I plan to use this forum to publicly describe my trading ideas, strategies and plans; based both on what I am personally doing (be it badly or well) and also on brilliant observations that I have read from others.

I tried scribbling notes and outlines in a notebook to myself, but the fact is I’m a slacker and the results were disappointing.

(Subliminally I knew I could get away with shoddy work if no one was looking)

Let’s see if making the same thoughts public forces me to be more exacting in how I describe the What, How and Why’s of my thinking. If I can’t make any sense of it, why the heck am I doing it? And how much damage could it do to me?

One strategy that I am very comfortable with is what I like to call a Two Line Entry.

Here’s a sample of a lucky one I had yesterday:

TWO LINE ENTRY

As RIMM started to stall during an uptrend from around $115, I felt comfortable mentally drawing a red line for a stop around at $117.25 and a green line near the previous trend low at around $115.15.

I felt confident at that instant that the odds of hitting the green line first were greater than the odds of hitting the red and stopping me out, based on how the market and RIMM itself were performing. Even if the was a literal coin toss, a 50% winner rate would still put me ahead if I properly let enough of the winners run.

So I shorted RIMM at $116.27 and the game was on!

It’s really just a mental game, firming up in my mind why I entered the trade, and more important, at what point do I cry Uncle! and look for another opportunity.

What’s the benefit for me in using Two Line Entry methodology? I find it much easier to manage risk by entering a short term position this way. The decision to stop out is a completely firm one because the decision itself was that it would hit green before red. If it hits red, I WAS WRONG!!! Game over. Whether its a mental stop, trade trigger, or a stop loss order, the game is done and I’m the loser. Like playing 21 in Vegas – there’s nothing to argue about if the dealer draws an Ace and a Queen.

Obviously to play the market by thinking this way you would prefer to find spreads where the red line is much tighter to your entry than the green. But in principle, that really does not matter. By keeping faithful to your stops, and allowing some of your winners to run, the odds of success improve significantly.

The Red line decision leaves no room for second guessing, but what happens once you hit a Green line? That’s the tricky part. I might have done just a bit better on this one if I hadn’t used a trailing stop.

Just like to pop a Live Trade in here now and again to see how it messes with my head. It’s a Two Line Entry trade.

Short RIMM at $114.34
Aim: daytrade only

Reason: Getting in a bit early on this one but let’s see how it goes.

UPDATE: Stopped out at $114.70

Outstanding news for the Whole Hog position today.

CEO Bill Joll says:

“What this means for On2 and the market in general is that VP6 and VP7 based cross platform high-quality video will be available for a wide range of mobile, IPTV, and web video devices.”

A wide range of mobile devices means a wide range of device royalties. I’m gonna borrow and buy some more if we see sub $1 prices this week.

Yes I said borrow. Is that a smart thing to do? Of course not, it’s complete insanity.

RELATED STORIES:

ARM Gives Thumbs Up to ON2

Swami Syndrome: A proclivity for predicting the future coupled with a blinding disconnect to the fact that a coin toss (or the proverbial monkey) would be more accurate than your lame prognostications.

Swami Charles Gave has polished up his crystal ball and sees all green in a contrarian dollar/euro position:

A Comeback for the Greenback

Jonathan R. Laing, the author of the article, starts out by listing all the negatives stacked up against the US dollar in today’s environment:

Of course, the case against the greenback is invariably couched in apocalyptic terms. America’s continuing budget deficit, for example, is said to betoken U.S. decadence, fueled by fiscal irresponsibility and imperial over-reach. The trade and current-account deficits? They are symptoms of a society that consumes more than it produces, spends more than it saves and relies on poorer nations to finance its profligacy.

Nor, at this point, can a strong case be made for foreign investment in U.S. assets in order to sop up the dollar surpluses in foreign coffers. U.S. gross domestic product growth is slowing. Treasury rates seem headed lower. Interest differentials favor higher-yielding government paper like the German bund. U.S. residential and commercial real-estate prices seem headed further south.

