February 23, 2013

• Trading Update: 2/18 – 2/22

  The self imposed “doldrums” are over as the market resumed moving and this time I was focused on taking advantage of it.

  After the holiday on Monday, the market opened up higher Tuesday and to my chagrin, kept moving up and making new multi year highs throughout the day. Since I was net short, and maintained my position as the market crept up the last few weeks, my net P/L was now starting to take a serious hit, even by my higher risk standards. According to my analysis the market should have turned back down but here it was continuing to move higher. Seeing the market do this felt like the Road Runner breaking the laws of reality:

   

   

   

   While this was going on my trading position felt like this:

   

   

   

  Not a nice feeling or position to be in, and my less experienced self would have likely given up or perhaps pulled a Wile E Coyote and try to join the crowd by going long. However, my more experienced self is more familiar with how the market operates – it tries to knock out all the retail positions (shorts) before turning the market down, and it does it through this type of psychological warfare.

  I’m now at the limits of declaring my analysis wrong, and the market is starting to move beyond that so I have to decide if I am really wrong and reverse my position, or just exit and reassess my analysis. I look over my analysis and redo it from scratch over and over and all signs are pointing to an imminent reversal, so I decide my best option is to start exiting and re-enter at a higher level if the move up continues.

  My analysis has also once again reminded me that I shorted way way waaaay too early and if I had known then what I figured out the last few weeks, I would have been long enjoying nice profits instead of losses and would now be piling in short with no worries. But like I said in previous posts, had the market not tripped me up, I wouldn’t have discovered the holes in my methods which allows me to make the needed changes to fix them.

  After the market closes Tuesday and goes into electronic after hours, the market is still ticking up higher, but I’m aware of how the market applies pressure to people so I’m trained to not let it affect me as much. The key comes from having a plan of action. I already know what my actions will be and I’ve already accepted the losses so I’m not biting my teeth in hope/fear.

  Wednesday comes and the market opens and begins to slowly drift lower, but that doesn’t stand out since that’s how it’s been behaving the last few weeks- drift or drop lower then reverse and move higher. Most people were expecting it to continue to do the same, while I was waiting for it to finally break the pattern and fall. To add to the drama, the market drifted down EXACTLY to a main support level just prior to the Fed releasing their minutes of the prior month. I knew the market was likely to move big either way after the minutes were released. I was ready to close some of my positions if the move up happened. All my senses were saying the move would be down since the crowd of people positing messages had all been conditioned to be bullish, predicting the market to keep moving up, and the vast majority of Bears had given up by now. So I waited, then the minutes were released.

  The market danced and moved around the support area enticing and scaring both Bulls and remaining Bears with what it was planning to do. It was faking and reversing in both directions below and above the support area. Then it finally decided, and BOOM:

   

   

   

  The market proceeded to drop like a proverbial rock. The move down is strong and steep and doesn’t allow people to safely enter new shorts at this point, which is why I’m always hesitant in exiting positions. You may not get a chance to get back in. Watching the drop reduce the red in my P/L balance was a welcome relief. The market loves to play these games time and time again – just when one side has been thoroughly discouraged and the other side is euphoric, the market will reverse- only now most retail Bears are out of the market and don’t recoup their losses and most Bulls are in and now it’s their turn for pain. The people who typically walk away with profits are the pros- which is why it’s so important to get in their mindset to avoid being roadkill.

  Now that the market has finally taken a sizable drop – my real work begins as I’m now able to start trying out what I’ve learned about micro day trading the smaller moves. This also means I will start actualizing my losses as I buy/sell since my short average price in is still underwater compared to where the market is at, but by doing so I will average up in price so I won’t have to wait until my original level is reached before making any profits. This points to another mistake many traders make including myself at times – letting one’s P/L affect current trades. One’s trading should be independent of it. The old me would just wait and wait until either the market reached my price level and I was profitable or I was proven wrong- meanwhile, watching the market gyrate in big moves back and forth, wasting time and realizing I’m missing all these opportunities. Now I intend to trade all these moves and not miss out.

  I’m also adding a new financial weapon to my arsenal – the hedge. This requires I establish both long and short positions in my account for risk reduction. I’ve done this for option spreads, but not for my trading in general. I’ve been meaning to do it for a while but I had a hard time figuring out how to implement it, but these past few weeks helped with that.

  If done right, hedging can flatten out the losses and increase profits, and if done wrong will have the opposite effect. If I hedge well, in due time my roller coaster P/L months will be a thing of the past. Of course hedging requires a good understanding of where the market is headed to get the greatest advantage from it.

  On Thursday the market continues lower and I’m actively trading both sides of the market, and faring well at it. I reduce my short position while adding longs shortly before the market starts heading back up. So instead of giving up all the gains made by being short, the losses are limited by the long positions. Now the light bulb goes off and I understand why I should have been doing this much sooner. I would have had far smaller losses had I done this while the market had been moving against me all this time.

  I have to laugh because more experienced traders in this area will go “Duh…of course!” But hey, I’m learning as I go and I had to figure out how to use it. This is another major change that if done right will move me to higher levels of trading that will easily eclipse last years returns.

  Friday hits and amazingly, the market fakes me out into getting rid of my long positions too soon and now being too unbalanced on my short positions as the market moved higher. I felt like a linebacker on the football field telling a receiver that I’m onto him now and he won’t get passed me again, then he does it quickly and easily…doh! Post trading analysis at the end of day made me feel worse since it was something I should have seen and correctly acted on. Oh well, can’t win them all – the market tricked quite a few folks that day- and that’s what makes trading a challenge.
  

  As a result I gave back a portion of the big gains I made the prior two days, but still had a great return for the week. My actualized losses look horrible but the net P/L has improved nicely, which is what really counts. I figure maybe one more week of actualized losses before hopefully switching back to actualizing gains.

  I have to say this has been a very good learning month for me so I take the losses as fair tuition.

   

   

  • 4:32 pm
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