Schaeffer's Trading Floor Blog

Worth a Read

by 2/17/2005 1:23 PM
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If you haven't read it yet...make sure you read Bernie's latest commentary on bonds - "Bonds on the Run"....

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I wanted to bring up this entire saga because I think it relates to three important points about trading. The first is that an event with one stock can cause a ripple effect that spreads. Personally, I think that this can have a bigger impact on the downside but I will let you make your own decisions on that.

The second point is that your goal is to create a trading style that makes you money over time. However, each trade is unique and you don't know how it will play out. Just like I know my "average" drive time, each commute is different. In essence, you are basing decisions on probabilities...and probabilities work over large data sets.

Finally, as was the case with the truck, I think it is important to note the relative action of stocks. In particular, stocks that are exhibiting action that is different from the market and their peers. This can highlight not only risk factors but strong stocks that may help buffer some of the risk from the first point...

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Lunch Time Lull

by 2/17/2005 12:36 PM
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The broad market indices have bounced off their lows but are still showing losses on the day. There are a couple of points in the graph below, however that just caught my eye...

The first is that housing stocks are gaining traction. Yesterday I mentioned Toll Brothers (TOL) and I still think it is an interesting (albeit risky) situation.

The other point that stands out is the loss in networking. This spurred me to check out Cisco and I saw that it is once again testing support near 17.50. I discussed this situation a couple of times last week and this link sums up those discussions. I would continue to keep a wary eye on this stock as a break here would not be "constructive"....


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The other aspect is that it can give you a chance to watch patterns develop. For example...This morning I watched a pickup truck come barreling up an open stretch in the slow speed lane. I didn't know the driver and I didn't recognize the truck, but experience has taught me that I could likely expect that what was going to happen next would not be pretty. I couldn't predict exact what the driver would do, but I had reason to expect that the "risk" level was about to rise so I made sure I knew what cars where around me and began to ease off the gas....

The driver stayed in that lane until the last possible moment and then cut-off the driver in the middle lane. A short-time later the truck then darted into the high-speed lane (cutting-off another car) and sprinted away. In the end, nothing bad happened, but I think it is safe to say the potential for problems was greatly increased.

I see this happen often, and most times it ends that same way. However, there will be a time when this triggers a set of terrible events so I want to make sure I prepared to handle it the best I can. In other words, I think it important to be cognizant of/prepared for the "unlikely" event because that is the one that carries the gravest consequences.

The key to identifying the behavior had nothing to do with the driver or the vehicle type - it was relative action. This vehicle was acting different from the rest of the vehicles around it and exhibiting different behavior from what you would expect to see in that lane. I have seen this type of behavior before and therefore had an idea of what to expect...

To be continued...


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I know the miles from my house to the office. I know there are various parts along my route that are bottlenecks and back up at certain times. I also know that certain "events" happen at various times - such as the school bus that passes my street at the same time in the morning and will slow me down if I get stuck behind it.

As such I can take these "constants" and get a sense for how long my drive will be "on average". However, each commute is different because I can never predict what individual drivers will do. A careless moment or a piece of debris that falls from a truck can cause a ripple effect that can severely alter any particular day's situation.

To be continued...

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