Trades for Monday 12/5/11

Last week was an interesting one, for the stock market and futures. Stock indices and currency futures had big days on Monday, baaed on strong black Friday sales, and again on Wednesday because of apparent central bank support on the global debt concern. For the start of this coming week, I am seeing several set ups that look like good short candidates. I have posted some charts below, but in the ES (and I am referring to futures in this post), Eurodollar, and Canadian dollar, I am seeing price action running into resistance.

The ES (S&P mini contract) and Canada dollar futures are both running into trendline resistance, and have sold off on Friday, so I am biased to more downward momentum on Monday. For the ES, a price break below Friday's low would trigger a short entry.

The Euro dollar had a Taylor short sell day on Friday, so a good entry might come from looking at an intraday chart. Support would be found at the downward sloping trendline. The Loonie has fallen below its trendline, so again, look at intra day charts for a possible entry on the short side. Sopport would be at the 20 day EMA.

Copper looks more bullish, with a possible buy signal above Wednesdays high of 3.6350.

Thanks for reading, and enjoy the weekend. I am still figuring out how to post the best looking charts- sorry for these.

More on risk

I wanted to expand the discussion on risk, to build on the definition from the last post, and get into levels of risk that are generally considered acceptable, as well as mention the concept of "portfolio heat".

As I mentioned in the last post, many investors and traders do not understand the concept of risk, and so, are not in a position to be able to accept that risk. Risk is the difference between purchase price and stop level, times the number of shares or contracts taken on. The investor that takes on a position in a stock, ETF, or mutual fund, and does not know the price that he will get out, has not defined the risk that has been taken on. In fact, they will not know how much they risked, unless the position reverses and goes so low that they cannot take it anymore. Pain has defined risk for them. Many investors learned this in past bear markets.

Most trading authorities agree that an acceptable level of risk/position is around 0.5% to 1.0% of total account value. In a fictitious $100,000 sized account, 1% would be $1000. So simply divide the difference between purchase price and stop level into $1000, and you get the number of shares or contracts (for futures) that you can purchase.

Portfolio Heat- this is the total amount of open risk on the account an any given time. assuming that you have multiple positions on, and have been moving your stops up to protect profits, calculate the risk per position, and sum the total risk over all positions compared to the account. Most agree that 5% portfolio heat is acceptable. That means that if all positions reverse, and get stopped out, that you only suffer a 5% drawdown in value.

Thanks for reading- I hope that this helps.

ETF's vs stocks

I wanted to share the approach that I take regarding stock investing, especially for the part time investor or trader. Many people want to know what stock to buy- what is hot, what is going up? Successful investors are more concerned with managing risk and following a decent trend, than chasing the hot momentum stock. In fact, I don't buy stocks any more- I trade ETF's (exchange traded funds). Why- is is simpler. Individual stocks have too many variables to pay attention to, if you are invested in any given stock, you need to know when an earnings announcement is due- it could affect the price significantly. So many things can change in a company that can have a hit on the stock. There are so many ETF's (check out profunds.com for a listing of some of the ones I trade), you can trade the indexes, metals, energies, etc. I'll get into that shortly.

Many people invest in an index fund, and are happy getting the basic market performance- this is easy to with ETF's. I'll use the S&P 500 as one example. The common ETF for that index is SPY. It is bought and sold just like a stock, and has none of the fund management fees that an index mutual fund has. It will also buy and sell when you place the order, not at the end of the day as a fund does. If you are looking for a more aggressive return, look into the leveraged ETF's- in the case of the S&P 500, look at BGU. It is a triple leveraged ETF- if the index moves 1%, BGU moves approximately 3%. It goes down as well as up, so be aware of the damage that leverage can do, if you do not manage risk.

To discuss risk a little, you have to understand and manage risk in any trade. Is risk what you spend on a stock? No. If you buy 100 shares of Apple (AAPL) at $320/share, you have spent $32,000 on that stock. Are you risking $32,000? Only if you are willing to stay in it until the price goes to zero. When you buy any stock or ETF, you have to know in advance when you will get out. At what price level will you decide that owning Apple is a bad ides, and sell it? If the answer to that question is "I don't know", then you should not be owning it at all, because you have no idea how much of that $32,000 you are really risking. On the other hand, if you bought AAPL at $320, and decide that if it drops to $300/share that you will get out of the trade, then you are risking $20/share, or $2000 of your money ($20/share, times your 100 shares). That is understanding risk per trade.

To wrap up for now, the other reason that I trade only ETF's is because I also trade commodity futures. I follow approx 10 markets, and don't have time each evening to also run an analysis on 20 or so stock charts. I can do that on 3-4 ETF's, and trade those.

More on risk to come......

Go Bears!