And then he gets to statements from Contrarian Swami Charles:

Thus, it comes as something of a surprise that GaveKal, an international investment research boutique with offices in the U.S., Hong Kong, Paris and Abu Dhabi, recently penned a report lauding the dollar’s prospects against the euro. In fact, in a telephone interview from Paris, firm founder Charles Gave terms the euro “grotesquely overvalued” at its current level. In the next couple of years, he maintains, the euro should fall to its “parity” value of $1.05 to $1.10.

Swami Charles goes on to point out many of the financial negatives in Europe that he believes will weigh against the Euro, and even says the M word!!

Higher birth rates of Muslim populations that have been only imperfectly integrated into European economic and cultural life could pose big problems in the Old World over the next several decades. For one thing, the trend could boost unemployment.

I’m guessing that Swami Charles does not live in Holland. Let’s do some math on that:

Far fewer Euro kids from secular Euros + ever increasing Muslim kids who won’t (or won’t be allowed to) assimilate =

Well let’s say it could be a boon to the car industry.

Other than that, Swami Charles thinks the Euros are in a bit of trouble.

Let’s take a look at the US Dollar chart:

Charts don’t get much uglier than that.

Dollar Bear Maoxian (the Beijing Swami) reports on Swami Charles and his bullish prediction for the US dollar in his post Bucking the Euro trend a bad bet:

Maoxian (the Beijing Swami) has been shouting Sell the Dollar! for quite a while now and advising everyone to as sell all US assets (and run off to a better country, like China I guess). He has surely earned his Swami Stripes on the dollar call.

His guess is as good as the next guy’s (commenting on Swami Charles). It might be wise to wait for the trend to reverse before targetting $1.05 to $1.10.

The Euro is sitting around $1.48, so let’s tag that number for Swami Charles and check back in a few months. As for the Beijing Swami, he has already been consistently correct on the dollar dive for weeks now. We’ll wait to see if he keeps shouting sell when the dollar does a reversal. It has to do one sooner or later, right?

Question 1: If Captain Cliche Obama wins the Presidency, will the Beijing Swami continue to be bearish on the US?

Question 2: Will the dollar/euro debate bring out a record number of Swami prognostications?

Question 3: Should the European countries which adopted the Euro switch back to their traditional currency while the chart is topping? Nations as swing traders - silly I know.

Swami Syndrome: A proclivity for predicting the future coupled with a blinding disconnect to the fact that a coin toss (or the proverbial monkey) would be more accurate than your lame prognostications.

Prem Watsa is affectionately called the “Warren Buffet of the North”. He’s not usually as gabby as Warren however, and I doubt that he’s ever whined about not paying enough taxes (Hey Warren, you can cut a check to the Feds anytime you know, its not against the law). Prem did do a recent interview however, wherein he boldly joined the ranks of the Doomsday Swamis.

An Interview with Watsa Swami: He has never been more bearish

The global credit squeeze is in its “early days,” says investor Prem Watsa, who is so bearish that his insurance company has stashed the bulk of its $18-billion investment portfolio into ultrasafe government bonds.

In a rare interview, the chairman of Fairfax Financial Holdings Ltd. said he thinks it’s possible the United States is on the cusp of a prolonged market slide, similar to the one endured by Japan between 1990 and 2003, when the Nikkei index plunged 80 per cent.

“We raise the question, why can’t the Japanese experience be repeated in the U.S.? We think it could be,” Mr. Watsa said.

Watsa Swami thinks the US markets may very well be on their way to a real catastrophe, and he has put his money where is mouth is. He then goes on to state that a near term recession is a sure thing:

“We don’t know how bad the recession’s going to be, so credit is going to be tough,” he said. “You’re going to have these big losses, the banks are going to have big losses. So we are worried.”

Watsa Swami has been a hugely successfull prognosticator in the past with Fairfax, but strange things can happen when folks put that Swami hat on in public.

One absolute prediction for a near term recession.

and

One rather bold, sky is falling prediction of a Japanese style disaster in the U.S.

Let’s check back in with Watsa Swami in June to see how well that Swami hat is fitting in 2008.

Swami Syndrome: A proclivity for predicting the future coupled with a blinding disconnect to the fact that a coin toss (or the proverbial monkey) would be more accurate than your lame prognostications.

