Mistakes

Trading mistakes happen. There are lapses of discipline where we chase, put on too much size or fail to take a loss where we should.  But the great thing about trading is that you can alway change your position.

despite my focus on discipline this month. Here's a mistake I made just yesterday

Entry1: 9.57 

I broke a rule jumped in pre-market  figuring this would push a big move. Should have realized that it had not cleared resistance. 

Entry 2. 8.53

I should have been out of the position by the time it got here. But rather than getting out I  made another mistake and doubled down after it went against me, which put me on more size than I would want to take buying into a loser.  After doubling the position, I had a 2% risk on the position, which is more than I would want to take on this type of set up. 

Remedy:

 I woke up early with a clear head.  There would be no chasing losses.  I needed to right size the position. There was a a .30 gap in the am and used that gap to unload 1/2 my position and get back to an appropriate size.    I avoid an over size risk.  The stock held its bounce and went higher all is right in the world. 

Cut losses and ride winners... If only it were that easy

How many times have we been told to sell our losers and let our winners ride.  And that losing traders sell winners too quickly.

Those conclusions are even backed up by research.  And, as academics tend to do it's given a fancy name-- the disposition effect. 

Per wikipedia:

"The disposition effect is an anomaly discovered in behavioral finance. It relates to the tendency of investors to sell shares whose price has increased, while keeping assets that have dropped in value"

The study also concluded that  Investors are more likely to take a small gain than a small loss.

Gosh, is that all there is to it? We just need to sell our losses quickly and let our winners become bigger winners.   

Here's the problem with academia and mantras.  When we enter a trade, we  don't what is going to become a winner, a big winner, or a loser.  If we did, we  wouldn't have entered the trade.  Rarely  does a trade go straight up and become a big winner. --   They go up, then down then down some more then up and so forth. 

Many times I've had a small winner reverse to a loser. I've had big winners reverse to a small winners.  I've had big winners become bigger winners.  We can't control what the stock does once our position is on we control only what we do. 

 One thing you can control is whether a small losses becomes a big loss. Small losses keep you in the game.  Learn to love them. Also, don't fear small gains. I take small gains all the time. I can make the argument, that by taking a small gains I'm avoiding a loss (big or small) altogether.  I came to that conclusion after finding myself embarrassed to take a small gain because it was small.-- I know I'm not the only one as Mark Douglas talked about his own issues with taking small gains in Trading with Discipline-- only to see those small gains become small losses.  If the trade isn't working get out with profit if you can. Small gains are better than small losses. 

Plan your exits.  I know where my stop losses are where I will get out for a small loss that's the easy party.-- and the most critical.   The harder part is where to take profits. When I take a trade, I know how I want it to act or behave. If it doesn't do what I thought it would, a small gain can be the right decision. For example, If I take a breakout and I expect it to get through a certain level and if it struggles I'll sell a portion.  Or, If the market presents an opportunity for a profit-- take some of it. The stock may still be a winner, or even a big winner, for someone else but it wasn't my trade. 

The point is its impossible to know what is going to be big winner. But we can prevent big losers. My conclusion is cut the losers quickly and the winners will take care of themselves. 

90% Bullshit.

How often do you see the statistic that 90% of traders lose money?  That statistic seems to be thrown around and accepted without question.  Yet, I've never seen a citation for that figure.  I don't see anyone getting scared out of trading by that figure.  To the contrary, it's great marketing. After all if you're a guru and your profitable you must be one of the chosen few. If you sign up to a service and then start making some money, then the service must be fantastic.

The problem is that that 90% failure is not accurate.

Over the years, there have been a number of studies about the profitability of various speculation activities. I've seen several articles referencing surveys that have shown trading may be a losing proposition, but nothing close to a 90% failure rate.

• 70% of day traders lose money. 
• "6 in 10 mom and pop traders lose money

 The 90% figure likely comes from a misinterpretation of the Thomas Hieronymus study.  Thomas Hieronymus took a look at 462 speculative futures trading accounts in the 1960s.   He observed that 92% of the traders who had traded fewer than 10 times over the year (i.e. the dabblers) lost money.  Hieronymus then looked at the regular traders and found that  41% of the regular traders made money against 59% losers.

Do you call the guy who placed 1 trade got his ass handed and went on his way a trader?  I wouldn't.
The 41 /59% split seems more realistic.  The lesson being that studying trading and preparing the odds get a whole lot better.  Now 41% might not be a walk in the park-- but it's not 10% and certain doom.

New Power Scan.

Here's a new scan I've been working out with a bit help from my friends.

