Martin Zweig, $100k cash max, 504 point down day in Dow, Risk Management

While the rest of the world suffers, its the daytraders and the few swingtraders that made money today. Fortunately, we got lucky and went back to and old style trading method from almost 20 years ago learned from Wall Street Week's Martin Zweig, and the payoff got me back into the black ytd. This is only the 3rd day in 2008 where I'm on the positive side of the ledger. Although I sold 1/6th of a position today, that still leaves 5/6 exposed, and any unexpected government intervention such as tomorrow's FOMC meeting could turn that profit back into a loss.

The Tradestation T2108 indicator dropped to 21.3 after the Dow recorded its sixth worst point loss in history. Historically, a reading below 20 puts the odds in favor of a countertrend rally but the timing could be as early as three weeks from a potential bottom. As mentioned earlier, the drop was likely caused by the closure of some of LEH's positions in the markets, as the company filed for bankruptcy this weekend after both the federal government and BAC said no way to investing or acquiring their Level 3 junk.

Assuming that LEH had at least $40 billion in positions covering all types of instruments, the market makers aren't simply going to throw the whole thing out at once, but they aren't being discreet about unloading at unfavorable bids. While most of the indexes dropped 3%, financials via the XLF ETF down 9.7%, energy and materials dropped 9% as the plurality of LEH's portfolio shows they doubled down in the summer hoping to ride out the financial downturn and lost. Unfortunately having to sell their winning energy and materials positions is exacerbating a 33% pullback from the 52 week highs in these sectors.

Originally, we had planned to sell over five separate days, just as it took six days to acquire the position through probe trades. But the market does NOT care what I think. There may come a time when you will be forced to close the full position at a moment's notice in order to prevent the previous profit from turning into a loss.

While I have one of the smaller accounts when compared to my daytrading colleagues, one thing we share is the dilemma of occassionally holding over 100k in cash. Similar to an FDIC bank account, I don't want to have over 100k in cash for more than one day in the 1/100 chance my broker decides to go poof. While my account would be covered up to 500k (if I had 500k), they only insure up to 100k in cash. Therefore, I am somewhat forced to keep about half of my net worth invested in something (whether long or short) at all times. I am always looking to find the potential turn or when the current trend could potentially reverse. Notice that today's action, KO was the only Dow component that was up today (up .25). If I think there's a potential for a trend reversal, I want to pay attention to what could be the new leaders. Forget the reasons about why something is behaving that way. The price chart is all you need to be aware of.

For those interested in the ultrashorts, the EFU (interesting ticker symbol), and the SDS show nice uptrending lines.

I am reminded by others that risk management is the difference that separates those who can survive all kinds of markets. Understanding when and when not to use margin. Many of the daytraders I interact with, understand that margin is a temporary tool to augment gains. You will NOT ever see any of them carry a position overnight with a margin risk that threatens them with a potential margin call. They are proficient at what they do because they balance: a maximum trading position versus, reserve cash for future trades, and understanding the cost of margin loans. There are few trades that pay 8-9% consistently in a short timeframe unless you are churning 30% plus profits annually before taxes and broker commissions. Let the big institutions play with the high margin money. Trading is hard enough as is and having to profit a set amount every period to cover interest on a margin loan is unnecessary stress for the inexperienced trader.