Full Disclosure: What Not to Do When Trading
Don't confuse luck with skill.
I once wrote that anxiety is the friction between where you are and where you feel you should be. I don't know if I coined that phrase but it's pretty accurate. When you're anxious, chances are you're not operating in a manner consistent with who you are or what you should be doing.
I've been on edge lately; one might presume it has something to do with the rigors of cohabiting for the first time, being a new dad and stepdad-to-be (times two) or the fact that we're about to go contract on a new home and all the responsibilities that entails. Maybe it's that we've chewed through another year in the 'Ville, assessing what we've done well, what we could have done better and what our plan is for next year.
But those aren't really the issues; the family and our future home are dreams come true; ones that have percolated for 42 years.
The business? It's been one of the tougher years in MV history, following eight months of due diligence last year by an indicated buyer and a multiple-seven-figure investor who "pulled" in 2009 after he signed the term sheet. We hunkered down this year, put some extra elbow grease into our efforts and flipped the switch to cash flow positive a few months ago. The 2012 pipeline is robust, and we just auctioned a bottle of LOUIS XIII yesterday for $23,000 that will help teach kids the building blocks of financial literacy.
So why the anxiety? Is it my Raiders, who are fading fast in the AFC West? The extra 10 libbies that arrives each year, almost on cue? It can't be the Syracuse Orange men's basketball team, as they're ranked No. 1 in the country despite all sorts of ugly allegations-the type of stuff that makes your stomach turn. No, it's something else and that something is how I've been trading.
I've been staring at screens for over 20 years; I've had some massive wins (dot-com bubble, the 2008 financial crisis, the sovereign sequel) and some spectacular losses (First Interstate, Focus Enhancements, this year's silver splash).
Through it all, I've prided myself on a few things; being honest is at the top of the list, and remaining disciplined is up there as well. The last few days of trading, however, I haven't satisfied the second criteria, so I'm going to focus on the first-honesty-as I walk through what went wrong and why.
First things first, the setup. After a decent year of hit it to quit it and make it to take it (read: quick, strategic trading), I flattened my book two weeks ago as I was slated to attend a CEO confab at the NYSE last Monday and Tuesday. My lone position was Research in Motion (RIMM), which was quite literally a placeholder that I added after the company pre-announced. When they reported-and pushed out their product pipeline to the back of next year, I did something quite curious-instead of taking a small loss, I doubled down.
It's one of those decisions that, if it worked, it's "way to hum, baby" but if it doesn't-and it didn't-it's, "WTF was I thinking?"
The answer to that question is simple, which isn't to say it was right. "There's a lot of tax-loss selling," I thought to myself when the stock got slammed and I again doubled down, biding time; there is franchise value, patent value and worst case scenario, I thought, there are suitors in the wings who would love to pick up that stock down 80% this year. There is a very fine line between proactive patience and rationalizing risk; it's called the bottom line.
But wait, there's more. I nibbled on some S&P calls late last week. The seed was planted when I spied a potentially bullish reverse head & shoulders formation in the S&P. "As long as the S's hold S&P 1210," I wrote at the time, "my risk is defined and you can do anything as long as you're disciplined." Heck, I even carried that those S&P calls home for the weekend, along with my RIM, while understanding that stops don't protect you from overnight gaps.
Yesterday morning, the S&P futures were indicated higher as I readied to scurry across town for yet another massively important business meeting. It went great-better than expected, and something that will pay dividends in 2012-but I returned to find the market softer, but still above the all-important S&P 1210. I thought about buying more but chose to pass, at that point.
A funny thing happened as the day unfolded; the banks got crushed (Bank of America (BAC), Goldman Sachs (GS) and Citigroup (C) are among my primary tells), breadth was 2:1 negative and it felt like there was unfinished business on the downside. And then it happened-S&P 1210 was breached.
What did I do? The guy whose supposed to demonstrate discipline? I froze; I did nothing. I watched, gritted my teeth, sighed three or four times and then in an inexplicable example of everything you shouldn't do when trading, I acted emotionally and doubled down my upside S&P bet.
This is perhaps the part that I'm most ashamed of-with 12 minutes left in the session, which is plenty of time for me to write a Buzz & Banter post, I again froze. I could offer that I didn't want to set a bad example but the more honest emotion was that of shame, as I knew I was behaving badly. I closed my eyes and rolled the dice, and that is the last thing that anyone of us should be doing when trading one of the most difficult tapes of our lifetimes.
One might think that I'm writing this given the Dow Jones Industrial Average is up 240 as of this post. I give you my word that I would have written this article no matter how the market looked. The anxiety I felt for not doing the right thing-and I did NOT do the right thing-riddled me all night, to the point that I actually discussed my trading with my fiancée Jamie, which I rarely if ever do. It was inconsistent with everything I believe in and trained for and for that, I apologize.
We have our 10 Trading Commandments for a reason. I wrote them, I practice them and preach them, in an unpreachy sorta way, I hope. And you know what? Yesterday, I broke them across the board, and as I list these transgressions, you'll see why.
Discipline trumps conviction: I should have sold my S&P position when it broke S&P 1210, as that was my defined risk parameter. And I should never have "hoped" Research in Motion would rally, as hope is never a viable investment vehicle.
Opportunities are made up easier than losses: Good traders know how to make money; great traders know how to take a loss. I'm obviously not a great trader, but I should have booked the RIM loss rather than rationalize that it traded punky due to tax-selling.
Emotion is the enemy when trading: I didn't want to take a loss, and the position became personal for me; I forgot that when it comes to the market machination, we're all just pawns in this global game.
Zig when others zag: I did, and got run over (at least initially). If you're gonna do this, define your risk, as I did-and then undid!
Adapt your style to the market: In this headline-driven bipolar stroller, overnight risk is blind risk. One of the most critical lessons I ever learned was to sync your time horizon and risk profile.
Maximize your reward relative to your risk: This only works if you adhere to your trade parameters!
Perception is reality in the marketplace: Santa or Scrooge? Europe or no Europe? War or peace? It's not about what we think is happening, it's about what the market discounts will happen.
When unsure, trade in between: I guess this would be the opposite of "when the market moves against you, double down and hope for the best."
Don't let your bad trades turn into investments: Am I a long-term holder in Research in Motion? Nope. How 'bout the S&P 500? Nope. I had right-sized trading positions that turned into out-sized rolls of the dice.
I am not proud of this sequence of events but the great thing about trading is that every day offers a new beginning, or an opportunity to get back on track. I will also share that Turnaround Tuesday was in the back of my mind when I heard the closing bell yesterday, but how silly is that? "Honey, I made a huge bet on a stock rebound despite having real concerns on the big picture. Why? Because it's Tuesday!" No, it wouldn't fly in my world either, nor should it.
Nobody is perfect-I'm far from it-but part of the reason we spend our sessions in the 'Ville is because our community is genuine, and I would be remiss if I didn't set the record straight. Yes, the trade "worked out" through the lens of profit and loss but that isn't the point. I've shared my mistakes with hopes that you will avoid them altogether--and perhaps I will as well.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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