Monday, December 31, 2007

Personal Year-End Review

After spending the weekend looking over the trades I made this past year, I came to several conclusions and I hope these conclusions will help me become a better trader in the upcoming year. Overall, I had a decent year - my overall return was good, but at several point this year I was up much higher than where I ended up at. Some of that is just the general difficulties of being a trader - you are always going to have fluctuations in your portfolio value - but there are some things that I definitely need to improve on. These include:

#1) Become more selective and demanding before entering a trade, and not overtrading

My overall win percentage for trades in the past year is not near where I would like it to be, and looking back, I think the main cause is that I took too many questionable trades. The market was very choppy overall this year, and I think I often tried to force trades when I should have just sat back and waited for a better opportunity to present itself. I bought stocks even though I knew they weren't perfect(especially with fundamentals) and then just hoped for the best. This is not a smart nor a disciplined way to trade and make money consistently.

For those of you that follow poker, I think it is kind of like the type of hands you choose to play. I could play hands like queen-jack unsuited or pocket fours, and I may still win some pots by playing those type of hands. More often than not though, those type of hands can bring you more pots lost than won. If you have the patience to wait for pocket kings or pocket aces, and then play those hands, your chance of winning the pot becomes much better. It is very hard to do this however, sitting for hours at a time waiting for the perfect hand, and takes an extreme discipline. I think this is analogous to trading - if I don't see great opportunities presenting themselves, then I need to sit on my hands and simply wait for the perfect opportunity to come. I may make some money taking riskier trades, but I am just as likely (and probably more likely) to lose money on those questionable opportunities.

Following other blogs, I have read many traders write about this being a very difficult market and a challenging year to trade in. I hope my experiences this year will help me realize that choppy, difficult markets are easier to lose money in than make money in, and often it is best just to wait for better times.

#2) Don't be scared to take great opportunities

This in some way may seem to contradict what I just discussed - reducing the amount of trades taken - but I can think of several situations this year where I had a particular stock on my quote screen for several days, watching it, aware of it, and then just sitting there and doing nothing while it did exactly what I thought it might do. This is frustrating because those stocks went on to make big moves. One stock that stands out in my mind is YGE, and two more recently were RICK and SDTH. Now I am sure some of this is the fact that it is always easier to look at thing in hindsight and tell yourself that you would have traded that particular stock just perfectly if you would have just gone for it. Most likely, you would not have and still made mistakes. However, I just don't know why I didn't take these trades when I had them as possibilities at the time of their breakouts. I saw the patterns they were making, I saw their fundamentals, and did nothing. Something stopped me for doing so, and I need to find out what that something is so I can fix it. I do believe learning how to use Telechart this past year will help me in next year confirm some of the things I see and maybe give me the confidence to take these opportunities when they present themselves.

#3) Develop more patience and let good stocks make their moves

I was in several big-time winners this year at some point this year (CROX, JASO, DSX, SIGM); however, the most I made on any of these was around 65% and the rest were only around 10 to 20%, which is extremely disappointing when I look at the moves they made after I sold out. Jesse Livermore said that "sitting" made him the big money - not the buying or selling. Having rules that I can use to sell out of positions gradually will help a little, and I continue to develop those rules, but I must also develop the patience to sit through the inevitable pullbacks that strong stocks are going to have and not get scared out of good stocks. I must do this if I am going to be the trader I want to be. Which leads me to my last area to improve upon...

#4) Avoid the temptation to watch the market throughout the day except at the open and close

This is something that is very easy to get drawn into doing because, to be honest, it can be somewhat fun and exciting. However, I need to decide why I am really trading - is it to have fun or is it to be successful. I have learned this year that watching the market throughout the day, even if it is just checking on things every half hour or so, negatively affects my performance. The main way I noticed it affected me as I looked back this weekend was that when I watch the market, I have a tendency to not use hard stop-losses and use mental ones instead. As of now, I do not have the discipline to use always follow a mental stop without question. I will watch the stock hit my stop loss, and then start rationalizing that it will hold there and I should wait. As you can guess, this just leads me to a point where I finally do use my mental stop and sell, except that the new mental stop is several percentage points lower than where I originally had it. Not good.

Looking at my losses this year, about 75% were under 5%, which is acceptable. I kept approximately 96% of them under 10%. However, I saw many situations where I lost more than I should have because I did not act correctly when using my mental stops. I think this would apply to the other side as well - I can remember several times where I sold out of a strong stock because I saw something intraday that I acted upon hastily instead of thinking through it. This cost me a lot of profit potential as well.

I need to do a better job of staying away from my computer during the day, and also setting hard stops - if they get hit, there is a reason and I need to accept that.

I know there are other things I need to work on as well, and any trader that doesn't think they need improvement is kidding themselves. Trading is too difficult a task to not try and continually improve yourself. I am going to focus on these specific areas the most in the upcoming year, and go in with a positive attitude ready to have a better performance than the past year. I will continue to learn, I will surely continue to make mistakes, but hopefully there will be less mistakes and more improvements throughout 2008. And hopefully this market won't be as crazy and spastic too. Good luck and happy new year to all!

1 comment:

Asunder said...

Hey there, nice blog! I found your site through Stockbee about a week ago and linked to you from my blog. I see you've changed your name... that threw me off, I thought you took the site down.

Anyway, I fixed the link and like I said, very nice blog. I enjoy reading your insights!