Trading RM, LLC.

The U.S. Dollar carry trade continues on as the equity markets continue to sell when the Dollar strengthens and are bought on a weaker Dollar. During last few trading sessions we have seen the Dollar gain strength and on increasing volume as the Dollar bears scramble to cover their shorts in what is now a very crowded trade and have to unwind their equity positions. The equity markets have also come into some strong trend lines that will act as support levels as the Dollar approaches resistance levels. The equity markets have seen increasing volume as there is finally institutional involvement with the markets and the Dollar may be seeing signs of capitulation.

Today Trading RM was visited by Jeff Quinto. Jeff is a 37 year veteran of the markets. His experience includes the Kansas City Board of Trade, Chicago Board of Trade, running an electronic futures trading prop firm, and serving as a personal trading coach to many traders. In addition to coaching traders, Jeff also teaches a course at Northwestern University school of continuing education: Introduction to Electronic Trading, does a monthly video at Option News Network, and has frequent podcasts available on itunes. Jeff also has some great videos available on his website or on the website of the CME Group. I highly recommend these videos. Please visit Jeff's website for more detailed information.

Jeff broke his talk to us into two parts.

Breaking up the day

Jeff talked to us about breaking up the trading day. He divides the trading day into 5 "quintos." Jeff likes to use open, morning, lunch, afternoon, and close. The exact number of parts to the day or their exact specific time is not important. What is important is recognizing that there are different areas of the day where the market behaves differently. This is because the various market participants behave differently. What does a fund manager do at lunch? What does he do at the open? What are day traders doing at the close? What are market makers doing in the afternoon? Accordingly, we, as day traders, must adjust our trading during these parts of the day.

Despite the world being a 24 hour trading environment, the market seems to revolve around U.S. equity hours. What happens is we see a flood of liquidity during the open period. The morning is characterized by liquidity and fluidity. During lunch volume dies down. Into the close we often see big players closing, not entering positions. None of the above is true 100% of the time. But over the long run this is more or less what happens.

As traders (short term traders) we must recognize these scenarios and adapt. Every trader and every product is different. Certain time periods may call for less size, more size, not trading at all, being more aggressive, bidding vs. paying up, etc...

Pre and post market work

The main theme is a trader who follows a mediocre plan is ahead of both a trader who has a great plan but does not follow it and a trader with no plan at all. Not many successful traders can come in at the opening bell and leave at the close without thinking about their market before and after.

Another theme Jeff brought up is "man plans and God laughs." In other words, sometimes plans and goals do not always turn out perfectly. But the key theme is that no plan at all is a recipe for disaster. A great plan is never perfect, but it puts a trader far ahead of the game. As far as goals, for every level trader the key is to have attainable goals. Jeff used the example of a tennis player. It is one thing to say "I am going to start playing tennis" and buy a racket and go hit a few balls. Yet it is unrealistic for this beginner to expect to be a pro immediately. A goal to be a tennis pro is probably unattainable (at least in short term). More realistic goals include: getting 70% of my serves in, practicing three times a week, etc...

Likewise traders need to have attainable goals. For a beginner trader it may be "make $1.00." Or learn 20 new stock symbols and charts. A more advanced trader should have more advanced goals. But they should still be attainable.

Thanks to Jeff Quinto for his time.

Has the vice started tightening on the UUP shorts? Granted the move today was not huge, the UUP bid most of the day with daily volume being 4,060,000 higher than average of around 1.8 mil. The clear inverse relationship between the UUP and S&P500 is demonstrated by the chart to the left. You see as the UUP(blue) traded up, as equities(red) came under pressure. If you take volume into consideration, you can argue UUP moved FIRST then equities moved inversely. I personally did not watch trading close enough to see this anomaly, but one thing is true, if one moves the other moves opposite.


Over time the relationship can become inverted on a daily chart, I.E. fall of 08' when traders flocked to the dollar as the "safe trade". This trade moves like this because the dollar is clearly front and center in traders minds and they know the USD rules the roost. Traders who are in these markets every day are tired of the same grind and are looking for volatility to show its head again, not because traders want the market to fall, they want the market to come to it senses. The USD is clearly the catalyst which can snap this market back into reality.

