Master Trader Session 6

This evening was the last of six Master Trader Sessions with Matt Gildea. I was just a little late to the start of this class. I had my cat fixed today and the vet was very slow to bring my Wannabe back to me. I ended up waiting 15 minutes for them to bring her out. Needless to say that was frustrating and made me 8 minutes late to my class! When I joined the meeting I came in on him demonstrating Order Entry in OptionsXpress.com

After the order entry we reviewed some current setups and talked about order management, especially stop management. Matt showed us several home builders' charts as they've been a terrific sector to short during the past few months.

After looking through these current market items, we looked at some essential Market Gauges. We began with the "Original Formula" Volatility Index (VXO, $VXO, ^VXO, often just pronounced: vix). This seems to be one of the most powerful leading indicator gauges at our disposal. For much of the past 5 years this has been an excellent tool to measure market sentiment. The best part is it really has demonstrated itself to be a fairly consistent leading indicator of market direction. However, more recently, although it hasn't been completely wrong, it just hasn't given the kind of clear signals it has shown in the past. Since general market sentiment affects stocks, this is a very powerful tool to aid in our decision of an individual stock's direction. Compare the VXO to the DJI, S&P, Nasdaq for the past five years for yourself and see what patterns emerge. Notice how the VXO hasn't moved as dramatically in the more recent past and how the market has similarly not has as dramatic a movement following the VXO's movement?

Although the recent volatility index range has been a bit muted it still follows as a leading indicator if you squint with one eye and turn your monitor sideways. No, just kidding, I was checking to see if you are still paying attention. It seems that all indicators must be continually reevaluated for their applicability to current market. Although this may seem to invalidate them, I think we'd be throwing the baby out with the bathwater if we took that approach. By keeping an open mind to a different interpretation of these indicators, we can still find use of these to aid our decision making on any given position. I may be reading too much into this, and the above account isn't exactly echoed from what I've been taught. It's my own interpretation of what has been presented to me. You've been warned.

After looking at the vix, we went through some guidelines on managing a gap open on our setup as well as how to manage gaps on our open positions. Some of this information requires that you are able to be in front of your computer making market decisions in realtime during the opening minutes of the market. Not exactly day trading, but certainly some strategies involve a similar discipline.

We then turned our attention to Relative Strength & Weakness stocks. Determining relative strength & relative weakness for a given stock is yet another way for us to support our opinion on a stock's direction. This is a multilevel filtering technique we apply where we compare the stock to the market as a whole (an index, such as the S&P 500), and the specific sector. It does make sense that you'd want to put your money into the strongest performers of a given sector that is ideally the strongest performing sector at that point in time (or reverse that for bearish or short-sale). I think this is a very important aspect that I will include in my analysis of an individual stock. It's not the easiest thing to analyze, but I think the benefits far outweigh the time cost.

Matt Gildea then spoke about what the daily routine of a professional trader is. You may have already picked up on this being a discipline that requires daily attention, but this point really can't be stated strongly enough. This is not something that you can expect to get tremendous results by doing it as a hobby, there is a daily routine that you really requires some time. You must be aware of the current market environment, pay attention to news reports, maintain your watchlist, continually be looking for new positions to open and manage the existing positions. It probably means a couple hours a night with some attention paid to the market just before it opens and ideally checking on your open positions as the day progresses to evaluate if any of your stops should be updated.

After having all this information spinning around in my head, it's going to take some practice to get it all down. Right now I'm moving a little on the slow side in terms of analysis & finding trades that I'd want to put my money into. I'm practicing the daily ritual with my paper trades, but there is quite a lot of analysis and things to consider. Patience and keeping a cool head seem to be vital to success.