Hedge Funds - Stock Trading

FAQ

WEBSITE QUESTIONS:

Are you able to post when you open and close your positions?

Yes. All trades (longs, shorts, sells, covers) are posted on the website before the orders are entered and executed on my end. All trades can be found on the ‘New Positions’ page.

What should I be looking at on BigWaveTrading.com?

Before every market day make sure you go to:

Daily Commentary Page
New Positions Page
Pre-Market DayTrading List Page
Live Chat

These are always updated before 5am EST before the opening bell.

TECHNICAL QUESTIONS:

What moving averages does Joshua use?

Joshua uses the 5, 10, 20, 50 and 200 day simple moving averages as these are the moving averages that have been used historically by the greatest mutual funds, hedge funds, and stock operators. This is where they go to support their top holdings when they pull back. In bull markets, the best stocks will either bounce directly off of these averages or they will “hang out” around these averages before resuming their uptrend.

What are some other secondary indicators you use besides price and volume?

Price, volume, and moving averages of price are all you need when selecting winning stocks. However, I do like to use some secondary indicators to confirm the strength in the stock. Relative Strength, MoneyStream, and BOP (MoneyStream and BOP are proprietary Worden Telechart indicators) are my favorite at confirming the strength. I also use MACD and Time Segment Volume to monitoring possible overbought and oversold conditions.

What does Joshua look for in a chart?

When it comes to a perfect stock the most important thing is the market and sector. If the stock market is in a very strong uptrend and the stock is a top stock in a leading sector in the uptrend, I normally look for a variety of setups like a cup with handle, a high tight flag, a double bottom, an ascending base, a cup pattern, or a bounce off the 50 DMA into new high ground that comes from a base lasting at least five to seven weeks. The volume during the base should be very low during the pullback/consolidation and there should be clear accumulation on the bottom, right side, and breakout of the base.

In a bear market I try to avoid going long unless the stock in one of the top three stocks in an industry group that is moving higher in the poor market. These are very rare but they do show up (study my top stocks from March 2000 – October 2002).

Since 2008 we have had to emphasize use of the pocket pivot point signal. The pocket pivot point signal is when price moves through or off the 10 day moving average on volume that is heavier than any previous down session during the past 10 days. This has allowed us earlier entry into quality stocks since most breakouts now reverse. This prevents us from getting shaken out due to a normal pullback.

When do you enter orders?

All orders are entered during the Maui evening and executed in the morning at the opening bell. It doesn’t matter if I enter during or after the AH session, I am just trying to make it clear that they are not after-hours orders. They are just being entered after hours to be executed at the opening bell. Limit orders get executed whenever they get executed. I enter most Limit orders GTC and will cancel an unfilled Limit order when I deem the trade dead.

Do you ever trade intraday?

Yes. Sadly, this is the only way to really make big quick gains anymore. I moved to Maui because you did not need to daytrade to make significant quick gains in the stock market. Stock selection was rewarded handsomely pre-2008. However, thanks to QE and ZIRP, stocks do not move like they used to move. Therefore, when I am not fully invested in overnight positions, I will play momentum in pump-and-dumps, contract winners, and earnings winners in low priced stocks that are heavily followed and actively traded by the momentum gambling public. These are special situations reserved for chat room members.

What is your favorite stock?

Any stock that is moving in my direction is my favorite stock. I do not label stocks as all stocks are bad except for your best stock and they are only good if they are still going up. If the stock is not moving higher, it is not my favorite stock. My favorite stocks are always changing. It is always the one moving the fastest in the correct direction.

When do you sell?

There are multiple answers to this. When I am cutting a loss, the normal procedure is to completely cut my loss as soon as the stock closes below the open and/or LOD of the signal date. Another area we will always cut our loss, if the stock does not move higher immediately after a new long is the 50 day moving average. Since most of my purchases come with the stock above this line, it should never trade below it initially after the purchase. As the stock is rising, the 50 DMA will continue to act as an area where I will partially sell some of my holdings when it is violated on heavy volume. Other areas that I partially sell out of are when the stock hits new highs for a couple of weeks in a row on low volume, when the stock goes into a climax / parabolic run on extremely strong volume, when the stock gaps higher after a long run on very strong volume, when a stock breaks above the upper channel line after a long uptrend, and/or if after a gain of more than 200% my final sell will be with a close below the 200 DMA. If any stock is ever purchased above the 200 day moving average, the 200 day moving average will always be the final cut loss level. We will never hold a stock below the 200 day moving average, if it was purchased above it.

