TKTM - Update #2

Due to the incredible bullish trend in the market TKTM keeps running. This paper position was initiated on July 15, 2009. The original stop loss was moved up to break even a few days ago. I am moving up the stop again to a higher level to lock in some profit. This position will terminate on the earlier of the following criteria:

1) New stop hit at $7.10

2) Profit target hit at $9.90.

3) Time target hit at 10th trading day (i.e. profit target not reached by 07/28/2009 - position sold same day.)

Managing trades is pretty boring but it helps you to evaluate performance on a risk adjusted basis. It also gives you a chance to play another day.

TKTM is almost done - I will be looking for a new position long or short in the next few days.

TKTM - Update #1

Let's look at this first trade and see how I am managing the risk so far and what needs to happen next. After TKTM was selected it gapped up along with most of the market on the next day. Due to the gap up on the open and the subsequent sell-off, I would have gotten off to a bad start - probably receiving an entry somewhere around $6.70 (or $0.35 higher than expected).

That said the stock did not sell off much before marching higher. Due to no major retracements I would still have this position today with the original stop at $5.35. At this point the stop needs to be moved up to $6.70 (estimated entry price) for a break even trade at worst.

So far the trade is going in my favor. I need to stick to the original risk management principles (use stop loss to manage risk). I also need to stick to my time stop to make sure that I am making an effective use of the risk capital.

I will exit this position on the soonest of the target price getting hit, my stop getting hit ($6.70), or my time stop getting hit - 10 trading sessions.

So far the stock had an initial risk of $1.35 ($6.70 - $5.35). With stock currently at $7.38 or $0.68 above entry price - I have a temporary gain of 0.5R ( or 1/2 X my $1.35 risk). If the target of $10+ is hit - I may realise a 2R or 3R return.

These numbers are not great - I need to strive harder to find favorable risk reward setup.

Ticketmaster (TKTM)

Here is an opportunity I have been looking at. For any trade I am looking at I am trying to answer the following five questions.

1) What should I buy?

Ticketmaster (TKTM) - because the stock chart looks interesting.

2) How much should I buy?

I would buy enough so that the entire position was 20% of the portfolio (talking trading capital here not long term hold.)

3) When would I sell?

I am looking at this in a swing trading time frame - i.e. 1-3 weeks, so my target would be the previous relative high around $10. If the stock did not hit that price within 10 trading sessions - it will be sold regardless of whether or not it hits target (this means both a price target and time target).

4) How would I manage my risk?

I would go long at the market price tomorrow morning and set a stop loss @ $5.35. I would have an estimated maximum loss of $1.10 per share, which works out to approximately 18% of the position. Because this position could theoretically be 20% of portfolio - my maximum loss on this position would be 18% of 20% or 4% of my entire portfolio. That is probably on the larger side - swing trading positions should shoot for closer to max loss of 1-2% of portfolio to avoid risk of ruin - assuming positive edge in strategy.

I would also move up my stop loss to break even if the position moves in my favor during the first 3 trading sessions.

5) How woud I measure my results?

I would look at the risk reward ratio. I have potential loss of $1.10 and potential gain of about $3.90 - giving a risk reward of 3 to 1. Not great, but better than 2 to 1 and good enough to take the trade.

I would also measure my results by my ability to follow the rules setup and to manage my risk if the trade becomes successful.

6) - ( really just five rules) This question is what does all this look like? Here is the graphical representation:

What's changed?

The world changed last fall and we are still feeling the effects today. The massive worldwide government intervention in the markets and the economy which began last fall has expanded during the past six months and has clouded the future as well as the underlying fundamentals of the economy.

Things that we know as facts:

1) The US economy is currently in a serious recession
2) The US Government via fiscal policy and monetary policy is attempting to change the underlying economic trend from contraction back to expansion

Things that are uncertain:

1) Will they be successful?
2) Will they create a new bubble on accident during the intervention period?
3) Are they creating wealth or printing money? (well everyone knows where I stand on this, but maybe Paul Krugman disagrees)

Where do I stand in the middle of all of this? My emphasis has changed from prediction, anticipation, and analysis to practice. I have full confidence in my analytical abilities based on my understanding and early forecasting of the debacle that occurred last fall and continues to unfold. This was an important stage in my development as trader / investor / speculator, however the next phase is even more important. That is the ability to manage risk in an uncertain time.

I am going focus on some risk management techniques that I am toying with and seeking to incorporate in my approach. Don't worry there is no serous math involved and the pattern used will not be remotely related to value at risk or anything else that lost people so much money in the past. The techniques will be practical and as a new one is successfully incorporated or discarded into the methodology some of its nuances will be discussed.

Why I am doing this? I am trying to change from a focus on end objectives to a focus on process. My underlying process is faulty because I have been unable to manage my risk in an uncertain period as measured by my past losses in the market despite overall sound forecasting and an understanding of the underlying economy.

This will not be an attempt to copy any existing system or to adopt a set of hard and fast rules. To the extent that the adoption of sound risk management principles can't change to adapt to growth or loss in the portfolio or the approach it is worthless anyways. There will be some discussion of the economy, technical anlysis, fundamental analysis, leverage and also a focus on some key failures - personal and third person over the past twelve months that might have some important lessons.

Cheers,

Ben