Peter Gabriel’s “Steam” is my inspiration for this post. The first four words of the song (above) gave birth to many of the thoughts below.
Sometimes it’s better to stand back from the market. All traders need vacations to keep from burning themselves out and making bad trades. But sometimes you need to stand back because you feel uncertain, and trading isn’t working as well as it was. You don’t have a clue what the market is doing, and you don’t trade with the confidence you’ve had in the past. Taking a break feels wrong, I know. But it’s smart. And the next week or two before Labor Day is a great time to do so.
I was forced through circumstances to take a couple of weeks off earlier this summer. I still followed the market, but didn’t obsessively watch each tick, nor did I trade. And I was amazed by how much my trading had improved when I finally returned to the market.
Sometimes, when you’re a new trader (I’ve been at this only about nine months, so I qualify as new), standing back gives you perspective. In my case, the time off forced me to realize one of my sins was overtrading, and it was an emotional reaction I did not want in my trading.
For me, overtrading was born of either greed or desperation–and both of those emotions will take your money faster than a three-card monte dealer in Manhattan. Overtrading to make more money, or to make back money because you’ve lost some, wasn’t working for me. I’ve read it doesn’t work for most, if not all, of us. Note that overtrading does not necessarily mean making a lot of trades–it means trading with your emotions more than you should.
Some people can trade successfully with their emotions in the mix, but not me. I’m a highly emotional and expressive person (which is why I have no poker face in poker–another story for another time). It’s hard work for me not to allow my emotions free rein while in the market. I have had to re-develop almost an indifference to the money involved, concentrating strictly on executing each trade and trading plan well. I say re-develop because, when I was younger, and successfully invested aggressively, such indifference was my friend–I had disconnected the feelings of fear and greed from my investing. I could take the chances I did because I thought of the money as numbers on a page or pixels on a screen, and not real money.
(That’s the hubris of youth–you think there will never be a time you can’t find a job or make money, if you’ve been successful to that point. And that lesson was painfully brought home to me when my husband lost his job and our retirement accounts were decimated last fall. But I digress.)
The other thing I discovered after my forced vacation from trading was that I had, indeed, managed to rediscover a kind of sangfroid in my trading. I had that old disinterested (but not uninterested) ability to analyze and execute that had served me well fifteen to twenty years earlier. I almost had nerves of steel, compared to the emotional trading I had done before. And, miracle of miracles, that disinterested way of trading has mostly remained. I still have trades, even entire days, where I execute badly, but they are much fewer and farther between.
The final thing I learned from my forced vacation is that, as I have so many times in life, taking time off caused a great leap forward in my abilities. I’ve always been one to learn something in great gulps, in lightbulb moments, not in a steadily-increasing amount of knowledge. For example, I remember the exact moment I could read. Literally, I remember the one moment when words on the page made no sense, and the following moment when they did completely. After that, I could read anything with no struggle except for complicated vocabulary. (Lest you think I was a child genius, I point out that I was 3/4 of the way through first grade before my reading lightbulb moment.)
So, take some time off. Spend time with your family and friends. Do things you enjoy, and tell people you love them. I’m taking most of the next week off, seeing people close to my heart and reading Brett Steenbarger’s latest. The odds are great that I will come back to my trading fresher and better at it. At least, that’s my plan.
Good trading to you, and be careful out there.
Barrie
Bound for Boston, the home of my heart
I have a family member in the hospital and will be traveling there to spend a few days. That means I might not be able to post another blog entry until Sunday or so. I’ll get back to the blog as soon as I can. Thanks for your patience.
It’s important to know why you’re taking a trade, even if it’s a really dumb reason. We all take dumb trades now and then–some of us more often than others. I’m waving my hand, here.
But my worst trades have come from my high-flown market theses, and stubbornly believing in those theses when the market was clearly screaming, “Get out!” I’m talking ignoring stops and continuing to hold while the stock went down, down, down, because I was soooo sure my analysis was correct.