What is your deciding factor in selling a stock?

A close below the 200 day moving average after a very large gain (usually 200%+) or a confirmation heavy volume close below the 50 day moving average if it has already closed below this average on above average volume

How much do you allocate to each trade?

At the start of a brand new bull market the perfect situation would be to have 5 perfect setups in extremely high quality stocks with outstanding fundamental and technical traits and put 20% in each one. I will never put more than 20% in any one stock. Those with accounts under $25k may want to buy as much as 25-30% in one stock if the bull is brand new, the fundamentals are great, and the chart is perfect. As a bull market goes along, I normally don’t like to put more than 5-10% in any one stock as a lot of perfect charts fail more often than succeed. By the time 2007 came along ASFI was only 5% and TESO was 4% at the final buy. IST was 10%, FMDAY 8% and TASR 5% at my final buys when they broke out. I get more cautious as time goes. With a smaller account you can focus more by making 5 stocks represent 100% of your account. In a bear market obviously you need to trade even smaller. As a matter of fact, new traders shouldn’t trade at all.

What about averaging down?

If you have a couple of billion dollars then this strategy might be worth a look. But if you have a billion or less, you can make a lot more money by buying stocks that are moving up, shorting stocks that are moving down, and being in cash during markets that are crazy and go back and forth. The best stocks trend anywhere between 6 to 18 months and there are always good stocks popping up in bull markets to always have your money working in equities that are making you money. In bear makers, you can always find stocks that are breaking lower or be in cash. Why throw good money at bad by averaging a losing position? Do you really want to trade like a muli-billion dollar fund? Cramer’s methods are not good for most. If you are here, chances are, they are not good for you either. The greatest traders in the world never averaged down, you should not either.

Do you buy bargains or stocks on sale?

In the stock market you get what you pay for. Bargains like Enron, Adelphia, Ambak, New Century, Accredited Home Lenders, Engaging Technologies, Clarus, Citigroup, Refco, and so many other stocks that have gone from 70 to 60 to 50 to 40 to 30 to 20 to 10 to 5 throughout the years keep me from this methodology. All these stocks at some point in their decline were considered bargains. Every stock was a Pinto. None a Mercedes. History has proven that stocks making fresh new 52-week highs go on to more than double the performance of stocks hitting fresh new 52-week lows. History has proven a stock hitting new highs for the first time usually keeps hitting them and the opposite is true of stocks hitting new lows for the first time. We try to avoid sales or bargain stocks as much as we can.

Do you buy ETFs?

Before 2008 there was no point. However, following the QE uptrend we have witnessed from 2008-2014 there is no doubt they are necessary for investor’s portfolios. Since there is not a lot of alpha in the stock market anymore, using leveraged ETFs can increase the size of your stock market gains during times when picking stocks is not in favor. Also during bear markets, instead of working on individual stocks on the short side, we now have 3x Bear ETFs that allow one to leverage yourself during market declines. If these vehicles would have existed back in 2000-2002 and 2008 Big Wave Trading would have had even larger returns. When the next bear market arrives, Big Wave Trading will be implementing these vehicles. We also use the 3x Bear ETFs to hedge in Retirement accounts when we are overextended on the long side in an uptrending market.

Do you structure your account to minimize income taxes by using a financial vehicle similar to a personal hedge fund, from which you then pay yourself a salary out of profits as needed and perhaps fund a 401k?

This is not my area of expertise. I am a simple stock market trader. I am setup in Hawaii and just pay the normal cap gains taxes. I do not recommend ever holding a position to minimize a short-term capital gain for a long-term capital gain. Your stock might not survive the time it is needed to realize a long-term gain before all of your gains on the short-term disappear.

What tools do you recommend? Telechart? Anything else?

Telechart, MarketSmith, Interactive Brokers are the only trading tools I use on a daily basis. However, I do enjoy reading Business Insider, ZeroHedge, and various other user groups around the internet based on the stock market to generate short-term trading ideas. Other brokers I recommend include Centerpointe, SureTrader, TradeStation, and ThinkOrSwim. Tradeking and Speedtrader are good for accounts under $10,000.

