February 17th, 2009 — BAC bad trade FAS FAZ INTC investing
In the interest of full disclosure, I have to cover my bad trades as well as my good. Anyone can crow about their winners. Here’s the anatomy of yet another bad set of trades I closed out today.
At the end of the first week of February, I went long FAZ at $45. At this point I’d been piling up shorts into the rally and the ever-declining FAZ seemed to be ripe for a turnaround. After holding over the weekend and watching the futures turn up in anticipation of the stimulus package, I got nervous and decided I needed to hedge long. As FAZ dropped to about $40 last Monday, I actually went long FAS and bought some BAC May $10 calls. The lame motivation there was that I expected some extreme daily volatility that would end with the financials continue their rise up, so the byzantine logic was that I’d have a chance to kick a FAZ rally as doubt rose, then cash in on the rebound when the stimulus details came out. I couldn’t day trade during this period, so the complexity came from trying to lock in trades with limit buys
The flaws (more like a comedy of errors) are compounded: being long and short at the same time with vehicles you shouldn’t carry overnight, buying derivatives on a broken bank, adding complexity and too many moving parts to a theory that could have been greatly simplified had I picked a single trade that was likely to work, believing that there might be something in the plan that the market would like. Traders talk a lot about “context” and the context that helped make me stupid here was that I was way short and the bulls were making noise like this could be a significant run that I had to hedge. Just got on tilt.
So BAC fell, as did FAS. The 11% loss in FAZ that I had when I added FAS was effectively baked in with the hedge, but as the week went on, the ETF sawtooth effect compounded the problems. Rather than save face immediately and admit the bad trades, I tried a couple of times to sell premium on both FAZ and FAS (out of the money) but didn’t get my ask. After averaging down a little bit on BAC, I gave up and spent the weekend analyzing my trades from the last five months.
I learned that while my winners outnumbered losers by almost 3:1, the average loss for a loser was about 33% greater than the win on a winner. Since I give a lot more play due to the volatility of the last several months, it didn’t totally surprise me, as I had a couple of big losers. Rather than set tight stops (which I may eventually come to—since it’s the conventional wisdom), I do need to execute a lot more discipline and cut my losers earlier.
Today I followed through. With the futures down big before trading, I tried to dump my FAS pre-market (not recommended) but only got out when the market opened at $6.79, saving another 11% in downturn over the $6 close (but locking in a painful 36.7% loss overall). I dropped the BAC calls next, dumped for a painful 50% loss. FAZ rose 24% today (and is up 50% from when I bought the FAS), so I’ve worked through the FAS loss and started in on the BAC loss.
Tomorrow (Wednesday), if we’re down, I’m looking to cover my tech puts (PALM and AAPL) and buy some INTC calls (RSI is really, really low, so looking to wait until the stock is in the $12s again), but let my other puts run (NDAQ, X, MA, BBY). As I type, the futures are up, so I may have to start plotting revenge for later in the week.
February 15th, 2009 — investing stocktwits trading
At the suggestion of @sorenmacbeth, I changed the tag line on these posts to reflect the real purpose—how an otherwise inexperienced retail investor can use StockTwits to make money. (Besides, I’ve maxed out the Google juice for the phrase “idiot retail investor”; maybe that’ll come in handy in the next retail investor bubble.)
This week’s trading didn’t turn out all that well, so I’ll cover that quickly and then dive into two other topics that I’ve been pondering: how I trade, and the whether averaging down works for me or not.
This Week In Failball
Going into this week I was way short, so I tried to get long financials prior to the stimulus hijinks. Unfortunately, that didn’t work out; my position in FAS was creamed (down about 30%), and my BAC calls are still underwater by about 30% even after averaging down. I also averaged down on both Best Buy (BBY) and Palm, two trades I expect to pay off well. I tried salvaging things on the financials by selling some premium, but was a day too late to get off some call premium on FAS and FAZ.
I’m still working on ideas for next week. My hold portfolio is all long (except for about 25% cash) so a bear rally next week doesn’t hurt too much, although there’s no denying that I was on the wrong side of a lot of financials this week.
The pain is no fun to talk about right now; I’m in denial. Let’s get to the good stuff.
How I Trade
I’ve mentioned before that the demands of my real job make it nearly impossible to day trade of follow the market on a daily basis. I tend to swing trade over the course of a few days or a few weeks, and sometimes over the course of a month or two. I focus on equity options, with a mix of equity positions. Over the past 5 months I’ve been primarily on the short side, although I have played AAPL, INTC, AMZN and DGP long trades. If I broke down the trades by dollar volume, it would probably be around 70% options (with about 15% index options), 15% equities and 15% ETFs.