An example: I recently opened a long position in a stock (for personal reasons, I’m not revealing it here) because I had a certain thesis in mind. I was absolutely, positively certain the stock would rise. It didn’t. Did I get out when I was only a dollar per share down? No. Like an idiot, I told myself it would bounce on the next day’s open, and held on.
It didn’t bounce. I finally got out, losing two dollars a share. For me, that’s a big loss. It wiped out a substantial profit I’d made the day before. I was so upset with myself for trading badly that I stayed out of the market the rest of the day. How many times do I have to learn the “get out at your stop no matter what” lesson? That I have to follow my plan? That market theses can, at times, be feces? Because that trade sure ’nuff stunk.
As Brian Shannon (@Alphatrends) says, “Price is the only thing that pays.” You have to do what the market is telling you to do, and if your thesis is creating a losing position for you, then your thesis might be wrong. Create a plan for each trade, knowing where you want to get in, where you want to place your stop, and why you are taking the trade.
But if the market tells you via price action that your reasoning is wrong, get out when your stop is hit. Good trading is about good execution, especially on losing trades. If you work on executing each trade well and manage your risk, it’s likely you will make more money than you lose. Losses are a part of trading, and each of us has to come to peace with that fact, unpleasant though it is.
Good trading to you, and be careful out there.
A StockTwits member, @daytrend (whom I highly recommend you follow), pointed out that my reference to stops in my previous post is incomplete. He then generously provided the information that follows, much of it in his own words. He was too shy to post himself on this blog, but you can read Daytrend’s blog at http://daytrend.wordpress.com/
Are you aware that stops for overnight positions are not totally effective? There is no stop at all that will protect you after-hours; they’re all day stops, essentially. With many brokers, (mine for sure), all stops are cancelled at the close, period. Even if your broker doesn’t cancel your stops, the stops are generally unreliable, or your fill could be terrible, if the stock/ETF gaps through your stop at the following open.
This is not some esoteric issue; it’s real. A great many traders who hold overnight have been hurt by this, so they don’t set their stop in pre-market. Instead, they wait for the first five to fifteen minutes of opening volatility to die down, in order to potentially reassess their stop and set it. This is why the term day-trader was coined—many people don’t want to deal with holding overnight because they’d have to deal with this situation.
The first fifteen minutes or so is the most volatile of the day (except perhaps for the final 30 minutes), and stops can be hit but then the new, terrible level doesn’t hold. Traders who can handle their emotions and act decisively will not put in a stop until they’ve assessed the day and the volatility is down.
The real key is to hold a position overnight only if you have very nice profit in the stock, then you can take some heat if necessary. [Note: I don’t always follow this rule to determine whether I hold overnight, but it’s a helpful rule to follow for new traders who may not have mastered their emotions yet.]
Mastering one’s emotions is hardest at the open because of the volatility. Possible solutions are to hold reduced size amounts, or just day-trade.
Daytrend goes on to say:
“From a practical standpoint, I’m certain everything I told you is true, but there are probably some fine details that I cannot state precisely, and this is a business of precision. A better person to address this would be someone who knows exactly, in the modern world of ECNs and the electronic NYSE, how stops work for the NYSE, NASDAQ, and ECNs. The details encompass a book, and I didn’t write it.”
Daytrend asked me to ask someone who knows the precise details, and then to tell him. So, I will look into finding out everything I can about issues with stops, and then share the information with you and with him. However, it might be a couple of weeks before I can do so, mostly because I’m on vacation starting next Wednesday and will be away for a week.
I hope this brief post about stops and overnight holding of stocks/ETFs is useful for you. I’m barely beyond newbie status myself, but together we can learn. Thanks again to my friend Daytrend! (@daytrend on Twitter.com and StockTwits.com)
Good trading to you, and be careful out there.
P.S. Quote for the day, from @RatioTrader on Twitter/StockTwits: “My Philosophy on Trading: If you don’t bet, you cant win. If you lose all your chips, you can’t bet.” Good advice when it comes to managing position size!
Today I have a lot of trades on, which means I am always looking at price targets and the question of whether I should take profits. Even with stops in, I am vigilant at protecting my upside.