Results with charts:

List: 

REPH

IDI

LJPC

BSET

LPCN

ABCD

LMNS

RLH

CHE

ASC

SCMP

QTWO

CARA

SHIP

LXFT

ABIO

BIO

AMED

XNCR

GNCMA

ISLE

INSY

SRNE

RARE

BRLI

DVAX

CUBI

AMAG

TWOU

NTRI

PTLA

REMY

CMRX

CBM

DY

SUPN

DST

SKX

ANTH

NGHC

BLKB

ANAC

AVG

CSFL

AMCX

EPAM

DATA

UBSI

TLMR

SNA

IBKR

TPX

Q

ULTA

IMGN

BRKL

FOLD

PANW

PENN

PVTB

BYD

NAT

HCC

HAS

ORLY

ELNK

HALO

PLL

MSCI

HZNP

TSS

CF

FHN

EA

HCA

HIG

CCL

PGR

KHC

AIG

SBUX

DIS

FB

CUK

EROS

A fish story- The monster gain that got away.

Since I've deemed this psychology month.  I thought it was appropriate to discuss the "one that got away"  I just narrowly missed a monster... and that's okay 

I bought EYEG yesterday.   It had a nice price pop on news that I thought was a big deal as it had signed a deal with $VRX.

Here were my entry notes from yesterday.

I took the position long at 6.70.  It then got more news as it treated its first patient or something like that and ran to $8.00.  With a 7.80 bid. That bid gave way and the spread was 7.25 @ 8.00 then @ 7.55 I hit the bid. It had only traded 10k on the day.  I had a decent gain on a thin stock and I did not want to get trapped.  Here's what happened next:

BOOM!  a monster move.

So how do I feel.  Surprisingly, not that bad.  For every EYEG there are probably 50-60 that pop and drop.  I still believe I made the right decision in terms of probability. Although I was wrong to sell on this stock, Most stocks don't run 130% in a day. This one did. On most trades, a stock that's bid falls away is a sign of trouble so I got out with a decent profit. 

It takes just one trader.

Once upon a time (not too long ago), a prominent floor trader decided that the wanted to get off the floor and start trading on screen.  In the pits, he had no need for technical analysis as he was trading order flow and doing it very successfully.   He realized that he would need to learn something about technical analysis. So he got put in contact with the young hot shot technician.

The young technician was eager to show off his knowledge and the two men started watching the soybean market together.  The technician was calling out support and resistance points and the market gradually drifted to a support point and the technician proudly boasted this will be the low for the day.  T

he floor trader looked over and asked "are you sure?"

The young technician responded "absolutely"

"Bull shit" said the floor trader with a knowing  look on his face.

The floor trader then got on his phone dialed his broker and said "sell 2 million soybeans"

 The market then then ripped through the "support" proceeding to drop lower and lower as stops were triggered.

The point is that no matter what your conviction in a trade or how many times the pattern or trade has worked in the past, it takes just a single trader who disagrees with you to destroy your chance of a successful trade.  For that reason we must plan for the downside of a trade, understand the real risk we are taking,and accept that risk when we put the trade on because there are no sure trades.

Trading in the Zone: Full survey response.

Here's my full response to the attitude survey

1. To make money as a trader you have to know what the market is going to do next. 

Disagree  -- you just have to prepare for a probabilities of risk v reward. 

2. Sometimes I find myself thinking that there must be a way to trade without having to take a loss. Disagree

3. Making money as a trader is primarily a function of analysis. 

Agree to an extent as the analysis allows you to take a position to make money from a trade if the analysis is correct.

4. Losses are an unavoidable component of trading. Agree 

5. My risk is always defined before I enter a trade. Disagree  (see previous post)

6. In my mind there is always a cost associated with finding out what the market may do next. 

Agree Disagree.  I think to some degree there's a price to admission. There is either a real cost or an opportunity cost. 

7. I wouldn't even bother putting on the next trade if I wasn't sure that it was going to be a winner. Disagree,  I don't know if any of my trades will be winners. 

8. The more a trader learns about the markets and how they behave, the easier it will be for him to execute his trades.
Agree Disagree   knowing the market structure and what is in the realm of probable, and possible makes it easier. 

9. My methodology tells me exactly under what market conditions to either enter or exit a trade. Agree   (but do I always follow it)

10. Even when I have a clear signal to reverse my position, I find it extremely difficult to do. 

Agree . Taking profits on a "clear" signals  is sometimes harder.  A position that goes against me is easy.  

11. I have sustained periods of consistent success usually followed by some fairly drastic draw-downs in my equity.
Agree : see previous post

12. When I first started trading I would describe my trading methodology as haphazard, meaning some success in between a lot of pain.