On average, I’d estimate I’ve been putting in about 7-10 hours a week focused on the market and managing my trading portfolio. I typically start the night before by checking the stock futures on Bloomberg to help get a sense for what’s going on the next day. Next, I check after hours quotes on the stocks I’m following, as well as any new commentary that’s turned up on my StockTwits portfolio page. After that, I place my initial trades for the next day. Since the first 30 minutes and last 30 minutes of the trading day tend to be the time that market makers screw over the part-timers like me, I generally place my trades slightly outside the money, trying to snipe overreaction in sentiment one way or another. While this sometimes keeps me out of profitable trades, it also keeps me from some of the morning shenanigans. For the most part, this has worked in my favor.
The next morning about 90 minutes before market open, I take about 10 minutes to check the futures again and the pre-market quotes. About one in every ten or fifteen trades, I’ll adjust my bids/asks based on changes in conditions. That’s where I stand most of the day (on days I work) with occasional checks and adjustments over lunch or as time and schedule permits, occasionally checking my Twitter feed for any updates.
And the next night, it starts over again; hit my Twitter network, then the StockTwits main stream, then check in on the main blogs I follow for trading purposes:
There are about a dozen other blogs I kind of half follow (or catch up with on the weekends); but since I maybe have 30-45 minutes a night to review and get trades in, I can’t follow everything I want to (or should). Really, the crest of my Twitter network acts as the filter. Over the last 6 months I’ve come to see this as both a blessing and a curse. A blessing because I find good stuff I wouldn’t find otherwise; a curse because I tend to rely more on the network than on primary sources. And that costs.
So far, I haven’t set stops on my trades. Quite a few of my winning trades have been down 40% before turning around for gains. However, I think I can improve my return slightly with a couple of adjustments to this practice described below. The main reason I haven’t been setting stops is because of the extreme volatility; it seems like three times out of four, the trade will recover quite a bit from where I might typically set a stop. Because I can’t trade during the day, I almost always set an ask price outside the spread before the day begins and take it. I shoot for something in the range of a 10-20% gain, adjusting up and letting stocks run a bit if I have conviction. To a fault, I average down when I think my thesis is right but my timing is wrong. I talk about this a little more below.
And that’s it. I was lucky—really lucky— when I started in September in that I was making trades that represented about two to three units on AAPL and ran off a great streak that doubled my bankroll of sweep cash in short order. Believe it or not, I hit a streak of 15 winning trades right out of the gate (although some took a month or so to finally be closed out.) This came from a combination of tuning into AAPL’s volatility, going against Best Buy (BBY) per Lindzon’s blog posts and tweets, and trading a couple of other stocks I was already familiar with from my portfolio. I’ve come back down to earth since then, but I’m still doing okay, and tuning how I work.
I expect that a year from now I’ll have this workflow honed even further. Early on, I didn’t really have a notion of position size. Lacking discipline, I put too much at risk and lucked out in that it paid off. I didn’t pay much attention to beta-weighting or any kind of traditional balancing. If anything, I was successful because I took my trading account extremely short during an epic downturn primarily to hedge against my hold portfolio.
Workflow is important when you only have limited time. Since getting into digital photography several years back, and processing thousands of images, I’ve come to realize that when you’re learning, you go slowly and take many unnecessary steps and make unnecessary optimizations that just take time. With changing light conditions outdoors, you jack around with white balance on every shot, and adjust the unsharp mask on every shot. When learning, processing a series of 200 shots picking and finishing winners might have taken me 4 hours to complete. Yet after you’ve done a few thousand shots, you figure out what really matters and you can get through the same 200 shots in about 1/3rd to 1/4th of the time. I expect at some point, I’ll reach this with analysis. One key element will be always tuning the social filter.
Averaging Down
Last Sunday, fortune8 reminded me that averaging down is generally a bad idea unless you have a strong feel for an idea. Since I’ve started trading more actively over the past five months, I have enough data (113 trades) to see if that applies to me.
In the last 5 months, I’ve taken “initial positions” in securities 69 times, and averaged down on an initial position one or more times for 44 trades. Of those 43 trades, 21 turned out to be profitable, 12 turned out to lose, and 11 trades are still open. The net gain per trade on these trades is 9.69%. When I average down, 67% of the time I make money.