I am the queen of taking profits, which is both good and bad. The good is that I make some money on many trades. The bad is, I’ve left a lot of money on the table at times. But I rarely let a profit turn into a loss if the market is moving against me. This suits my risk profile, which I admit is very limited at the moment. I’ve had a couple of losing days, so I’m using small positions and working hard to execute well so that I can rack up wins and build my emotional capital (as well as my cash).
So, today’s short post is simply a reminder to take profits. Take half, or a third, or even a fourth of your position off once you have a nice move in the stock or ETF. When I was a complete novice at trading, the idea of selling only part of my stake was new to me. I’d invested in my retirement accounts for years, and rarely did I scale out of a position. So I mention the option here in case you might not have thought about selling a partial position.
If the position is too small that taking half would be rather silly, then you might consider doing what I do, which is selling all. I realize this seriously limits profit potential, so selling all might not be for you. But–don’t get so wrapped up in the money you’re making that you forget to take profits. It’s only prudent.
And, remember–it’s not money in your account until the stock is sold.
I have made money with the ultra-short ETFs (exchange-traded funds) during the bear market. I have lost money, too. On balance, I’ve lost more than I’ve made. What follows is a cautionary tale.
I found out about the Direxion 3X ETFs FAS (3X long financials) and FAZ (3X short financials) in January, 2009. Previously, I had played (traded) the 2X short ETFs: SKF (ultra-short financials), SRS (ultra-short real estate), and SDS (ultra-short S&P 500). I was completely ignorant of the mathematics that underlie the leveraged ETFs, but I had read that holding them long-term was a very dumb move. So I day-traded them all with some success.
In hindsight, I actually had bigger wins with the 2X short financial ETF, SKF, but 3X funds are a kind of financial crack: the siren song of so-called “easy money”, especially if you’ve actually made money in the funds, can be irresistible. And a few wins can make you cocky. Remember what I said about hubris and the market? She just loves to slap you down when you think you’re a big swinging you-know-what.
Here’s the first mistake I made with FAZ. I bought some on a Friday to hold over the weekend. I knew I wouldn’t be able to monitor it Monday (mistake number one), and I hadn’t entered a stop order to limit my losses (mistake number two). I bought one hundred shares of FAZ on Friday, February 20 at 82.14.
We hit a few days of upward motion in the finnies, so—you guessed it—my FAZ (3X short) position was toast. And I was stupid enough NOT to sell it on Tuesday, Feb. 24. Nope, I rode it all the way down to 62.04, which is where I sold it on Friday, February 27. I lost over two thousand dollars.
There is simply no excuse for losing that much money on that trade.
Don’t you make the same mistake. These 2X and 3X leveraged ETFs are beautiful trading vehicles for traders who know what they’re doing, who manage their risk, and execute trades well. I did none of those things, and I lost a ton of money. And you will, too, unless you know what you’re doing.
Your takeaway: always have a stop order in place to limit loss. It should be an actual order in the system that will execute if you plan to step away from the computer. If you’re planning to monitor the trade closely, you can use a mental stop as long as you’re disciplined enough to sell should the stock/ETF fall to your mental stop. Never enter a trade without knowing what your exit point is should the trade fail, and never, ever change that exit point “on the fly”. Odds are you changed it because you are trading emotionally, not with a plan.
If you are a new trader, commit this information to memory and follow it without exception. And, for God’s sake, don’t play with the leveraged ETFs, long or short, unless you know how to manage position size and risk. I’ll write more about position size and what it has to do with risk in a future post.
Next up will be my huge failed trade in yet another leveraged ETF. Can you say she lost over five grand, traders? And she compounded the error by holding the ETF for weeks? {shuddering at own idiocy}
Good trading to you, and be careful out there.
In the future, I will have plenty to say about how I made mistakes with leveraged ETFs, especially the three-times ones. But for now, this set of graphs and information should sober you up as to the long-term risks inherent in holding the two-times and three-times leveraged ETFs. These ETFs are short-term trading vehicles and are not meant to be held in a long-term portfolio.
Thanks to @G2Trading on StockTwits for providing the information, and to @infovestment for re-Tweeting it.
