Trade the S&P Tickle Me Elmo Style Part 2


This is a continuation of Part 1 – start there if you haven’t read it.

Last time we worked out how one might go about speculating in Tickle Me Elmos in 1996, and I made the claim that the same logic can be used to trade the S&P in shortage situations today.  If you’ll recall, the basic plan was as follows:

  1. Identify a good to speculate in based on sufficient TAM and a shortage of the good, which manifests as increasing price and gross margin.
  2. Determine a “will-buy” price for that good which takes into account the shortage, leaves you sufficient margin, and leaves a reasonable chance someone will sell to you.  Make it be known you will buy the good at that price.
  3. Wait for someone to take you up on your offer.  If someone does…
  4. Sell the good at full post-shortage prices on the open market. Continue reading

Trade the S&P Tickle Me Elmo Style Part 1

It’s Black Friday in the US which is the start of the traditional Christmas shopping season.  To get us in the shopping spirit I figured we could all use a Dikensian visit from the Ghost of Black Fridays Past.  The ghost that happens to be pulling the late shift this year is from 1996 which turns out to be a pretty interesting year, Black Friday wise,  for two reasons: eBay and Tickle Me Elmo. Continue reading

The Surprising Effect of Small Edges

Imagine you have a trading method which trades the GLOBEX west Texas crude oil contract (ticker:CL).  This is a futures contract that represents 1000 barrels of crude oil.  At current oil prices, the contract has a value of about $100,000.  Price for CL is specified in dollars per barrel, and the tick is one cent per barrel, or $10 for the contract.  Now, let’s say this method has very simple trade management – once a trade is entered, a stop loss order is placed 10 ticks away from the entry price, and a limit order to exit is placed 10 ticks the other direction.  These orders are set up as a “one cancels all” or OCA group, meaning that if one of the two exit orders executes, the other is canceled.

This is a very simple type of trade setup, and is common for very short term trades.  In this example once you enter a trade (assume a 1 contract position) you should get one of two resuls:

  1. You win $100 minus fees
  2. You lose $100 plus fees + slippage

Fees in this example are simply your transaction fees.  Slippage is the cost associated with stop orders executing at a price worse than the trigger price, which they can do since they trigger market orders.  For now, let’s assume that the round trip transaction fees for 1 contract of CL are $4 (my broker charges $4.01 for some strange reason) and that slippage is zero.  The slippage assumption is unrealistic and I’ll address it in a subsequent post, but for now I want to get at a different aspect of the situation.  I want to know:

How often do you have to place your trade in the right direction in order to make good money here? Continue reading

Is the Problem Technical, Psychological or Luck?

There’s a commonly bandied about statistic that something like 90% of active retail speculators lose money in a given year.  Incidentally, in this case “retail” means “private trading through a conventional retail broker like E*Trade” and has nothing to do with a retail store.

This statistic is taken from two places.  The first source is a congressional investigation into day trading that resulted in the SEC imposing the pattern day trader rule in 2001.  The second source is records from a number of brokers who have had their accounts exposed by bankruptcy.  The number varies slightly by source, but overall 90% is about right.  The smallest I’ve ever seen it was about 50% losers from a arbitrage-oriented foreign exchange broker.  These are sobering numbers. Continue reading

Bulls, Bears and the Permanent Versions Thereof

Today’s post is about market bias.  Market bias is a trader’s opinion about the long term direction of the market.  If you’ve been learning what this blog is trying to teach, you first question should be “which market?” because there are many.  While it’s possible to hold a bias about any of them, the most interesting market are the “risk on” markets which are those that are positively correlated to the economy – stocks and commodities mostly.

Biases are traditionally expresses via two terms – “bull” and “bear”.  A bull thinks the market will go up.  A bear thinks it will go down.  The origin of the terms are lost to history but the most plausible explanation I’ve heard relates to the fighting tendencies of the two animals – bulls thrust upwards with their horns, bears claw downward.  What is certain is that the metaphor has stuck, going so far as to create a cottage industry selling tacky bull and bear statues for traders’ offices. Continue reading

Should You Focus Your Trading on Stocks?

Stocks are the most widely held and discussed securities in the United States.  Of all the security types, they are the only one that has penetrated popular culture and become a topic of kitchen table discussion.  When Joe Sixpack refers to “the market” he’s talking about stocks, not bonds or commodities or derivatives.  This is seen as myopia by most financial professionals – while stocks matter, they really only matter at an economic level in the aggregate.  Any individual stock is small in terms of capitalization when compared to the T-bond market, mortgage bond market etc.  In terms of size, bonds and index futures rule the roost and individual stocks are a backwater.

This pro-bond/anti-stock bias is apt in the context of very large funds and bank trading desks trying to move huge volume.  If you want to put billions of dollars of capital into play, you’re limited to a small number of markets – a few bond markets, index futures, oil, foreign exchange.  Individual stocks just don’t play.  But for the individual trader with a small amount of capital, stocks have some intriguing characteristics. Continue reading

The Rise and Fall of Trend Following

You may have noticed that  modern markets behave in choppy and downright strange ways.  Market price rarely moves from point A to point B without several false starts and weird twists along the way.  This is true on a wide range of time scales – look at a daily chart of the S&P 500 or a minute by minute chart of oil prices, and you’ll see the same phenomenon. Continue reading

Reading Candlestick and OHLC Charts

Traders frequently use a form of charting known as candlestick charting to display price information about a security.  Candlestick charting was originally invented in the mid 19th century by Japanese rice traders, and has subsequently been adopted in modified form by most traders the world over.  A candlestick chart has time on the X axis, divided up into periods.  The conventional Japanese candlestick chart used a 1-day period, but any period of time works reasonably well.  In general the period should be long enough so that multiple trades execute.  Here is a candlestick chart of the S&P index future (symbol ES) with a 1-minute time period: Continue reading