Wednesday, June 29, 2011

The Kirk Report

The Kirk Report

How To Trade While Away

Posted: 29 Jun 2011 10:18 AM PDT


Many have asked me over the years how I trade while on vacation. Here are my two rules: 1) I don’t trade during vacation, and 2) I close out all positions no matter what their upside potential before I leave.

There was a time when I wasn’t nearly so smart. Like others I would drag the cell phone and laptop with me and every single chance I would get I would check in to see how the market was doing and my positions. I know I’m not alone in doing that since every single time I go on vacation I see groups of people doing the same thing from the strangest of places. In fact, I recall not too long ago sitting and holding hands with my dear wife on a beach in Kauai enjoying a most amazing sunset while others were not paying any attention and instead had their heads and eyes only on their laptops, iPhones or other gadgets. Talk about a missed opportunity!

Sooner or later, many of us learn to mature and wise up. Vacations are for taking time away from the market and not for working. Like most lessons, I wasn’t smart enough to realize why without first having the lesson taught to me in a most painful and memorable manner.

Back in the Spring of 1999, my wife and I were on vacation and I took my laptop so I could trade. I recall being really juiced up because I had a trade in play that was already blowing past my profit targets daily and looked likely to make my month if not my entire year. At worst case I thought I could at least pay for the entire trip just with the profits from that one trade.

Well, you can probably guess what happened next. While sleeping in a little bit during during our trip, I woke up a little late to finally check in and quickly discovered that my trade was down by over 30% after some speculation that the stock I was trading had cooked its books. Not only was I terrible vacation partner for that day, but the whole trip was ruined because I couldn’t stop beating myself up for being so stupid. To this day, that was one of the worst vacations we ever had!

So, please learn from my experience. When on vacation – be on vacation!

With that said, I know many of you treat the entire summer as a pseudo vacation period away from the markets. I know this because website traffic slows down significantly and my email inbox suddenly becomes almost manageable. The period between the first of July and the end of August before the kids go back to school is when most people tune out. And, in recent years, the market’s performance has given them plenty of justification for doing so.

For those who are looking to scale back a little during summer but NOT trade during their vacations, I think Alan Farley’s advice on how to trade remotely can be of some help. Here are his 10 recommendations:

  1. Long-term charts:  Weekly price patterns work very well for folks unable or unwilling to watch the short-term markets. Just keep in mind that you’ll need to focus on trade setups lasting for weeks or months instead of hours or days. The hard part will be in picking the entry point that takes full advantage of the longer-term trends.

  2. Trade smaller size:  You don’t have to be a gunslinger to book long-term profits. Stop using margin, take small positions, and then get out of the way. This lowers risk considerably by letting price jump around without shaking you out of good trades. Even a hundred shares can produce outstanding gains when held for weeks or months.

  3. Choose wisely:  Pick the right stocks to trade. This means you should forget about Chinese rockets, thinly traded biotechs and secondary agricultural players. Instead, limit your portfolio to slower movers that are less likely to exhibit overnight price shocks. More-lethargic sectors that let you sleep at night include: cleaning products, packaging and beverages.

  4. Play the exchange-traded funds:  ETFs let you take on measured exposure to entire market groups. This has both benefits and disadvantages for remote traders. On the plus side, you can avoid company news that sends individual issues through the roof, or over a cliff. On the negative side, you have to play against automated programs that dominate these instruments.

  5. Loose stop-loss strategies:  Remote traders need a quick nightly review to check out the day’s progress and readjust their stop losses. Longer-term position stops aren’t placed in the same way as a day trader or a swing trader. You keep them loose and out of the way, making sure they’ll only get hit if there’s an obvious change in trend.

  6. Apply weekly Bollinger Bands:  Long-term Bollinger Bands show remote traders the most favorable periods to enter and exit positions. It takes patience, though, because many weeks will pass between major trading signals. Here’s a hint: Place a weekly 5-3-3 Stochastics under the price bars and look for convergence with Bollinger Band signals.

  7. Let the market come to you:  Place deep limit orders and sit on your hands until they get hit. Look at the weekly pattern and find the price where weak hands will get shaken out. That’s where you want to place your buy or sell order. You won’t get filled every time, but this technique will get you into many great trades at perfect prices.

  8. Use dollar cost averaging:  Long-term trades are price-sensitive because of the great distance between closing bars. You can address this challenge by combining classic investing and trading techniques. Build the position over time with dollar cost averaging, but line up your entries with large-scale support and resistance. For example, add to your position each time the market pulls back and tags a horizontal weekly Bollinger Band.

  9. Play the index cycles:  Negotiate the minefield of conflicting trends with a smoothed Wilder’s RSI (relative strength index). Place a 14-day RSI, smoothed by 7-periods, under the S&P 500 index chart. Then watch for major turns below 20, and above 80. These cyclical shifts are highly predictive and tell you when to establish longer-term positions.

  10. Master the waiting game:  Stalk your long-term setups and do nothing until the market planets come into perfect alignment. It’s easy for remote traders to feel left out of the action and start chasing the market. But their edge relies on absolute detachment until their chosen entry prices come into play.

This is a very good set of recommendations. In fact, many of these are also appropriate for those of you who cannot stay on top of the market as much as I can most of the time.

A common theme you know I stress so very often is how important it is to use and adopt a trading and investment strategy that is in complete agreement with the amount of time, skill, and effort you can put in. Vacation time is no different. And, always remember, the market and its opportunities will be here when you return!