Wednesday, June 20, 2007

When Good Trades Go Bad, Part II

...continued from my previous post on this matter.

Let's review some tenants of successful speculation:

  1. Let your winners run
  2. Good trades almost always go right, right from the "get go"
  3. Cut your losses short
  4. Try to buy into identifiable trends
  5. Don't have an opinion
  6. Don't advertise what you are doing (opinion)
  7. Don't try to make the market meet your timeframe
  8. Don't buy "ahead" of identifiable patterns

I previously covered what went right (not much), and wrong with the trades I previously posted...long txm.v and long sds (an s&p double short).

I left the previous post with number "4.) Try to buy into identifiable trends" to continue:

Don't have an Opinion

Ok...this is a little silly, because as you know, opinions are like a-holes...everyone has 'em...especially fubarrio. But, in this case, it mean more that you shouldn't be "wed" to an opinion. One should try to analyze what is happening with as open a mind as possible and not through a lense of what they think should be happening. This is, at times, really difficult....especially if you are an opinionated bastard like fuBarrio. In general, you have to set that aside and just react to what is happening in front of you in the market. Otherwise, you could end up being "right" but not having the financial firepower to stick with a trade long enough to see it pay off (a very common thing).

In the case of these two trades I most certainly had an opinion, and jumping in front of two movin freight trains without even looking to see if there was any identifiable short term support was just stupid. In the case of sds, I wised up the next day. In the case of txm.v I just got "lucky" in the short run (although I still think after it cups this summer it is goin to be a huge hit relative to the rest of the marekt -- there I go with opinions again)

Don't Advertise what you are Doing

I first heard this from my very suspicious girlfriend, and I just attributed it to some islander voo-doo. However, for nearly a year I had a rule that I didn't tell anyone what I did for a "living". It was the most financially successful year I've ever had. Coincidence? I don't know.

I read a variation of this same "rule" in "confessions of a stock market operator" -- the psuedo biography of one of the greatest traders of all time.

After I read it, I thought about it some more and it makes sense. If you are telling people what you are doing, it is very easy to start to lose objectivity. You will be tryin to make the market something it is not...bending it to your "will"...that will never end well (see previous rule, "don't have an opinion") You may get lucky from time to time, or if you have a huge following and you tell people to buy as you fade the bounce you might get some results (for a while). But the reality is, it's better just to shut the hell up.

I obviously failed on this "rule" during these two trades

Don't try to make the market meet your timeframe....

...or any other "needs" you have. The market doesn't care. Like the rain doesn't care if you have a baseball game that day. It's irrelevant....except insomuch as it make you do irrational things.

trying to triple my stake in a few short months forced me to loose my patience and attempt to catch the market before i objectively saw that the trade was setup and ready.

another "F"

Don't buy Ahead of Identifiable Patterns

Seeing a technical pattern before it has formed is all well and good. However, if you are looking for higher success rates, not jumping the gun on those trades will do you well...In other words, buy the "break out", not the setup for the breakout.


Because the real buying activity only happens after there is confirmation in the breakout. Self-fulfilling prophecy? Perhaps. But in short-term trading we aren't looking for logic and reason so much as more predictable profits or "positive expectation"

Grade? "F" again.

As you can see, I've left my ineptitude open for the world to see in this post. That said I still think both will return 20%+ year over year (especially if taken together to guard against a market meltdown of somekind). However, the market can stay "irrational" longer than you can stay liquid....

*If* the market can continue the trend a little later into summer (really questionable at this point) I'll be looking for a turn to enter both of these trades in weight LATE in the summer with the hopes that fall/winter could be a good time to be in both. If the s&p rolls over in june or early july, i'll let you know what i plan to do then.

ciao for now,


1 comment:

kirk wynn said...

For me, the most important tidbit in the faux-autobiography of Jesse Livermore you reference was the concept of identifying whether a bull or bear market is occurring. Now, it seems, we have a bull market so letting winners run should be one's modis operandi. It hasn't paid in the past few years to be clever or have an imagination!