A couple guys in the room traded ISRG to the short side today. Here is what we saw and why it was a good trade regardless of if it paid or not.

• It is a stock that can move a high dollar amount


• Around our entry short at 8:45-9:00am cst we had a move up in the overall market but ISRG was still extremely weak (divergence)


• Shorting names on their lows had not paid me, I was ready to short this on a bounce. My morning game plan, sitting on my desk, has this specifically written out. Shorting lows has not paid for most of 2009.


• Even though ISRG bounced $6-7 off the open it was still down $13 on the day. We got to fade a huge bounce and at the same time get with an intraday trend.


• This was a post earnings play and the gap down broke a long term uptrend in the name. News and a break of a long term trend.

Check out the below chart of ISRG (in green) against the SPY (in red). The arrow is our approximate entry. With a name as volatile as ISRG I did not expect it to move in a straight line. Immediately off the open I was offering stock higher and bidding puts lower.

When trading a name like ISRG and fading the bounce (but staying with the days trend), it is key for me to do less size. I scaled in. I almost hope my first short entry gets run over so I get filled at better prices. At the same time, if my first entry is hit and the stock rolls over I can add as it works.

Trading RM's Shae Peppler was recently interviewed by Brian Dryfhout about her gig on the "Chicago Huddle." The full interview can be found here.

"BD: With your experience working at Trading RM, LLC who's had the worst year - the stock market or the Chicago Cubs?

SP: I did a promotional shoot for Trading RM a couple months ago. One of my guy friends from Indiana works for them. If I had to take a stab at this I would say the stock market. The Cubbies had some issues but nothing that can't be fixed. (I tell myself this every year but that is OK.) We have a lot more in front of us when it comes to the economy and the stock market."



Check out Shae's video about Trading RM here and her video about Trading RM Realtime here.

The agriculture stocks have been on the move as traders continue to play on the weakening dollar and strength in the equity markets. With the dollar making lows and equity markets pushing new highs the agriculture sector has been strengthening over the last several trading sessions with increased volume.

IPI

POT

We have been talking a lot recently about goals (daily, weekly, monthly and yearly). Why do we need goals and what are "good" goals to have.

1) Why we need them: someone said "no one plans to fail, they only fail to plan." I suspect very few traders (hopefully none) plan to have bad trading days/weeks. But how many traders do not plan their day or week? Too many. So if we do not plan to fail, why do we fail to plan?

Dr. Brett Steenbarger writes that having a desire to succeed is not sufficient to succeed. You have to do the work. Does a trader say he has a passion for the business or does he show it? Likewise it is important to be consistent in goal setting. It is not enough to have goals for Monday and Tuesday but not the rest of the week. Likewise it is not enough to have goals for one week but not set any for the next weeks. Lastly Dr. Brett has also touched on the importance of daily goals:

Dr. Brett says "Setting a goal each day creates learning loops that improve you significantly over time. Setting daily goals also keeps your head in the game, reinforcing your positive learning even during days and weeks where you're not making money." I underlined "where you're not making money." This is important for me - to be proactive and positive during times of draw downs.

Every one's favorite college football coach/analyst, Lou Holtz, has no shortage of thoughts on goals (or thoughts in general). I think many of his thoughts carry over to trading. Two great Lou quotes on goals: "If you're bored with life - you don't get up every morning with a burning desire to do things - you don't have enough goals" and “I’m a firm believer in goals. Take a good look at me. You’ll notice I stand five feet ten, weigh 152 pounds, wear glasses, speak with a lisp, have a physique that appears like I’ve been afflicted with beriberi or scurvy most of my life. The only reasons why I can stand up as head football coach at the University of Notre Dame are: I have a great wife and I am very goal oriented.” My takeaway: if you get up every morning and say to yourself that trading sucks or trading is slow then you do not have enough goals. If you have no goals you will have no success.