By way of comparison, overall I’ve made 113 trades with 66 winners, 26 losers and 21 trades still open with a net gain per trade of 7.86%. (For initial positions, I’m 45-14-10, with an net gain per trade of 7.38% with 76% wins.) Overall, that’s picking right 71.7% of the time.
Overall, I’m up a little over 6 “units” of my current average trade size. Until recently, I haven’t been that consistent on position size, in some cases going as high as 4 units, with most of the average-down trades on the order of 1/4th or 1/2 a unit.
Those numbers are eye-opening to me, even though I have no frame of reference. I think I saw that some systems assume that they pick right as little as 35% of the time, willing to take more losses to let bigger winners run (e.g., typical winner might be 2.5x the size of a single loss.) In theory, with such a system, you’d end up winning about 17% per trade over a course of trades.
The numbers I’m showing are about half of that in terms of return. And what comes to mind when I see that?
Poker. The classic amateur poker player is the one who’s the happiest guy at the table, pulling in the majority of the pots, winning almost every hand, frustrating other players as he sees each deal through to the river, grinding out low-return hands. And does that guy ever really win? No. The solid poker player lets the amateur harvest all those low return pots, content to sit back and play tight until it’s time to play loose and take the big pot.
Can I change my style and let my winners run? Is averaging down throwing money into a lost hand when you’re already beat?
At this point, I don’t think so. The data shows that for the most part, the primary difference between “initial” position trades and the “average down” trades is that the initial position trades tend to close out more quickly, and the average down trades tend to get more run. But in terms of success and return, there’s not a significant difference. In other words, for the most part, they should be thought of as independent events, even though psychologically, I tend to clump them all together, trying to “save the trade” as a single unit (e.g., referring to my “cost basis” rather than treating those as separate trades).
And maybe that’s the lesson: there’s no such thing as averaging down. Each trade is truly an independent event for a swing trader. Cost basis is interesting only for tax purposes. In trading, it’s simply a psychological construct that may inhibit appropriate decision making.
As I mentioned above, I go without stops and allow a lot of play when I have time. Based on the data above, I could probably improve my results slightly by setting a stop at something as crazy as 40%. Doing so would a) maintain my overall “initial position” winning percentage, b) cut my overall return slightly, but c) keep me “smaller” (as in too small to fail) by keeping me out of some of the long-running, large position trades. And in doing so, this might also allow me to get back to larger initial position sizes, which could make up for some of the loss in terms of actual trading units.
Focus on the Feel
The thing is: it’s not simple. Part of the reason I have so few trades is because I have such limited time. When I have a “feel” for a stock (e.g., AAPL and INTC), I can dial in and trade it with great success. Averaging down is a form of that, what I call “focus on the feel”. The areas where I’ve been killed have come from stocks outside the “feel” and in places where I shouldn’t have been. USO calls in the fall. The financials pretty much anytime. So cutting out the more profitable (but lower success rate) average down trades would be a bad thing if done on stocks for which I have a feel. But I could safely do so on stocks that are outside my comfort zone.
And this is all just a long way of partially agreeing with fortune8’s comment:
New People I’m Reading this Week
I haven’t done the StockTwits Saturday brunch yet, but thankfully we have @dakapbj’s great synopsis on Keep Unread.
February 9th, 2009 — amazon amzn kindle
Several times over the last seven years, I’ve purchased an AAPL product instead of buying the stock. Without fail, I would have been better off financially buying the stock rather than the device.
Tonight, I pre-ordered a Kindle 2.0
and the same effect may be at play, despite Amazon’s big run up since its lows.
The new Kindles aren’t available until the 24th, so that gives me a few more days to try to get back into my AMZN position that was called away at 50. The more I study Amazon, the more amazed I am at their strategy and coherency of vision.
February 8th, 2009 — investing stocktwits
Walking into the Propeller Blade
Rough week to be short.
This week started out with the predictable selling into the rally, selling Feb $15 call premium on half a the INTC position in my hold account on Wednesday.
All through the last 6 months, it’s felt like the right thing to do is run against the trend, to run into the burning building instead of out of it, and to avoid friendly trojan rallies bearing gifts. And to a large degree, it’s worked out. Even in the darkest hour, the bear would come through and save the short trades, and buying quality companies beaten down turned out well.