Agree.  I'm sure I, like a lot of other traders jumped around a lot. I followed others and attempted to rationalize trades.  

13. I often find myself feeling that the markets are against me personally.

Disagree.  I don't often get that feeling.  But even though I know better, I've had moments where those thoughts creep in.  Usually after a series of 

14. As much as I might try to "let go," I find it very difficult to put past emotional wounds behind me.   

I think I'm okay here. 

15. I have a money management philosophy that is founded in the principle of always taking some money out of the market when the market makes it available.
Agree. I like profit taking. 

16. A trader's job is to identify patterns in the markets' behavior that represent an opportunity and then to determine the risk of finding out if these patterns will play themselves out as they have in the past.
Agree.  100%

17. Sometimes I just can't help feeling that I am a victim of the market. 

Agree.  I've had multiple positions gap against me in a week. I know they are my fault but still sometimes those thought creep in.  Conversely, I sometimes feel I am the greatest trader ever.  As much as I know better, those thoughts creep in as well. 

18. When I trade I usually try to stay focused in one time frame. Agree Disagree.

I use multiple time frames. Monthly momentum, weekly breakouts, daily charts for exits. 

19. Trading successfully requires a degree of mental flexibility far beyond the scope of most people.

Agree 

20. There are times when I can definitely feel the flow of the market; however, I often have difficulty acting on these feelings.
 Disagree  

21. There are many times when I am in a profitable trade and I know the move is basically over, but I still won't take my profits.
Agree Disagree

22. No matter how much money I make in a trade, I am rarely ever satisfied and feel that I could have made more.
Agree Disagree

23. When I put on a trade, I feel I have a positive attitude. I anticipate all of the money I could make from the trade in a positive way.
Agree -- and those usually are the trades that lose money.  

24. The most important component in a trader's ability to accumulate money over time is having a belief in his own consistency.
 Disagree

25. If you were granted a wish to be able to instantaneously acquire one trading skill, what skill would you choose?

how to do insider trading.  Just kidding. How to hold on to stocks that make parabolic runs to catch most of the move without waiting until the backside. 

26. I often spend sleepless nights worrying about the market. Disagree.  

27. Do you ever feel compelled to make a trade because you are afraid that you might miss out? Yes 

28. Although it doesn't happen veiy often, I really like my trades to be perfect. When I make a perfect call it feels so good that it makes up for all of the times that I don't.
Agree.  Perfection in anything feels amazing. 

29. Do you ever find yourself planning trades you never execute, and executing trades you never

planned? Yes.  Occasionally. 

30. In a few sentences explain why most traders either don't make money or aren't able to keep what they make. 

See prior post. 

Trading in the Zone: The Intro Survey

At the beginning of Trading in the Zone, Mark Douglas' provides a survey.  I thought I would share my  answers to what I perceive as several of my trading issues.

"5. My risk is always defined before I enter a trade. Agree Disagree."

Disagree:
I have a stop limit when  I entry a trade and I assume that is my risk.  Yet on several occasions. I have been gapped and have taken much larger losses than I had anticipated as my risk.  I had not accounted  for the black swan type of events. 

"11. I have sustained periods of consistent success usually followed by some fairly drastic draw-downs in my equity. Agree Disagree"

I find this the most frustrating aspect.  Just when I feel I get it and I'm "in the zone"  I find my self taking a large loss on a trade where I had bent rules.  Last year I went in big FUEL and took nearly a 10% hit.  At the time, that happen I was up over 60% on the year and had just completed a 16% month.  I could do no wrong.      

I did it again in January and in June.  None of these drawdowns were slow.  They were usually caused by  I don't fault the market, downgrades, missed earnings or any of the things the financial press may have attributed the drop in a stock.  I got intoxicated with my success and suffered the hangover. 

Although I have been able to pick myself up each time and trade successful and pull myself out, It's time to stop that cycle.   

21. There are many times when I am in a profitable trade and I know the move is basically over, but I still won't take my profits. Agree Disagree 

Agree. Probably related to 11.  There are times when I feel my profits are too small relative to the number of shares I have on, which prevents me from taking the profits.  Many times those positions cause the most harm. 

"30. In a few sentences explain why most traders either don't make money or aren't able to keep what they make."

We attempt to rationalize moves and apply logic to why a stock has moved too much or why It will move a lot in our favor.   We jump at poorly planned trades out of fear of missing out.  Our equity curve reflects our emotional state so when we get a burst   in our equity curve we do not see the risks and trade in a manner different than what caused the equity increase.