Saturday, June 16, 2007

When good trades go bad....

...or when "bad trades go worse".

well, even though i moved a signficant portion of my trading portfolio to cash, i left on a trade from my "house hunting days" and got "stopped out"....forced to take a loss after a 10% loss on the trade.

to refresh your memory, i put 10% of my "house" fund in sds (something that moves in reverse of the s&p only two times faster) and 10% in txm.v with a "stop" that would force a sale in the event that i lost 10% in either investment...meaning, the most i could lose in the house fund through either investment was 1% of the total....i left the rest in cash since the rest of the trades that looked good to me felt like "picking up nickels in front of steam rollers" (high risk/low return)

I ended up selling both of these trades for a loss. So, in the hopes of getting something positive out of the experience, i'll share what i did wrong (and right) on both of these trades in a hope of helping someone avoid the same fate. ironically, neither of these trades really met any of the criteria which i've been espousing on this very blog for nearly a year...and there is a reason for that, which i will explain as well. To review, here are some of the things that I've been saying on this blog about trading, and also some things I haven't but try (often unsuccessfully) to adhere to:

  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

Good trades almost always go right, right from the "get go"

the next day, i believe, i posted that *both* of these trades were really ill-advised based on how and why i entered them and i already had "buyers remorse" -- on the sds i bailed that day not waiting to hit the stop, taking a loss of about 1% on the trade (1/10 of 1% on the fund). On the txm.v i figured it was "in the black" and i just let it "run"

Let your winners run

trading most advice is full of contradictions. "No one ever went broke taking a profit", "pigs get fat and hogs get slaughtered" and the advice of a rich man getting rich by "sellin too early" all seem to indicate that taking money off the table when "up" is how to acheive trading results.

However, "let your winners run" is also one of the most oft-advised strategies for trading. The key here, i imagine is to have some fixed rules with a "little bit" of flexibility (more contradictions!) it's important to note though that most traders make most of their money off a couple of trades that they gave a lot of time to "mature" into great fact, they are often times more often wrong than right, but they let their winners run...and....

Cut your Losses short

The flip side of "let your winners run" is to "cut your losses short". The often (ill in my opinion) advised "martingale strategy" (or some hybrid of said strategy) to to double down on a loss until you break even. Other variants of this include "dollar cost averaging", reducing your average cost of ownership by buying as the price falls.

I used to be one of the biggest proponents of this.....and, let's face it, in the 90's, in technology, this (along with almost ANY strategy) would work. But, when trading, weakness (especially relative weakness) in a security is really not a sign of anything other than your initial buy was WRONG.

Being wrong is not a sin. Not admitting you are wrong and hangin long enough to wipe out all your gains, is.

Try to buy into identifiable Trends

Everyone thinks they are or wants to be a contrarian thinker/trader. No one wants to think of themselves as one of the sheeple...myself included. Fact is, however, the easiest/safest money is just trading with the trend. "The trend is your friend" didn't just become a famous saying because it rhymes...although that helped! :)

On this I failed miserably. I bought sds in a huge downdraft (an insane s&p uptrend that had yet to break) and txm.v had fallen off a table and broken through any identifiable support.

...this post will be "continued" later today after i donate a lung playing some hoops with the locals.


No comments: