LET’S REVIEW

This chapter may seem out of order at times because it assumes you are
doing things that I’ll discuss throughout the book some of which will come
later. However, I put it here because the best way to start your trading day
is to get ready for it the night before. But before you start getting ready for
the next trading day, the first thing you should do is go over all the trades
you made or have on. You can do this in any order you like, but I prefer
to start by looking at any trades I have that are still open. These are the
ones I need to be the most focused on going into the next day, and I like to
confirm that they are still good trades.
By “good” I mean that the reasons I put the trade on are still valid.
I’ve been known to not get out of bad trades in hopes of them opening
up the next day in my favor. This is always a bad decision as bad trades
should always be gotten out of as soon as possible. Now this is different
from a trade that is not making money but is still in the parameters of your
strategy. I’m referring to trades that blow through your levels but that you
have decided not to get out of.

If I still have a bad trade on after the day, I make a big note to GET
OUT if it does not start reacting correctly as soon as the market opens. It’s
oh-so-common to look at a bad position and rationalize why it could work.
For example, if it gaps down against you the next day, you may say, okay
this is the worst it can get and it will close the gap. And you sit there and
hope all day it does. Doing this could easily throw off your whole game plan
for the next day as you will spend too much time babying a bad position
and ignoring the good ones you have, which may end up turning bad.

After the Close

A man rushes into his house and yells to his wife, “Martha, pack
up your things! I just made a fortune in the stock market!” Martha
replies, “Wow, should I pack for warm weather or cold?” The man
responds, “I don’t care. Just get out!”

So, it’s 4:15 P.M. and the S&P futures just closed and you had a bad
day trading, so what do you do? Go down to your local bar and get
soused? No, you start preparing for the next day. Actually, first you
should run to the bathroom as you probably have been sitting for four
hours straight glued to your monitor. Then go take a quick walk to stretch
out and clear your mind. If you work on a trading desk at a day trading firm
most likely everyone will be gone when you come back. But the next hour
or so could be the most valuable one of your trading day. You’re thinking
the markets are closed, I can’t trade anymore, the day is over, why should I
still be here? But it’s only the end of the day for John and his loser friends.
Great traders use this time to review their day and start planning for the
next one. As soon as the market closes is when your trades are freshest in
your mind, so why not spend some time after the close going over them?
You can gain a lot of insight into your trading by reviewing what you have
done and what’s more, you can start getting ready for tomorrow by doing
so. After you’ve gone over all your trades, you should take some time
preparing tomorrow’s game plan. This is a two-part process, which should
be done both the night before and the morning of, but by spending time
on it the night before you will get an incredible jump on it the following
morning and will be able to see things much clearer during the trading day.


Some things you will be concentrating on are what’s happening tomorrow,
what will you do if such and such happens, which of your trades just
aren’t working, and what are you doing wrong. You can also spend time
looking for places to adjust your stops to and review your money management
and risk levels. It doesn’t take a long time to do all this, and its worth
is invaluable.

CLOSING THOUGHTS

The better you know your stuff the better your chances of surviving are.
It does require extra work learning everything you can about the markets
you trade, but you will only be a better trader by doing so. Some of the
things I mentioned you will only gain knowledge of through time by watching
markets day in and day out. If you are lucky and have experienced
traders who you work with, you may be able to learn faster. Just don’t rush
things and expect to know how the markets will react to every piece of news disseminated out there. And don’t get stubborn about what you think
should happen. Remember the markets are always right, and they will tell
you where they should be—not the other way around.
When I was studying for my SATs I learned the word “parsimonious.”
Twenty-five years later, I don’t think I had ever used it, until this sentence.
Yes, it has nothing to do with trading but it was a thought I had while I was
rereading these closing thoughts so I figure I’d share it with you.

GETTING THE BIG PICTURE

Let’s forget about the peculiarities of individual stocks, but let’s look at
the big picture of where a stock is. When you trade, you need to know
where in time you are. Some traders have blinders on when trading and
forget to see where a market is in its long-term picture. Before you make
a trade you need to know what type of market it is because markets will
react differently in different conditions. You should be looking at charts in
multiple time frames to get both a short- and long-term picture of what the
market is doing to help determine if the market is trending, choppy, range
bound, and so on. You also need to know what the general direction of the
market is. You may also want to be using indicators to help you determine
where the current market is in relationship to the big picture. Once you
know all these things you can make smarter trading decisions.
For example, is the market in a long-term rally but has currently surged
and moved too far off its trend line and therefore due for a retracement before
going back up? Is it near the support of a range bound, choppy market
with clear support and resistance levels? Has it recently broken out of a
choppy market? Is it in a position where a possible reversal is looming?
Once you can pinpoint where a market is and know all of its levels you
can start planning trades with much less of a gambling factor than if you
were just looking at a small amount of data. Good traders will use different
technical indicators and systems depending on the market conditions.
Their game plan will vary according to where the market is versus its longterm
history. They will be able to make smarter decisions as to where to
get in and out as the picture gets clearer. All this in turn will make them
better traders.

R O U N D-A B O U T-W A Y-W E A T H E R-C A N-A F F E C T-P R I C E S

I own a bar/restaurant and was just speaking to my produce vendor, who is a
large nationwide company. We were talking about how ridiculous prices have
gotten, and he said “you aint seen nuttin’ yet.” He was telling me how the recent
flooding in the Midwest is going to drive prices through the roof and not
just because the floods have made the grains hit record highs. It’s because his
cross-country truckers have to take alternate routes as the roads are impassable.
He said it normally costs $4,200 to send one truck cross-country, and last
week it was over $11,000 as they had to go through Canada. Between the extra
manhours and extra gasoline, coupled with all-time record-high oil prices, the
cost of a fajita at my place is going to go up.

KNOW ANY CORRELATIONS

If you are trading stocks you should know if they are part of the major
indices and how a move in the indices correlates to the stock. It need not
be exact but you should know that if the Dow drops 100 points your stock
would normally drop $1.50 or that a dollar move in your stock will move the
Dow 11 points. Sometimes it’s easier to look at the markets as a whole and
get a determination of what a stock may do, instead of trying to figure out
what a stock may do on its own. And if you knew the correlation between
the two, you could time your trades a little better or know if a stock is
stronger or weaker than the market.

You can look for correlations between stocks in a sector, or commodities
and the price of gold, or oil, or the dollar, or between commodity
groups like heating oil vs. crude oil. Many people trade the stock market
based on what the bond market is doing. Many things affect different markets
and there are correlations all over the place. The better you know
them, the better you become as you may pick something up just a little
faster if you are aware of them.


Are They Laggards or Leaders?

This leads me to another factor you should know when trading and that is
whether the stock or market is a leader or a laggard. Within every sector
there are the stocks that make the sector move first and there are others
that move once the sector becomes active. Some stocks move in sympathy
with other stocks, like if one bank has great earnings and rallies, the other
banks will follow as well. It’s good to know these things and which stocks
do what as it will help you find opportunities to trade.
This isn’t just true within sectors but in the market as a whole. There
are some stocks that can move the market by themselves. Well, not by
themselves, but so many other firms react with these stocks that it moves
the market, and the one stock was the catalyst that made it happen. These
are usually the big name stocks with huge volume. If a company like Bear
Stearns has a bad earnings report every other bank may drop, as well as
many other firms that depend on the banks, which can create a snowball
effect and start an avalanche. I’m not telling you not to trade these stocks
but be aware that sometimes the big safe stocks can be riskier to trade than
the stocks that are laggards.

I used to trade at a firm that never liked it when people traded the
leaders. They thought it was too difficult to compete with all the big players
in those big stocks. Instead they preferred to find small and mid cap
stocks with volume of 100,000 to 500,000 shares a day that would follow
the moves. They had less competition and more time to react and felt they
could trade better, and this is how they taught new traders. I never liked
doing it, which is why I left, but it worked for them.

What Moves It?


