profit taking?!?

[nickola.pazderic]

I thought I'd put this out with the hope that both some heavy hitters and us normal folk can chime in.

During the last three robot sell signals, I've taken sizable day/overnight profits but held a slender position.

Today seems to have the color of "Black", as in "Black Monday."

I just got back from a miserable meeting and found my account value had risen substantially since the morning. I've followed my pattern and taken sizable profits while leaving some on the table to "run" as it were.

I'm also paying attention to lines in the sand like SPX 1102, noted by Tim Knight at Slope of Hope, and want to cover at least some at these natural rebound points.

But mostly, I recall the words of Billy that profits on the short side come fast. So, I've acted accordingly.

In any case, that's my story.

A double, no triple, hat tip to Pascal and Billy for the Robot.

I open the floor....Any other thoughts/experiences?

Many thanks,

[Riskslayer]

Hi Nickola,

I would say that I am an intermediate level trader; I have been working on technical analysis for about 4 years. I have a full-time position and trade in between calls and infrequent meetings.

Last week I made about 40 trades in/around IWM and most of its juiced ETF's (I didn't trade TVIX). I was directionally correct all week, but despite relying on the robots, $TICK, etc. and being up big end of day Wed (I held overnight), the gap-up on Th morning was very hard to hold through and I had to dump 2/3rds of my positions near the open's second bounce, getting stopped out by $0.02.. then I took more profits shortly after the Fri morning gap down.. at this point I was holding about 1/3rd of my Wed night profits. The rest of Fri morning to mid-afternoon, I tried to jump on 4-5 intraday downtrends in IWM with TZA because I knew the market was looking weak, but I got stopped out each time. To my surprise, IWM closed below YS1 (64.40), so I shorted 100 shares of IWM at 3:59:40 PM ET Fri.

Anyway, I spent a ton of emotional energy last week and only retained about 10% of my Wed gains by Fri's close.

Over the weekend I read Peter Brandt's "Diary of a Professional Commodity Trader" and did some soul searching. Brandt's is a +40% discretionary, chart-based trader with over a +20 year career, and his emotional challenges are his biggest.

If there is going to be a significant bear move in the coming months (as I am biased to believe), market conditions are going to be *extremely* volatile and the snap-back rallies vicious and scary. It is going to be extremely difficult to time and emotionally difficult, if not impossible, for me to trade effectively (see my results from last week, as an example).

Brandt's book describes 4 components to trading: 1) trade identification and entry, 2) trade management and exiting trades, 3) risk management, what % of my capital do I put into this trade, and 4) emotions (fear, second-guessing, greed, self-doubt, etc). The Robots are back-tested, proven through fall 2008, and take care of 1 & 2 better and more reliably than I can. Risk management - I am using Kelly's criteria and for the IWM robot's win rate = 58% and 3:1 odds, this formula suggests that a trade should be 45% of one's capital account for optimized returns (I am worried that maybe the robots will not trade to these stats over time, so I am looking at going with conservative assumptions and trading 10% of my capital for now and perhaps pyramiding into positions each day the robot triggers). Last week exposed my biggest weakness, i.e. the need to work in the emotional area (fear, greed, etc.).

This is a long way of saying that if this market is going to go into a serious bear mode, I am sticking to the IWM Robot as best I can, and focusing mostly on controlling my emotions (which to me means mostly not letting the bad stuff in by staying away from the intraday charts, CNBC, etc.) and using stats to build confidence so I can increase my position size to Kelly levels.

Anyway, that's what I think about when I wonder about jumping the Robots on profit-taking.

Shawn

PS: My gains today are about twice what they were all of last week and the stress infinitely less.

[grems8544]

Nickola et al.,

As i've said in our discussions over Skype "nobody is ever faulted for taking profits, but we certainly are faulted for not taking profits." I truly believe that profits are controlled by money management and position sizing, and taking profits in a volatile market near the close is as good as it gets to a perfect day.

I had the new entry threshholds for both Robots set today and as most here will know, our threshholds were met, resulting in multiple positions for me in -IWM, +RWM, +GDX, +NUGT, and +TZA. I had small +GDX and +NUGT positions on over the weekend, so was glad to have an "easy" opportunity (e.g., without much thought) to enter. I finished the session leaving all the unleveraged and the leveraged +NUGT positions on, but once again, I took all but 100-sh lots of TZA off the table and put them in the bank just before the close. These gains are protected and will help drive my metrics upward.

Last week was much of the same, capturing account value at the end of the day and taking minimal headline risk over night. With volatility so high right now, I feel it prudent to lower exposure in the overnight hours.

Psychologically, it's getting hard to see NUGT swing so much -- I now am feeling quite exposed in multiple accounts -- but I have several metrics aside from the Robot telling me that shorting DUST/long NUGT is exactly where to be. This is the continual battle that I wage -- while I trust the Robots, I also trust my own systems, and at the end of the day statistics do not lie, so I must swallow deeply and go with eyes wide open into increasing position size at a better price (e.g. Connor's TPS trades).

One thing giving me confidence is that I've been working on in-sample/out-sample testing using the $TICK cumulator functions and setups to enter TZA/TNA, with good results. Some of the most recent buys in testing those strategies have been during last week, so holding onto positions that backtest well takes some of the anxiety out of the equation.

Another important concept that I try to employ is that as ATR(20) goes up, position size goes down. This way all positions in the portfolio provide the same risk. The "Turtles" practiced/lived by this rule, and other authors (e.g. Conway/Behle) also use variants on that theme. Knowing that I'm not "over exposed" helps me to keep perspective and anxiety lower.

