Tuesday, April 21, 2009

Trading Lessons (Rhyme over Reason)

Today was the first frustrating day here in some time. My shorts went mostly against me (to be expected given the reversal), but my longs went mostly against me as well. As such, I started reducing exposure and expect to likely continue with that plan early tomorrow. I'll then hang-out while something better takes shape, perhaps focusing on simple index trades if that is working; focus on my next hunt-and-grunt adventure if not.

I'm not crazy with the action in leadership at the moment and there are not yet enough indications the trend has changed for me to focus on shorting aggressively. The reversal in the banking uglies today was impressive, like it or not.

Okay, since I can't make money at the moment, I may as well teach...

Percentage-wise, today was no big deal here. But my trading style more and more is based on rhythm (centrifugal ramping-up as things are going well and shutting down or finding a cave as things worsen). I want to be fully insane when my position is optimal and I want to be conservative when I cannot find the handle.

This is the exact opposite of how I often traded in the past. I was a fighter, taking-on great whites in their own backpool, because I thought I knew something significant and important and I (thought I) hated to lose.

Experienced traders reading this know that it is not uncommon for traders to fight harder (average-down, etc.) when losing and then book profits too easily when winning; thus risking more on losing positions and limiting gains on a winning position. The typical psyche lusts for this pattern, even though it is a loser.

You'll never go broke taking a profit, right? Well, if you're the kind of loser who let's his losses run and at the same time takes small gains when you've (finally) got something right, then you will go broke eventually. For some of you that may be obvious, but it warrants mentioning.

Some years ago I was complaining to an artist-friend (not a trader) about having to rename a (failed) internet venture due to trademark concerns. He listened to my feeble rant and responded: "Make it a positive."

I've thought a lot about that (10 years and counting) and more and more I work on incorporating it into my trading style. I analyze where and how I am losing money and identify common, repeat-mistakes; figuring if I turned those traits into strengths I improve results significantly. If I can identify my greatest weaknesses and commit to making them positives, I optimize results.

I can be wrong most of the time and still make money. And if I happen to be running like god, then I'm killing it (and all of god's children, if it be short-selling).

I was a trader who would fight to the death, on occasion, when I was strong-minded about something. There was a succinct pattern of being early and ultimately being varying degrees of exhausted by the time the market did move my way. In the case of the 2000-top in the Nasdaq, I was more sure of that being a great short than I was of my own existence. However, I fought against the tide for the last remaining weeks of that bull (from January to early March) and when the break finally came I made back my losses for the early year very quickly, but then I moved aside; essentially exhausted. I did the same thing with the housing stocks a few years later, only in this instance I lost more fighting those uglies before the top and had little will left to capitalize when the juiciest momentum was under way. I had a couple of similar situations in the 90's where I got ahead of myself on the long-side; only in the 90's it was easy enough to turn around from a mistake and make another 200% in the following 12 months, again and again.

Earn while you learn was the mantra for the 90's. These days it is more like Burn while you learn. The market is a lot less forgiving.

The recent rally recently reminded me of these traits, but after net-losing money shorting stocks like BZH, HOV and LEN a few years ago I took the idea of "making it a positive" and decided that I should train to be a little late (instead of early) and focus on having my maximum energy on a trade when that trade was working (instead of anticipating it working and burning up confidence and will in the meantime). I don't need to care at all what really happens, nor whether I am right or not - but simply suspect what might develop. Focus on reacting, in real-time as things take shape. No more hero stuff for me.

So while I did attack short again coming off the initial bounce in early March, my own rules forced me to stop. And given there were so many decent growth charts out there at the time, my rules allowed me to increase exposure on that side as things continued to work.

By not averaging-down (no matter what the brainpan is shouting), but instead adding to wining positions only, you're getting big into a position as profitability is increasing and you are only lightly invested in one that is losing. And then instead of exhaustion from battle fatigue, one can trade aggressive when the sharp teeth are to the side of the pond.

Be Late, be Great. Or, Fortunately I am an idiot. I don't know anything ultimately, unless the market tells me it's true.

Being smart is over-rated and total conviction can be deadly.

Being a meathead however, is just fine. As long as you are willing to adjust.

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