Though I’ve always been a technical trader and barely looked at the news
to trade, as I write this chapter I’m realizing how important being better educated
can be. I still believe that everything is reflected in the price and that
news may not help you react any quicker, but if you know why something
did something, then you can be better prepared to exit a position when
that condition is over. As a trader you should be aware of what moves the
markets you trade. There are many factors that can cause a commodity or
stock to move and you should be alert to them. Some of the things you
should know are:

Which Reports Can Do What and When Do They
Come Out?

There are so many reports that I’m not going to bother to list them, but an
example or two are crop reports that will move the grain markets and the Consumer Price Index report, which can move the whole stock market and
different stocks in several ways.

When Do Earnings Come Out and What to Do
with Them?

Not only should you know when earnings come out, but you should learn
how to read a stock’s reaction to them. Good or bad earnings is not important
to me, it’s how the stock reacts to that report that is key. Don’t
get caught with your pants down because you did not know the stock you
shorted last night has earnings due today before the open.

How Do Markets React to Changes in Interest
Rates and Foreign Exchange?

One of the most anticipated things in the market is the Federal Reserve’s
announcement on interest rates. A cut or hike greater or smaller than expected
can trigger a huge move in a stock, future, sector, and whole market.
But not all sectors and stocks react the same way, as some sectors react favorable
to higher interest rates while other do not. You should know what
a change in rates will do to the stuff you trade. And of course you should
know when these announcements are due. Changes in foreign exchange
can have more subtle effects on some markets, but nevertheless you should
know if the stocks or commodities you trade are sensitive to them. As the
U.S. dollar drops, gold will most likely go up. Cocoa is a market that can be
affected by the British pound because London cocoa futures trading, which
have a huge impact on worldwide prices, is conducted in British pounds.
So, big fluctuations in the pound will impact the price of U.S. cocoa futures,
due to the cross-currency fluctuations of the British pound vs. the
U.S. dollar. There is constant arbitrage taking place between the New York
and London cocoa markets so the rate between the pound and the dollar is
very important. This is something the average person may not be aware of
but it’s good to know.

Is the Market Weather Sensitive?

Orange juice, oil, grains, the softs (coffee, sugar, cocoa, and cotton), cattle,
and a few more, are very much weather-related products and a frost,
drought, flood, or heat wave can send prices soaring in some markets. Or a
slightly different weather pattern can send one market up while sending another
down. Keeping abreast of the weather can help you determine which
direction you want to be trading some markets. Hurricanes or threats of
them, for example, can cause large moves in the oil markets and soft markets, but may not have any effect on cocoa, which is not made in the
area affected by the hurricane.

O P E N-I N T E R E S T

Open interest is the total number of active or open contracts for any given
commodity at the end of each day. It refers to the total number of contracts long
or short in a delivery month that have been entered into and not yet liquidated
by an offsetting trade or fulfilled by delivery. It measures the flow of money
into and out of the market. For each seller of a futures contract there must be a
buyer of that contract and they combine to create only one contract. Therefore,
to determine the total open interest you only need to know the totals from one
side or the other, buyers or sellers, not the sum of both. Open interest can
change in three ways:

1. If one new buyer buys from one new seller, open interest will go up as thereis a new contract being made.
2. If an old buyer sells to an old existing short. There will be one less opencontract and open interest will drop by one.
3. If an old buyer sells to new buyer, it results in no change, as it’s just thepassing of an existing contract to someone new.


By keeping track of the changes in the open interest at the end of each
trading day, you can get some information out of the market. Increasing open
interest means that new money is flowing in and that the present trend will
continue. Declining open interest means that the market is liquidating and implies
that the trend is coming to an end. Watching open interest and combining
it with volume and price direction can be a great method of preparing for the
end of a trend or confirming a move. Using price, volume, and open interest
together you can draw the following conclusions:

Price                Volume                    Open                 Interest Indication
Rising                 Rising                     Rising                Market is strong
Rising                 Falling                    Falling                Market may weaken
Falling                Rising                     Rising                Market is weak
Falling                Falling                    Falling                Market may strengthen