I don't think that this signal will last all week. I haven't run the GGT database numbers for today's market but the selloff today has to put us further into oversold territory, approaching August's strength and LCR values. I know that we already had broken through the price index floor of August as we went into today, so I'll need to review where the next floor is. I'm anxiously awaiting Billy's pivot level commentary for the SPY as well as Bob's ES charts to see what we're up against in terms of support vs. resistance ... THIS will drive my anxiety over the next few days.

My strategy this week will be to carry the unleveraged positions over night, all which have gains. These positions provide account buffer the next day to enter into leveraged positions (it's far easier watching the account go from a large positive value to a less positive value due to a leveraged trade moving against me than it is to watch the account go negative). I intend to take the majority of the leveraged positions off the table the next day at the end of the day, whether up or not. I also intend to close out any position that looks like it could do major damage to my overall numbers if it starts getting out of control.

Hope that this helps!

Regards,

pgd

[nickola.pazderic]

Several strands of thought came together for me, and I realized that anxiety was really unecessary with the robot. No matter what I do, I'll never trade better than it. This realization preceded the recent "strong short" and "short" signals. I'm no longer anxious about profits either. I simply need to remind myself that beautiful numbers don't last forever, and I might as well break them down and take some off to secure some gains. (Paul prodded me out of my seductive slumber).

Taking profit seems to be more art than science-- at least to me who must appear to all as something of a romantic and less quantifiably inclined. Art or science, Nicolas Darvas replied to the old saw, "You cannot go broke taking a profit" with the matter-of-fact reply: "of course you can (p. 30)." A few small profits can be swallowed by a big loss or two. So, for him, it remained crucial to let his winners run so far as possible. But he was not selling a bear market. This is the predicament we face.

[grems8544]

So, for [Darvas], it remained crucial to let his winners run so far as possible. But he was not selling a bear market.

As a self-proclaimed student of Darvas, he may have very well been buying/selling into any type of market -- he simply didn't care.

What is most important about his strategies (in my opinion) is that you place your stop losses without wavering. His success was attributed (in part) to raising those stops as profits were attained. He didn't care about the instrument -- had he the ability to trade TZA he would have in a down market, as it clearly has departed a weekly box from the upper right corner at 57.90, a daily box at 54.93, as well as smaller-interval boxes. His time frame was on the daily close, so emulation at least on this time frame could be a worthwhile goal (and many, including myself, attempt this on an ongoing basis).

The primary concept behind Darvas' methodology is to catch a new breakout in a trend. A trend. We haven't had many long ones on a daily basis as of late, but in terms of swing trading on a 15m/30m/60m bar basis we have been able to capture these trends in the present climate. Darvas didn't have access to intraday quotes while on the road, but since we do, and since his methodology is not limited to time frames, we certainly can (and do) play the intra-day game.

Darvas had a beautiful sophistication in his methodology that I think stemmed from his right-brain dominance. Myself, as a trained engineer and scientist, lack this ability to abstract risk away such as he did (recall that he would often place a single (large) order and simply let it ride), and hence, I find it difficult to grasp (psychologically) his methodology with my complete portfolio and simply "do as he would have".

We must all define and walk down our own paths -- I'm only trying to do so following the broken branches and trodden ground of those before me.

Futures are down another -1% as I write... it's going to be an interesting day on the short side ...

Regards,

pgd

[ericoleman]

Thought I might chime in here, too.

I actively follow the Robot commentary and use Billy's daily posts as input for some discretionary trading decisions. But I was here long before the Robot so am much more familiar with the standard 20-Day MF Signals and tracking the sectors on the EV site. Employee trading policy is such that I have to hold positions for at least one day after purchase. Consequently, I am looking for moves that have at least a few days to move in the direction that I am positioned, at minimum.

One tool I use for determining when to sell a position is the Active Boundaries tool. First, I never "expect" that the Upper Boundary will be reached, but use that level to get an idea of where price might gravitate following a buy signal on both the 20 day and sector level. If you participate in the early thrust, then depending on the type of stocks one is trading, catching the initial 5-10% allows some time to let the position move in one's favor. Then one can proactively use the EV tools to determine opportune exits. This is simply a way of using the tools each evening for a determination of whether one's position is a hold or sell.

Pascal's comment of the day put me in "preparation mode" this morning, as I knew the day had potential to evolve into a "cover" type of situation. As the OB/OS oscillator moved into a territory where holding one's short positions became less favorable, I simply covered by midday and sold my puts, too. I didn't catch the whole move or cover at the low, but I got a pretty good chunk over a 6 day period. Nimble day traders are able to use the 20 day MF for intraday positions; however, my preference is to try and participate in the "thrust" of a move, whether positive or negative. Every so often, the stars align and the thrust can produce significant gains rather quickly. One can use the EV tools to determine when the thrust is waning and close out their position accordingly.

For a swing type position, I might suggest tracking the sectors and their respective components. As soon as a sell signal occurs, then increase your situational awareness. For example, look at the most recent short signal for the Fertilizers. That was a time to get short, and one could cover upon a "cover your shorts" signal, a buy signal, or a sector buy signal. Either way, catching the bulk of the move gives some flexibility and relieves the stress of intraday trading. I am really fond of becoming familiar with the components of some the sectors I track,too.

Besides this, short side profits come very fast, and they can seem easy. But the market will rip your face off if you hang around too long hoping. I also think the old adage of asking oneself if you would buy/short at the current levels can be useful feedback.

Best,
Eric

[nickola.pazderic]

Eric,

Your approach is excellent and very helpful. I will pursue it.

Also, I remain deeply indebted to Pascal for sending out a signal that allowed me to "reconsider" the potentials of my short positions in real time.

Best,