Many people have heard of Lou Holtz's "bucket list." Here is a brief back story of his list of life goals in his own words:




My takeaway: "be a participant, don't be a spectator. Do I come in every day and watch the market I am trading or am I engaged in it? Can I be engaged in it without having daily and weekly goals?

Lastly here is Lou Holtz on quick fixes:

"We have instant coffee, instant tea and instant restaurants. Everybody looks for a quick fix. There isn't any. You build it day by day. You don't panic. You don't overreact. You don't change your principles. If you preach the same thing over a period of time, and it doesn't change, one of two things is going to happen. They are going to believe in you or they are going to leave." My takeaway: I think this one is obvious. There is no instant fix to get out of a trading slump or a tough market. Keep working and keep working harder.

2) What are "good" goals to have:

Every trader has the same generic goals: "be green, have a high winning percentage, keep losses minimal, be green x number of days, etc..." The struggle for me is to dig deeper. I need better goals to become a better trader.

Dr. Brett has a great post on turning set backs into goals. We all have set backs, losses, fat fingers, and mental lapses. How can I turn these into opportunities and goals for tomorrow?

Previously I wrote about being process focused. This is an obvious one when it comes to goal setting. Do I set PnL goals? Or do I also set lower level, action orientated goals? For example: "this week I am going to track these two new indicators to see if they help with my timing. I am also going to cut my losses x% sooner until I have winners that are x% larger than recently. In the most recent two weeks my stats show my losers are getting slightly larger while my winners get slight smaller. " These are more specific than saying I am going to make $500 a day.

As mentioned above, Dr. Brett also writes about being consistent and overcoming procrastination. I think good goals are consistently set. Whatever your time frame is, set your goals every time. (daily, weekly, etc...)

Lou says: "The man who complains about the way the ball bounces is likely the one who dropped it." Do not drop the ball, set some goals.

I love sports and trading analogies. An article has been going around our office (and other trading offices) from Golf Digest written by Michael Jordan with Craig Bestrom. It details Michael Jordan's 10 rules for maximizing your competitiveness. Michael Jordan is specifically talking about his golf game. But the lessons cross over to basketball and trading.



Some highlights from the article:

• ''If you have 100 percent confidence that you can pull off a shot, most of the time you will.'' -- Michael Jordan My takeaways: Not many traders who do not believe in themselves will succeed.

• "Focus on the little things. During my basketball career, I always told myself to focus on the little things because little things added up to big things. I equate making putts with making free throws, and my biggest mental challenge shooting free throws was in my second year, 1986, when I came back from a foot injury for the playoffs and had a 63-point game against Boston in the Garden. I had to make two free throws to send the game into overtime, and all I focused on was the basics -- I'm not gonna be short. I'm gonna extend and reach for the rim -- all the fundamentals that I had worked on at home and at practice for all those years. Golf is no different. Don't assume, for example, that any putt is good. Make sure you putt every three-footer with conviction.
  And keep score every time you play. I do. " My takeaways: focus on one trade at a time. Keep score = keep track of your stats (win %, average winner, etc...).

• "Don't think about the prize; think about the work. At my basketball camps every year, I award the kids shoes if they make a certain number of free throws or if they complete an around-the-world or something like that. But I always tell them that if they're thinking about the prize, they should be thinking about the work. Prepare, practice and perfect it. Do the work, and the prizes will come." My takeaways: this one is obvious. Focusing on PnL and avoiding the day to day work is a recipe for disaster.

• "Keep it simple. There are a lot of correlations between basketball and golf, especially on the mental side. Whenever I played a big game, I tried to stick to things I knew I was capable of doing. I do the same in golf. I've seen Tiger hit that stinger, and I know it's doable for me, too, but it isn't a shot I've practiced much. Why would I try that in the heat of the moment?
  My instructor, Ed Ibarguen, has me focus on a specific target before every swing. One of my biggest problems is, sometimes when I see water right I try extra hard to stay away from it. And what happens? You end up going right in the water. That's because you're focusing on the wrong thing.
  Eddie tells me to pick a blade of grass on my line or a building in the distance and to blindfold myself to everything else. That's keeping it simple, and that works especially well in pressure situations." My takeaways: Focusing on the home run trade, what a big trader is doing, or complex setups are not great...especially if struggling. Focus on your best set up, a simple trade. What simple steps do you do to prepare for a trade, enter the trade, and exit the trade. Focus on the blade of grass in front of you, not the end of year PnL number.

