Trader Discipline and Risk Management

The SPX hit 2401 on 3/1/17 following the election/year end markup followed by a 3-month trading range of just 3.4%. It was pushed above 2400 and hit 2446 Fri before closing at 2432. The market remains in a prolonged period of passive “so called” investing, and extreme all-time lows in volatility, yet the Fed Ponzi Scheme of inflating assets continues as they have made record purchases so far in 2017 including stocks, as have other foreign central banks.

It would be interesting to see the central banks holdings of the stocks that have accounted for most of the advance like AAPL, AMZN, GOOG, FB, and MSFT. The correlation of those stocks with the Fed asset increase is well documented and without it most “House Portfolio Strategists” would have nothing to talk about because the news and fundamentals have little bearing on the market as it remains the Feds “game”.

It is easy for many to get caught up thinking the Fed will not pull the plug on the market, but the Fed is no better than Bernie Madoff, and he eventually failed. It is my subjective opinion, having seen all of the bull/bear markets since 1970 that it will fail, and after what could be a painful adjustment the active management of assets will be front and center again. Human responses will always remain the same, and the majority must always be wrong. We will see that come to pass as the Fed Ponzi Scheme comes apart.

The implied volatility we use to calculate the volatility bands hit a 52wk high of 20.63 on 6/24/16, and a low of 7.0 on 6/21/17 with the SPX high of 2440. The 1.0VB at the 20.63 high was 22.37 points, and Fri the implied volatility closed at 7.50 with the 1.0 VB for Mon 6/12/17 at 9.55 points. However, as day traders we adjust to the implied volatility for the current day and take positions accordingly.

A basic trading rule that is most helpful in addition to IV, Symmetry, Price Pattern, and confirming technical evidence like RSI etc all relative to the time period that you are trading is the “Expectancy Rule”.

RULE: Number of times you win x gain per trade less the number of times you lose x the loss per trade over time

You can win 25% of the time and make money or win 90% of the time and not make money, so obviously self trading discipline is an absolute necessity, which we all know but sometimes emotions take over and you get caught in red ink.

The SPX monthly RSI hit 91.60 Fri and is obviously extended. There is key long-term Pi symmetry in Oct as 10/11/17 is 3141 CD’s (8.6yrs) from the 3/6/09 667.79 bear market low. If you use the yearly cycle date of 2017.9 the date is 11/24/17. However, for the long-term Pi symmetry it is a time zone, and direction is based on the technical position of the market at the time. We could have a significant short-term correction into the fall Pi time period , and if confirmed by basic technical evidence the expected reversal would be up. The reverse is obviously also true.

Trading Volatility remains the Day Traders best friend.

Kevin Haggerty