Here’s the next part of our story.
When last we left our sassy heroine, she’d just announced to her husband that she planned to learn how to trade stocks short-term and thus recover what they had lost in the market.
Her husband has recently asked her, why did you ever start trading? She asked in return, don’t you remember what I said one day in November? And he answered, no, did you say something about it?
She was stunned that her pronouncement, so important to her at the time, had gone unheard, but she was not surprised. Such are the ways of husbands at times.
Okay, enough of the literary posing. It’s last November, I was mad as hell, and I wasn’t gonna take it any more. Eat my shorts, world!
An aside: most of my accomplishments in life have started out as anger, as (for example), “I’m gonna get out of this small town, or die trying… I’m gonna get a college degree, or die trying… I’m gonna have a career in radio, or die trying…”
Well, you see the pattern. My own determination (some dare call it stubbornness), and a refusal to give up until I got what I’d vowed I wanted, have fueled me throughout my life. But anger and stubbornness can only get you so far. You have to start learning, and the hardest part of learning a new field is figuring out where to start.
So I went back to the economics and finance textbooks, re-reading selected sections. I began reading stories on financial news web sites and cast about for new books to read, discovering the first real trading book I ever read, by “Trader Vic” Victor Sperandeo (turned out it was right there on my husband’s bookshelf). God help me, I even bought stocks mentioned on CNBC’s Fast Money and Mad Money, and spent time digesting market news on their web site.
Feelings of desperation will lead you to strange places, I’ve learned. It will also cause you to take stupid risks and make terrible, terrible trading decisions.
As December dawned, my poor husband was still rather demoralized over losing his job. I was working a part-time job over the internet (okay, I worked for Google, but I’m not allowed to tell you what I did—seriously, it was in my contract that I can’t tell you hardly anything about it), writing like a madwoman to earn even more money, watching the market during the day, and studying in my every spare moment, so that I could begin trading.
I started using one of my broker’s trading platforms, the less-advanced one. (I still use it in combo with the more-advanced platform.) I’ll never forget the first morning I watched my stock list at market open: the red and green flashing price ticks going off like fireworks shook me. I actually couldn’t watch at first, because it drove my eyes crazy. It took me a day or two to get used to the rapid-fire action. Remember, this was when the VIX (a measure of volatility in the market) was still above fifty, an unprecedented level before September, 2008.
I did some really dumb, dumb things, especially with double-short and triple-short ETFs—things I will detail in future blog posts—but I was excited. For the first time in a while, I felt in control—sort of, anyway—of our financial future.
As 2009 dawned, I had been trading and studying trading for nearly two months and, despite moments of sheer idiocy and terror, was net green. In other words, I had made more money trading than I had lost. I was hooked!
Next, I discovered more resources on the internet, one of them being Twitter. (I actually opened a Twitter account under my pseudonym because my plan was to expand the marketing of my writing. But that plan quickly gave way to concentrating on “following” people who traded stocks.) As early 2009 progressed, I met, via Twitter, a stock trader, @JinShing (thank you, Jin!), who mentioned StockTwits to me. I’ve never looked back. (If you are a newbie in the markets, I highly recommend StockTwits and the TweetDeck platform–unsolicited testimonial.) I also found out about a conference (Trader’s Expo) in NYC in February that I could attend for free, and that fit my price budget. I convinced my husband to let me find a cheap room in midtown for a couple of nights so I could attend the conference. The trip would take a sizeable bite out of our budget, but it smelled like opportunity to me. My husband, a dear man who rarely says no to my passions, drove me to the Bolt Bus pickup point early on a Saturday morning. I’d spent ten dollars each way for the bus that would take me to New York, I was dressed in my best business attire and heels, and I was so worked up over what I hoped I could learn, I could barely sit still.
