I Didn't Take the Afternoon Off

In fact when I'm quiet during market hours, it's because I'm studying something very carefully.

Looking at the charts today I'd have to say 99 out of 100 times I would have gone short with full confidence, today something struck me as strange and as I often tell you, I'd rather miss the trade than take a trade that could go very wrong when I knew there was a red flag.

I've explained many times that there's a difference between probability and high probability.

Here's an example, a long time member (years) who was always the nicest guy in the world asked me about HL, not as a trade, but as a potential turn around play. I looked at it, told him it had just made a new low and there are some shorter term positives in place, but to support something bigger it was going to need to do more work, more basing, the indicators were going to have to improve before it was a turn around play.

Well here's the chart...

The day in yellow is the day he asked me about it, the next couple days it didn't do anything and then it moved at the same time we had strong positive divergences in GLD and SLV and bought at the low of the day and sold at the high of the day 4 days later, so the silver miner moved with it. He emailed me upset that it was up in his words, "20%", if you bought at the lowest low and sold at the highest high it would have been 17%, if you bought at the close the day he asked and sold at the exact top on the close it was a 10% gain, we had just made 88% in 4 days on GLD and SLV calls (bought at the low and sold at the high), with one of the days we were holding being the biggest 1-day gain for both GLD and SLV in 7 months, but that was a trade, we knew when to get out, it wasn't a turn around position. So shortly after I received the email that he should have listened to himself, which I agree with, you always need to listen to yourself and make the decision, he cancelled his multi-year membership.

Then HL went down the next day and over the next several days was down 23% counting close to close and 28% counting the perfect entry and exit and as you can see, HL just saw a typical countertrend bounce, it wasn't at a base/bottom. In any case, yes there were short term signals everywhere in precious metals including HL and the probabilities obviously were HL would bounce with the PM complex, but it was no where near a trend reversal.

I guess you could say the probabilities were it would bounce, but as a turn around trade, it was no where near a high probability trade.

Today was a REALLY hard day for me to make that call, there were so many things that looked really good for a short position or puts and maybe tomorrow some of these things resolve, but as far as what I can observe today, I thought the probabilities are on the side of lower prices, but being a special trade, a high probability trade, something was missing.

Again, if a stock is in the middle of a move down and I'm looking at it, I can say, "I think the probabilities are that this stock continues down for maybe another 10%, that may sound like a good position, but here's the difference between the probabilities of another 10% down and a high probability trade, it's not even in the percentage move (because if the signals are strong enough we have tools like leveraged ETFs or options to make it worthwhile).

A "High Probability Trade" is one where the risk is low, the chances it does what we expect are very high and the timing is good. A stock that has run up and is exhausted with tons of negative divergences in a general market atmosphere that is similar (a market that has made an exhaustive run with tons of negative divergences so it supports the trade instead of works against it) and a trade that has come to us instead of one we are chasing on the way down (as a bounce is much more likely when you are chasing) and a trade that we have watched and expected to do "A, B and C" and it does all of those things to put itself in a "High Probability" position is the kind of trade I'm looking for, not jus tone that probably has some more downside, one that is far away from a natural stop, one that is out of sync with the market, etc. So there's a big difference.

Today the differences were more subtle, but there were red flags. I mentioned earlier that it took me all of maybe 30 seconds to decide the IWM and GOOG were great call candidates yesterday and we made +53 and +73% for less than a half day of market risk, we even got out at the height of market momentum before the gains started to fade off. That was a high probability trade. After years of watching these charts, you can just see the ones that are screaming "TRADE ME" and the ones that look good, but something's not quite there.

There was an old demon at work too...

A while back I had a full AAPL short position and I closed it because everything suggested that AAPL moves higher, so I take the profits and then re-enter at a better price and ride it lower. Unfortunately as I mentioned the last few days, when we get to where we are in the market, not only volatility increases, but the predictability goes way down. All it took was Dan Loeb's Third Point Fund with AAPL as a top holding the prior week and missing from that list the current week and every hedge fund tried to exit the same door at once and the result was AAPL was nearly cut in half, down over 300 points and I missed that.  So these type of things are what haunt us as traders, if I had the same fear today that I'd miss the trade, I'd let the l;little red flags slide and even though it looked great (the market short), it wasn't screaming like GOOG and IWM calls were yesterday or closing all the Market Puts yesterday. 

Sometimes we don't even recognize what the past trauma was that keeps sabotaging our trading, this is why I'm a huge advocate of a trade journal, but not at all like you are probably thinking. I've described it for many of you and the process, it's not about writing down what trades you took, where and what indicators told you, it's much more powerful than that and I'll be sure to post it soon because YOU become your own teacher and find trading habits and techniques that may be great, but there's one that fits you best. I digress... The point is, the fear of missing the trade from that AAPL trade was certainly there, but as I said, I had to learn that I'd rather miss the trade (because there will be another one right behind it) than take one I see as subpar or has something I don't understand.

Well enough of the motor mouth, I'm late to talk to my wife on Skype (5 pm) so I'll post these charts as soon as I finish  talking with her and see how her treatment is going, but I have been here the entire time looking at so many charts my fingers hurt and I type all day, every day so you can imagine.