 

I see how you recommend new positions both long and short, but where do you post your “unwind” recommendations when you reverse your position? Also, do you ever use options instead of the equities directly?

They are posted on the forums under the category ‘stocks I am selling’ and are also posted in the New Positions section without the reason for the sell.

I do use options at the start of fresh strong new bull markets when the fear gauges and

How closely should I watch the stocks I just exited? I used to keep them on a watchlist and monitor them. It seems like many would reverse later and go on to be gains that I missed. It seems like I could have re-entered as they crossed back over the 50d, for example. I’ve even heard some speakers at investment club meetings say that you should follow previous holdings because now you have “experience” with that stock and have invested time in learning how it moves. But I’m not sure I believe that. Maybe if you are a day trader with a “bread & butter” stock that you churn every day, but probably not for Featured or swing trading.

But now I just put them behind me and never look at them again. No point in kicking myself about things I missed when there’s always another stock.

Is this different if you’re shorting? I know W. O’Neil says that you may have to be persistent if your short doesn’t break down after the 2nd or 3rd attempt at a moving average. So would it be prudent to monitor shorts I just covered, as long as the market is bearish?

It depends on a case-by-case basis. Some leading stocks you want to monitor extremely closely all the time when they are near new highs. Others are different. For stocks that are not of high quality, as soon as I sell a stock I am long that is it. Out of sight, out of mind. I don’t care if I ever see it again. I don’t care if it goes lower, goes higher, exist, or delist. It doesn’t matter to me until the next time it shows up on one of my scans and produces another trigger signal. If you have a stock you love but the chart is broken, I say live and let live. Move on and let go. It is like an ex-girlfriend. Sure it hurts A LOT that they left you. It does. But just like stock there will be another one eventually.

Put these stocks behind you. Never look at them again. Because, if you sell and it goes lower you will pat yourself on the back for how much a genius you are (which isn’t true) or if it runs right after you dump it you feel like an idiot (which isn’t true). It is best to ignore former holdings until they show up again on your scans and then whatever they do to become another play is up to them. I just never worry about any long I was once long, even if it runs like EMS did in 2006-2007.

I accidentally sold all of my long in this stock when I should have only sold 25% back on 11/28/06 for a 20% gain. The rest should have produced a 200% gain in 11 months. Instead my SCREW UP netted me a 20% gain in three months. This is just one of my mistakes in selling a long too early. It sucked but it sure didn’t beat me up.

I find it worse to not go long a stock and then see it run 100%. I don’t care if it is even $500 in a $5,000,000 account. I want some of it. Especially when commissions are only $1-$5 on all of my platforms. If you are paying more than $5, you pay WAY TOO MUCH. Even $7 at Scottrade is too much, nowadays.

When it comes to shorting, I almost expect to be wrong a few times before NAILING it. So yes it is different. You must monitor your favorite stocks for places to short since it is such a harder play with lower odds of success. Just look at chemicals. If they fail here and go to new highs, they are still the best leading stocks of the five year plus rally. Therefore, whenever their time comes I want to be there. No matter if it is now or 3 to 5 more attempts. When MOS MON AGU TRA TNH POT are ready to break they are going to break hard. I am looking for 75% gains in about a year’s time frame with these leading stocks in the top sector.

Do you ever buy a stock below the 200 DMA? Do you ever go long a stock with the 200 DMA over the 50 DMA but price is still above both?

Yes. There are always leading stocks that are trying to form bottoming patterns before a new leg higher. Sometimes those bottoming patterns will give us pretty high reward/low risk signals. It doesn’t always happen but it does happen a few times a year.

Do you ever put a little money into extremely oversold markets like the one in 1987?

No. I always need to see some strength before I go long any “oversold” market.

RANDOM QUESTIONS:

Router Issues
One of our members had problems navigating our members area and forums. After a lot of troubleshooting he found the issue with his router (NetGear Rangemax N) :

By the way, in reading on Net Gear, it said sometimes XP Service Pack 2 firewall will conflict with the router’s firewall, basically two firewalls trying to do the same thing. So they suggested taking down the windows firewall which I did and all works fine, so now I don’t have to plug and unplug.

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