Early in 2007 Chairman Maoxian from Beijing stepped tentatively into the Swami for Hire arena by making this generous offer to his readers:

Chairman Maoxian’s Boring picks

This is the Beijing Swami’s self-deprecating description of them:

1. These ideas are extremely boring

2. These ideas won’t win you any friends at a cocktail party.

3. These ideas will definitely not make you rich quick.

He offered to export 15 trade ideas from China, in exchange for American dollars (which were worth a whole lot more back then). And in his own funny way he included a no money back, zero guilt clause for comedic effect. He described them basically as battered down value, long term plays. We can tell that he was extremely confident in them (hence the first time request for $$$$$$). OK so let’s check in to see how he’s done after several months. Here’s some data on the 15 picks (visit his excellent site for traders - a fine read - and send him a bone if you want the ticker symbols)

Lăolao!!!! - 3 winners and 12 losers. He’s got a couple strong winners there, but otherwise he’s taking quite a pounding. Let’s look at a chart to see how his picks have performed against the indexes (yeah, he owns the CMF tan line, the one that seems to be looking for a lost contact lens).

And here’s some further, rather depressing data:

We will check in again on these picks next year, and plan to take note of the Beijing Swami’s dollar death spiral prediction in a future post (he’s been all aces on that one so far). A few questions remain:

Question 1: Do we implore Swami Maoxian to provide a new list of ideas asap so that we can short the hell out of them? Naaa, that’s completely unfair. The above is just a tiny snapshot of the Swami from Beijing’s prognostication prowess.

Question 2: Why didn’t the dollar bashing Beijing Swami ask for his payment in Euros?

Question 3: Do we load up on the picks from this list that have been battered down the most? Hmmm, when my Whole Hog play pans out perfectly (as of course it will) I will be checking back on this list again.

Let’s short RIMM again!!!!

Short at 113.40

UPDATE: trailing stop triggered at 112.00

Comparing the 2 RIMM live trades today, this is really how it should work out with my daytrade plans. I will take losses, but they will be smaller than the gains.

UPDATE: Closing out at the end of the day would have worked out better, but its hard not to keep a trailing stop with RIMM. RIMM closed around 110.90

With the pittance in my trading account that is not locked up in ONT, I plan to post live trades just to see how it affects my psyche and decision making.

What are the odds that this first one will be a loss? Excellent!

Short RIMM at 108.46
Aim: daytrade only

Reason: I watch RIMM alot.

UPDATE: Cried Uncle! Out at 108.80

Glad to get that first live loser out of the way. Poor decision making in my stop. My first inclination was to get out at 108.50 when it wasn’t looking right, I ignored that and paid a small price.

Watching RIMM move up to 110 from here is why I like this stock. If you can keep the losses small, the gains can move in your favor significantly.

Whole Hog Investing: Recklessly and foolishly placing all (or almost all) of your investment account in a single equity position.

Confession - I am currently in a Whole Hog position in ON2 Technologies (ONT).

Commencing finger wagging and mocking now. Go ahead and roll your eyes too if you wish.

Yes, it is very risky. Yes, it is very foolish. Yes, I will likely end up broke.

But - my research on this one, and my instinct, compels me to dive head first into the pig pen.

Let’s look at the chart.

Why the hell did I bring up that hideous chart?????????

Oh yeah, because the point is that the chart is irrelevant for most Whole Hog positions.

In this case, the decision to place my entire destiny in the hands of corporate types in New York that I know next to nothing about, and have never met, is due to the fact that I believe Whole Hoggedly that On2 will achieve substantial increases in revenue in the near term future.

I have Whole Hogged before, 3 times to be precise. 2 big winners - 1 excruciating loser.

I do not advise anyone to Whole Hog this (or any) stock, especially this stock. If the video technology involved evolves away from the On2 solution, or if the politics of the game does not play out right, I will be hit very hard.

But here’s to taking that shot when your gut tells you there’s no other choice. I’m in heavy around 80 cents (held that position for a year and a half or so) and in hog heavy some more where we sit now (near a buck). (The wise among you will notice my piggish folly in taking no profits when it bumped against 4 bucks) Where’s my stop? Did you say stop? as in Money Management?

I’m stopped out when I no longer feel that On2 will be a huge winner in the video codec space.

