For those who have been following, you know that I am concentrating on the short side of the market. But, the market has already come off 10% and by in large, the action in the market this week has been rally attempts on Monday and Thursday. As a trend follower, this is exactly the type of market action I am looking to short into, especially weak volume rallies, such as Thursday's, has highlighted by the chart. So if this is the type of market I am expecting, the next question should be why did I lose money and lots of it?
To be brutally honest, I did not listen to my own teachings of preparing and planning trades. I broke my own rules. I saw the market attempting to rally on weak volume and got giddy, looking for stocks at good prices. And without any confirmation with regards to chart patterns, resistance or any other technical tools I know work, I began to blindly short what became one of the strongest stocks in the market that day (CLF, which was on my weak watchlist stocks). Trader lingo for shorting at perceived "good prices" without any confirmation of any sorts is called picking the top (or bottom, if I was buying into a down market). I became an egomaniac with my view of the market and disregarded my system, my bread and butter. I was acting as if I was an institutional player with millions of shares to short, who most of the time, are forced to do what I was doing in order to get all the shares they want. But I am just a minuscule fish in the sea, with no buying power to affect any stock. What was I thinking?
Anytime you are wrong, the market will make sure you get smacked in the face. This time, I was smacked hard, deservedly so, and without any mercy. As the stock kept rising, I kept covering and shorting more. After a big fat check from the market, I realized in the insanity I was going through and covered my entire position (using full leverage, adding insult to injury) at a price way out of the money. As I was replaying the scenario in my head, I had thoughts of anger, disappointment and ultimately sat in a state of shock, which might be worse than letting out the frustration through vocalization or physical exertion. I felt like a drunk mess in Vegas, saddled with an exorbitant bill I did not want to pay for services I did not even know I receive.
Even the greatest trader to have lived, Jesse Livermore (search him on Google and get the book Reminiscences of a Stock Operator), had countless days like these. His teachings are now maxims in the trader world and yet he made and lost millions, going broke twice in his life. I reminded myself that this was just a bump in the road, that my system was still profitable overall and that all I needed was one good trade to at least wipe out this market spanking. Livermore himself recounted countless times in which he was given a teaching lesson by the market in the form of a "tuition bill" he had to pay and was glad, no matter how much was given up, that his bill was not larger. Basically, his attitude is to learn from his mistakes and to never make it again. I am sitting here today on a great position that on paper, has already wiped out 80% of my mistakes yesterday, with the potential to actually bring me some profits for the week.
The cliche of how you rise up from a fall is absolutely true in whatever you do in life, and none truer than in the market, where even the best traders can slip up once in a while. All it takes is one trade to put you back in the game, to regain that self-confident swagger (but not reckless arrogance like my Thursday showing) that is needed to take on a position. Even in tough trading markets like this February has shown, at the very least a trader must believe that great opportunities with present themselves sooner or later and must be ready to pounce on them. I was lucky that my opportunity came the day after catastrophe.
Feel free to post comments, I will respond and appreciate every one. Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss. If there are any questions on the lingo used in this post, feel free to ask as well.
Hey Henry, good post man, and nice lesson learned there. So it seems like you did some emotional decision making there. My question is, when you long a position, you can use stop loss to prevent yourself from irrationally holding a losing stock. Is there a mechanism that could've helped in your scenario?
ReplyDeleteHey Steve,
ReplyDeleteCertainly, whether I am short or long, I could have used tighter stops. But the act of chasing the top or bottom requires that you loosen up your stop prices and areas, which is a very risky and usually unprofitable move. Add onto the fact that I allowed my emotions to take over my rational thinking and you have a cocktail named disaster.
Honestly, I was not very professional that day. The fact that I was not prepared to trade that scenario shows me how incredibly important being ready and prepared everyday is, if not to make money, then to not lose money. While it is true that as a trader, you should be open to being either short, long or cash, the only way you can make the big money is to have a bias. To have to conviction to apply more of your money at work requires such thinking. With the way I trade, I use leverage quite liberally so it's even more important that I play prepared.