This past week, I did the same, but the usually queasiness felt a little deeper than normal. The bull sentiment seemed broader, and I felt like I ended the week like someone finding out too late that the game is musical chairs and the music stopped a couple of days earlier. For the first time, I realized how attentive and agile you have to be to enter these short term positions.
The next two or three weeks will tell whether limited (but focused) attention is enough to stay profitable, or whether it really is a full-time daytrader’s game.
With that, the rest of the recap.
AAPL: Somebody Moved My Swingset
I twice averaged down on AAPL July 80 puts on Wednesday and Friday as it flirted with $100, and sit now with a cost basis of 6.65. I haven’t had a bad trade on AAPL since I’ve become more active since September, but this may be the first time. Currently down 20% with a position size that is about double what it should be.
Financial Hijinx
After Visa (V) reported earnings and Mastercard gapped up, I took one small sip of puts at a lower price, but didn’t average down further when Mastercard itself posted better earnings. Overall, these are still down a little over 40%. I need to just put this one behind me.
When the FAZ hit $45, I bought some. Another ridiculous move when Swan and others are calling for FAS to be the one to rally. FAZ is going to open Monday in the mid-30s, it appears, and my string of poor timing on financials continues.
What I plan to do this week is look at BAC, BAC calls and FAS to hedge these financial positions and buy time. The StockTwits sentiment seems to be putting forth this notion that BAC could see $10 again in the short term, which would help the financials overall, even though this could be another C situation where the boost is just a little exuberance due to government intervention and a reprieve before it continues its drop to 3. If it plays out right, then I could see some benefit from a BAC rise, then switch directions again to get out of the financials altogether.
Finally into PALM
Finally snagged my long awaited Palm May 5 puts after executing on my Friday plan. I’ve decided to go with a shorter leash here. While I still think they suck for the long term, the second wave of Pre buzz seems to be coming. Ultimately, I stand by the notion that after everyone tries the pretenders, they’ll come back to the iPhone. However, the timing is what may be off.
X Marks the Failure
Still on tilt, I averaged down on X puts. Not a good idea when the government is getting ready to dump a bunch of money into things needing STEEL. US STEEL. Got no long term conviction here, despite how I felt earlier in the week.
Trying NDAQ short again
I think NDAQ is primed for a fall, and as it crossed $24, I bought some more puts. It’s a laggard and I would expect that if we do see a termination to this rally, it’ll be one of the first ones to drop. But it indirectly increases my negative position on financials, so I either have to get hedged or get smaller.
Buh-Bye: BBY Puts
Tried averaging down on BBY puts into the rally, but despite Best Buy touching $30, the order never filled. Along with my NDAQ puts, this is the short I feel most comfortable with. I may sit this one out awhile, but will look to average down if the optimism just gets stupid.
Other Stuff: Position Sizing
Last night I ran across this fairly good thread on position sizing after looking around for more info on the concept of “optimal f”. The first couple of pages are worth a read as the debate goes on about the Kelly criterion vs optimal f as maximizing returns based on adjusting position size. I’ll digest this some later, but it ended up being a good practical introduction to what’s involved, like whether you want to tune position size to the maximum downturn you can stomach, or to reduce your risk of ruin.
One of the comments contained this down-to-earth simple heuristic for position sizing:
The idea that money management is a mysterious and complex issue is proliferated by books like this. I can sum up effective money management in two steps: First take your worst case loss scenario, which will be based on a run of lossses with a less than one percent probability of occurring, as calculated by your expected win/loss ratio. For example, if you reasonably expect to win 40% of the time and lose 60% of the time, there is a less than 1% or “worst case” probability, that you will see ten losses in a row at some point in your trading (this may look like hard math but the calculations are actually grade school level). Next, determine your max desired drawdown. What’s the biggest hit you could possibly stand? Ten percent down? Twenty five? Fifty? Let’s say you are moderately aggressive and able to deal with a twenty percent drawdown without losing your nerve. Divide twenty percent by ten, and you see that your max allowable risk is 2% of your account balance, including calculated slippage and commissions per trade. If you can stomach a 40% drawdown you don’t risk more than 4%, and so forth. Simple, straightforward, no hidden gimmicks, gizmos or geekspeak. The only other bogey you have to deal with is the once in a blue moon nasty price shock that blows your stop to kingdom come (a simple and emphatic argument for less risk per trade, not more).