I attended everything I could over three days and nights, read everything anyone gave me, and talked with anyone who would talk to me. The traders I met were amazingly friendly and helpful—so much for that Wall Street stereotype, traders are all greedy and selfish jerks like Gordon Gekko who wouldn’t cross the street to pee on you if your butt was on fire. I was completely indiscriminate about what I absorbed and who I talked with. I did so because I didn’t know what was important and what wasn’t, so I figured I would learn it all, or… you guessed it, die trying. At any rate, it worked for me, but I have holes in my knowledge that, to this day, I’m still trying to fill.
Something about those days in New York cemented my resolve. Not only would I get back all the money we’d lost in our IRAs—and I set that as my goal for 2009, nothing like ambition, eh?—but I would learn to be a good enough trader that, eventually, I could make a living at it, and my lovely husband could quit worrying and retire. When I finally arrived home, exhausted but triumphant post-conference, I felt like I’d finally been able to kick Fate in its privates. It was payback for Fate kicking us when we were down the previous fall. I had renewed my determination that we would survive—hell, we’d prevail, maybe even thrive!
Oh, hooray, you say, she’s a big success now, right? She’s bought an S-class Benz and a summer home and life is good, right?
Well, even though so far I’m solidly net green for 2009, I’ve also lost money, lots of it. The more you learn about trading, the more there is to learn, or so it seems. And that is one of the most important pieces of wisdom I can pass on to you, if you’re a newbie—never stop learning, because the market is different every single day. (The “new” market every day means I’m rarely bored. I love getting out of bed and commuting a few feet to my computer, ready to kick butt and take no prisoners.) Never be complacent that you know it all and you can relax. Because, if you haven’t been running a hedge fund or working as a Wall Street analyst, and you’re starting from nearly zero as I did, the market will be happy to kick you in the privates the moment you show any hubris about your trading skills. Never, ever forget that the pros out there are more than happy to take your ”dumb money.” That is what they are there to do, after all. Taking “smart money” is much harder.
The second piece of knowledge I pass on to you is, you have to love doing this, because otherwise you won’t be able to stomach the work involved. Trading is much more than parking yourself at 9:30 a.m. in front of the computer and going for a beer at 4 p.m. The best either arrive early and stay late, or they’re so incredibly advanced/talented, that they don’t need to study and research every single day. I can’t tell you how many hours I’ve put in on nights and weekends, every week, to attain what small level of skill and knowledge I have. I can tell you that, without exception, I’ve loved every fantastic, frustrating minute of it. No one, other than my husband, is more amazed by this fact than me. I always thought I was a writer. Now it turns out I’m a writer and a trader.
Imagine that!
It’s Sunday evening, and it’s almost time to begin the work I do to prepare for another week in the market. There’s a lot more to my story, but you have the gist by now. Next time, we’ll begin addressing basic market survival rules and the mistakes I’ve made along the way. I fall on my face at times, but I always learn–at least, I try to.
Good trading to you this week and, as @MissTrade has said to me on StockTwits, be careful out there.
Here’s part one of our story.
The company my husband worked for shut its doors the same day the market began to plunge in earnest, September 15, 2008. We had known that the company’s bankruptcy might be in the cards. We thought we had enough in our retirement funds and savings to relocate to a cheaper area (we already had one picked out) and get along in a forced retirement if we invested carefully. After all, I have a small writing income, and my husband is old enough to draw Social Security. Our house has practically no mortgage, and we’d realize a huge cash windfall when we sold it and traded down. Plus, we’re both frugal by nature. The only wild card, we thought, was health care—neither of us is old enough for Medicare. But, as long as we had our retirement money, we figured we could make it, even if my husband couldn’t find another job.
But then, the market plunged, and with it, the housing and job markets. For the next few weeks, we were in shock. We had just lost most of our income, our retirement funds, and our health insurance (no COBRA for employees of bankrupt companies). And the company went under owing my husband months and months of income—to date, we are still missing two-thirds of what’s owed him.
For us, it was the perfect storm, financially speaking. I remember thinking, we are so screwed.
Just before the time I decided to become a trader, the USA was barely avoiding a complete seizure of the credit markets (countries like Iceland weren’t so lucky). We were living on sums of money we’d taken out of the bank, because we no longer trusted the system. I had assessed our hard assets (gold and silver) in case the worst happened. I was looking into buying a shotgun—that’s how bad the situation seemed to me. I was freakin’ terrified! It was my worst financial-meltdown nightmare, unfolding before my eyes. David Byrne and Talking Heads came to mind: “And you may ask yourself, how did I get here?”
Boy, was that the question of the hour. As Jeff Macke said at the time, there were only two positions to take in the market—cash and fetal. We were temporarily curled tightly into a fetal ball, too shell-shocked even to sell our loser stocks.
By late October, I had been gobbling up all financial information for weeks like a hungry dog. I sucked up every bit of information I could glean from CNBC’s Fast Money. (Then-host Dylan Ratigan did a decent job explaining the crisis.) I was even reading economics textbooks cover to cover, just to figure out what the hell had happened, how worldwide credit markets work, and how we might, as a country, survive this mess. Thankfully, I wasn’t starting from zero in my knowledge, because I worked in commercial banking and international funds transfer software in my previous high-tech life. Still, the learning curve was steep, but I believed, in some way, my life depended on understanding it all.
Eventually, worldwide collapse was taken off the table, and life grew more normal. I never did buy that shotgun, and we started trusting the banks again. But I was furious that we’d been brought to our knees financially—and we considered ourselves relatively lucky. We were in no danger of foreclosure and carried no debt except for a very small mortgage. We had two old cars that worked. We could afford to run the heat, and we wouldn’t starve. We even found a limited-benefit health care plan we could afford.
But then—I got pissed off.
I don’t remember the exact day, but I do remember sitting on the couch in early November and watching Fast Money, impotent rage coursing through me. See, anger motivates me. I grew tired of hearing about all those who played a part in bringing our financial system to its knees, tired of seeing our retirement funds vanish with each passing day, tired of feeling scared about the future. I grew tired of watching the clowns in Washington fiddle while the country burned.
At a commercial break, I rose from the couch and announced to my husband, “That’s it. I’m going to learn how to trade, and get back the money we lost. I’m sick of this <expletive deleted>.”
More to come in part two.
Barrie
P.S. Highly recommended reading: The Trillion Dollar Meltdown by Charles Morris. That book contains the blueprint for a future I’m not looking forward to. So far, Mr. Morris has accurately predicted much of what has happened.
Not to borrow a line from David Byrne or anything, but I’m not yet sure what this blog will not contain. What it will contain is easy: bits and pieces from my life, which spans the unlikely worlds of day trading stocks and writing erotica/erotic romance.
It’s likely you’ve followed me here from either Twitter or StockTwits. I hope you’ll check back to see the latest thing I’ve done. It might be something quite boneheaded (i.e., amusing in a schadenfreude way–go ahead, look it up). Then again, I might actually have a nugget or two you’ll find valuable. Whatever I write, I will always strive to make it entertaining.
If you’re new to the world of stocks and trading, I especially hope you’ll make this blog a regular stop, because I plan to tell you all about my mistakes in the trading world. Many trading newbies make the same mistakes. Perhaps I can save you some aggravation, time, or–who knows?–maybe even money. Don’t expect fancy buzzwords or analysis here, no tips on using Fibonacci numbers or Keltner channels–I don’t pretend to be a markets guru. What I will give you is honesty, painful at times though it will be (for me, that is).
I do write R- and X-rated fiction, and I’m darned good at it, so you will see the occasional promotional piece and link here. However, I won’t post any excerpts or the like in order to keep this blog G-rated and acceptable to all. No worries if one of your kids comes up behind you while you’re reading my posts, I promise. I’ve been there.
My life is at a crossroads right now–my husband is about to join me in the trading world because he’s been unemployed for nine months, and it’s no secret we’re not sure how well we’re going to survive financially. Because of my (relatively) new interest in trading, I’m rethinking everything while simultaneously working hard at becoming a better trader and a better storyteller.
So, I hope you’ll stick around for the ride. To paraphrase a famous Bette Davis movie line, fasten your seat belts–it’s going to be a wild ride.
And, oh yeah: if you like erotic fiction, please buy a book. Thanks, and be careful out there.