Swami Syndrome: A proclivity for predicting the future coupled with a blinding disconnect to the fact that a coin toss (or the proverbial monkey) would be more accurate than your lame prognostications.

There are lots of Pseudo Swami’s out there with Swami Syndrome!! Let’s see if we can distinguish between a bologna swami and the real thing.

We’ve got a Swami Sandwich filled with contradicting condiments with this first entry:

The Big Threat of Mortgage Credit Losses

On one side you have Swami Ben Stein. He loves to be on TV a lot which automatically puts him at risk for developing Swami Syndrome.

As you can see by that all knowing grin on his face, he may already be afflicted. But, maybe not, is he right?

Ben says, Subprime is a mess. But it’s a small mess.

Subprime mortgages account for roughly 20 percent of mortgages even in the most heavily exposed states. About 20 percent of them are delinquent in some way. That’s 4 percent of mortgages.

Of these, maybe half, or 2 percent, will go into foreclosure. There will be roughly 50 percent recovery on sale of these. This is a loss of 1 percent in the mortgage market — a sum the lenders have already made many times over because of the hefty fees on those deals. In the context of the size of the U.S. financial sector, it’s nothing.

And why should a crisis in subprime drive down stocks in Mexico and Thailand? Again, because the speculators seek to create panic to make money by selling short, and they sell short everything.

Spreading the Fear

In other words, it’s all the speculators trying to panic us so their sell programs will make money. And they’ll make money as long as they can spread their panic. When they can’t do that any longer, they’ll work the long side — and make up reasons for that, too.

In the meantime, the economy is strong. Profits are great, and interest rates are low and will stay that way. Don’t sell. With all the shrieking about the market, it only fell to what it was about five weeks ago — and we didn’t think we were poor then.

So Swami Ben is predicting that the Subprime debacle will not be the cause of an imminent recession. If we don’t go into recession in 2008 I think we would have to say that Swami Ben’s crystal ball was crystal clear on this one.

On the other side we have The Big Picture and Goldman Sachs U.S. economist Jan Hatzius. Swami BigP takes his first shot by bringing up the problem that derivatives pose to the subprime mess.

Its a rather foolish, overly simplistic analysis that ignores far too many other elements of the sub-prime slime. The pyramid of Derivatives built on top of them, for instance. It reminds me of an argument you might get intro with a child: “But daddy, the economy is so big and sub-prime is so small…”

and then he quotes Jan (too lazy to read all of Jan’s opinions so I can’t slap the Swami tag on him):

What’s different about mortgages is, in a word, leverage, he continues. Most stocks are owned by traditional investors, such as individuals, mutual funds, pension funds and insurance companies, who don’t use margin and don’t short. In contrast, most owners of mortgages are highly leveraged, including banks, savings and loans, broker-dealers and government-sponsored enterprises such as Fannie Mae and Freddie Mac, according to Fed data, which don’t count hedge funds.

This distinction makes a huge difference. If, say, these leveraged players account for $200 billion of mortgage-related credit losses, and they lever up 10 times, that hit results in a $2 trillion reduction in credit, Hatzius theorizes.

This would be a shock equal to 7% of total debt. Such a credit contraction could produce a large recession, if it happened in a short period such as a year, or a long period of sluggish growth — say, over two to four years, he adds.

And Swami BigP even goes on in another post to belittle Swami Ben by coining a new catch phrase:

I am starting a new campaign: Let’s replace the phrase “Tom Foolery” with “Ben Steinery.”

It’s clear to me that BigP is predicting a recession, caused mainly by subprime mortgage chicanery. Since we are already well into the subprime fallout, to be a sage like Swami, that recession would have to occur in 2008.

Let’s revisit this one in June of 2008 and see how these Swami predictions are panning out. Will the new catchphrase be Ben Steinery? or will it be Big Picturey?

UPDATE: Lo and behold, Big Picture turns out to be the Anti-Swami!! In his comment below he backs that up by directing readers to this terrific article http://www.thestreet.com/_tscana/comment/barryritholtz/10226887.html

This single line really highlights a theme of his piece:

No one truly knows what tomorrow will bring. Nobody.

That throws the harsh attacks on Swami Ben in a new light. Thanks for the good read!