke through that 6.75 level and I bought ITM $5.50 calls at $1.29.  Chased it a hair because the volume was there.  I bought right on the exact break of that trendline.  It continued higher and I was green in the options and then 4 candles later…. WOOSH a massive sell came in on the stock and killed the momentum.  At that point it was damage control and I exited as quickly as I could.

aria

aria

-$367 loss.

 

Account balance today stands at $8085.20 (+$3085.20 +61.7% ROI)

5K_01-16

GALE Short Entry

Entered GALE short with 40 $7 APR PUTS at $1.75 on ridiculous market cap evaluation.  $800M Market cap for a company that currently sells one product called Abstral that brought in a whopping $1.3M in revenue for the Quarter ending Sept 30, 2013.  The company has approximately $55M in cash and equivalents and expects to have funding through 2015.

So, Neuvax is currently in Phase 3 trials and is not expected to be complete with patient enrollment until 2017.  By comparable standards, most cancer drug companies trade at market caps of $200-$300M for a one cancer drug company.  So, the market is pricing ABSTRAL at $500M?  Are you serious?

Continual price upgrade after price upgrade by Roth.  Maxim Upgraded GALE as well.  This is just beginning to look like an epic pump and dump in my opinion.  Needless to say, from a technical standpoint the price was WAY overbought and I shorted the open with puts when it failed to bounce off yesterdays high.  It broke down immediately and the selling was coming in pretty good.  I covered half the next day to reduce exposure primarily because the short interest is too high and the risk of squeeze is definitely in the back of my mind.

gale

Today, Jan 16, Jim Cramer announced that he’s having the CEO of GALE on Mad Money.  That new alone sent retail longs into a panic frenzy of buying the stock back.  I exited the second half flat.

gale

Trade has been closed.  +$471 profit

 

 

ACHN trade exit (Update)

This morning Achillion updated investors with the status of the company.

Article here

http://finance.yahoo.com/news/achillion-reports-hcv-pipeline-progress-112500226.html

I was very interested in the Sovaprevir clinical hold status.  Was hoping the company would guide that we would see that hold lifted much sooner.  They guided 1H 2014 and also stated they have plenty of cash on hand.

Dr. Milind Deshpande, President and Chief Executive Officer of Achillion stated, “With our 2013 year-end cash balance projected to exceed $150 million, we believe we have sufficient capital to fund our operations into 2016 and achieve a number of value-creating milestones throughout this year with our HCV assets.”

However, the goal of this trade was to anticipate the news and make fast bucks for the $5K challenge.  $100K from $5K within a year is not easy so I have to act fast.  The Sovaprevir hold is just not going to be soon enough for me in this trade.  Although they are still in a very strong position fundamentally I exited the trade.

In addition, I was watching action at the open and there were very little buyers in the stock and it was meeting short term resistance as seen in the chart below.  In order for me to keep with this trade it had to go through $4 today and it did not.

achn_exit

Therefore, I closed the position for +$1908 profits and 34.7% gain.

Closing balance of $7982.44 (+59.6% ROI)

achn_profit

5K_01-13

Only 1152% more to go!

Happy trading.

Update End of Week 10 JAN 14

Crazy week in the biotech stocks.  Started off the week with a terrible downgrade on $CELG by Goldman Sachs that was really unwarranted.  This set the tone for the biotech market early.  But this made for some great bounce trades mid week and into Friday.

Some interesting things happened this week.  $CHTP AdCom panel briefing documents were released and after review I actually feel like they aren’t that harsh.  Management has a history of defending Northera well so I expect a 60-70% chance of a positive outcome from the panel.  However, the stock was slaughtered.  Down 29% on the day.

CHTP

 

Secondly, $MNKD had some very crazy action.  The stock was up through $7 Thursday on zero news only to be surprised by the FDA requesting and AdCom panel.  Wow!  This news couldn’t be any worse for longs.  AdCom panels have a history of being very harsh and could throw a wrench in the plans of approval on April of this year (PDUFA).  The surprise AdCom panel is concerning because Al Mann stated in conference calls that he did not expect one.  Additionally, this AdCom data of April 1st will likely delay the PDUFA decision and likely a higher chance of dilution by the company to raise funds.  All negatives for MNKD.  That being said, I’ll be looking forward to seeing the Afrezza data without PR fluff from the company.  This has been a very interesting story and I remain skeptical.  Rajalonghorn remains bullish and I hope he’s right because the public needs this therapy and it would be an awesome trade if approved.  Upon news of the panel MNKD shares closed down 16%.

mnkd

 

Some other interesting plays came into the watchlist this week.  $ONTY, $RMTI, $AMRN, $ARIA, $GALE, and $RNN (Wow).  We’ll be watching these stocks for continuation throughout next week.

Lastly I am still holding $ACHN calls in my 5K challenge account and will intend to hold through $4 move.

EOW_rick