The one thing it helped me remember is that position size isn’t simple; separate positions may in fact be representing the same thing (e.g., my MA puts and FAZ positions are redundant to a certain degree; MA puts themselves relate to beliefs about consumer/retail, etc.) That kind of overall view of relationships between positions gets lost when you are listening to the StockTwits stream and evaluating opportunities. If you’re not careful, you can end up with a collection of positions that all fall together, or a single “theory” that ends up with a too large bet size on it. I’ve been lucky so far, but I need to add this basic macro overview to my evaluation criteria.
New to This?
If you’re new to this blog, and disgusted by my amateurish week, check out some of the previous posts in this series when things looked a little better:
February 5th, 2009 — entrepreneurship social capital twitter
If you missed it, be sure to check out Howard Lindzon’s epic rant calling for new confidence, social leverage, entrepreneurial fire and a Twitter IPO.
On the IPO:
Who cares that Twitter is not making money. Now is the perfect time for their IPO. At a time when ‘Too Big to Fail’ is the myth, Twitter is just the right size for an IPO. It’s ‘Too Small to Fail’ as an IPO and public company. It has something more important than profits for the moment, believe it or not….demand and a clean balance sheet.
All you ‘knucklehead ANALysts’ are thinking ‘…but Twitter has no assets’. I say I would like to block you from this blog. I think Donald ‘hairpiece’ Trump had assets, Las Vegas Sands had ‘em too. A large black hole of capital – Sirius Satellite Radio – did as well. They used those assets to transfer capital from you to them. Once upon a time before ‘Asshat’ Ken Lewis was born into the banking world, Bank of America had assets. Lot’s of good that has done us.
On Social Leverage:
It’s time to make up some new rules and lead by example once again. In the end, confidence comes from trust. There are millions of good people on the social nets who have built up unprecedented levels of trust and although each of them may never MONETIZE the new found trust and responsibility, he/she can use it to lead in different ways. Healthier ways.
Trust and confidence are not built overnight, but there are thousands of smart people in the public world of finance and Venture Capital on the blogosphere and social nets to pick this country up itself and just MOVE FORWARD.
Thought provoking. This call to action will take some time to mull over.
February 5th, 2009 — investing trading
Not the Master(card) of My Domain
I got killed today on my Mastercard put position with their good news; that transactions are still flowing through the system and they’re still collecting their fees. My entire premise was mostly wrong because I didn’t understand their business well enough. I just thought that a downturn in consumer confidence and spending combined with their agents (the banks) going all usurious on their customers would cause transaction volumes to drop. And to a certain extent, it did slow the growth. The news was largely negative and their results were helped by major cuts in ad spending. Will morale improve now that the consumer beatings have stopped?
But at the end of the day, I flat out missed that one and my streak of being on the wrong side of financial trades continues. Props to @dmooney9 for calling this one right and staying long. I’m holding the puts a little longer simply because I can’t get my head around this irrationality and I think there’ll have to be some kind of pullback. Overall, down about 42% on that trade at the moment. The StockTwits sentiment is turning negative, so I have some company as I decide to recover from my horrible entry.
The only silver lining in this is that in the last two weeks I’ve started putting a lot more focus on maintaining appropriate position sizes, so while this is a loss, it’s not as bad as it might have been with the lack of discipline I had last fall.
And at least I wasn’t the last commenter in this thread last August, commenting on why Visa was such a good safe stock to swing trade as it sat at $72 (it closed at $53.74 today):
If, all you had done is buy and sell on every 5$ price movement on V since day one- you could have easily had 50 solid (and easy trades) under your belt. Is anyone naive enough to think the floor is going to fall out on V- and suddenly the shares will be trading in the 50s??
Backhanding PALM
Today I also finally picked up some PALM May $5 puts at my desired price. The downside is that these aren’t that liquid and I’m going against the chart. The upside is that PALM sucks and I expect this one to work out; I got in near the high of day. I intend to give this one no more than 10-15 days due to the May expiration.
NDAQ Puts on the Radar
Tomorrow, my eye is on Nasdaq (NDAQ). It shot past $23 today, but the puts order didn’t fill. If this rally continues tomorrow, I expect to get in when the stock hits 24.50 or so. Like Mr Creosote’s mint, this one feels wafer thin and seems to lead the way down when things fall apart. Better? Better get a bucket—it’s going to throw up.
I don’t see any longs that intrigue me at the moment. The downside of being negative for 6 months is that your favorites have already rallied quite a bit and it feels late to get in. I’m very short in my trading account, which is keeping about net neutral overall with my long term hold account. I sold a little INTC April $15 premium yesterday when it popped. But I need to get a little more in balance.