Gold has once again made new highs this week with higher highs being made during the last two trading sessions. Tuesday the GLD opened right above a major resistance level of $100.50 and rallied $1 to just under the $102.50 level. Yesterday, the GLD was barely able to make a higher high and is currently trading higher in the overnight session.

As all of the trade reviews I have written to date have highlighted a winning trade, I wanted to discuss a losing trade in order to explain what our traders were seeing and how they reacted. The trade is Jabil Circuit (JBL) from last Wednesday’s open.

The very first question TradingRM traders ask themselves before entering a trade is: “Is this stock in play?” Before the open, JBL had posted better-than-expected earnings and gapped up roughly 6% from the previous day (see daily chart at left below-click to enlarge). The strong earnings and premarket move were a catalyst that told our traders that JBL was a possible long in play. When the market opened, that upward move was confirmed on solid volume. As shown in the 15 minute chart at right below, JBL was trading on extraordinary volume during the first 15 minutes compared to the previous day’s activity.

Another factor that our traders were considering was JBL’s relative position to the market. As shown in the 1 minute chart below (click to enlarge), JBL (green) started trending up, while the SPYs (red) started to fill the modest 4 handle premarket gap up. Approximately the time the relative positions converged, our traders decided that the earnings catalyst, confirmation on large volume, and the relative position to the market were all signs that JBL could be going higher. As shown by the TradingRM real-time blast, our traders started buying calls around 8:40 CST and continued to find pullbacks for entry over the next ten minutes.

During this time, the market formed a base and started moving sideways. JBL held strong and maintained a good relative position. However, volume began to dwindle, the stock started to chop, and implied volatility was sucked out of the option prices. As bids in the options fell, our traders managed risk and exited when loss targets were reached.

The lesson to emphasize is that not every trade can be a winner! In fact, even experienced traders have win rates of 40%-50% (trading on a similar time frame). The way to sustain long run profitability is to set good risk management parameters. By adhering to profit and loss targets, a trader can have an average win twice as big as his/her average loss. This rule-based approach is a big part of the TradingRM edge.

For more information about the TradingRM real-time chat, go to www.tradingrm.com

Today has been a slow day for me. I have only done 2 small trades for a net scratch as of 12:00 pm cst. I had some setups I liked in MTW and BRCD but they did not get to my price. That being said, the day is far from over. We have seen a select amount of great setups in the afternoon. These are the keys for me going into the last three hours of the day:

• Stay in the game, do I have mental bullets?



• Be patient, do not try to make money.



• Focus on one trade at a time (one swing at a time)



• Keep my eye on the ball, the game is not over until 3pm

Speaking of keeping your eye on the ball...did anyone in the Detroit Lions coaching box notice that Johnny Knox fumbled the ball before crossing the goal line on his 102 yard kickoff return for a TD? The Lions staff/upstairs replay guy should have caught this.

PEP made a nice move to the upside on Friday on strong volume breaking its 50% Fibonacci Retracement and closing above on the weekly chart.
MOS has shown relative weakness to the market during the entire rally and failed to make new highs. MOS was barely able to tag its 25.0% Fibonacci Retracement and has an unfilled gap which signals great weakness. MOS is now testing major long term trend support.

MON has shown relative weakness to the market and is trading within a large triangle consolidation pattern. MON is now trading at the bottom of the triangle near support. I will be watching for a break down as MON was unable to make a new high as the market made a new high and is looking weak along with other agriculture stocks.

The US Dollar Index appears to be forming a bottom and a bullish consolidation pattern is appearing for a possible push higher.



The GLD has pulled off of its highs as the Dollar pushed off its lows.

The USO has rallied to retest the longer term diagonal trend line, but was unable to recapture.