Friday, January 30, 2009

State of the Market - 1/30/09

Do you ever feel like you are waging a personal battle against the market? Do you ever feel like whatever move you make, it will be the wrong one? That's how I feel right now after today. This commentary is going to be less market-based and more psychology-based. The market did break down early, but never really followed-through to the downside until the very edge of the day, and even then, it just kind of held there instead of really selling off. It was a difficult day to trade, at least for me. Not fun at all.

My frustrations with this market definitely continued today, as the early spike took me out of over half my short positions from yesterday with small losses. The frustrating part is that on a few, the stop was just barely hit and then the stock reversed hard without me for the ride down. That is probably the worst feeling as trader. I was away from my computer for most of the morning, so I had to set my stops and see what happened - I didn't have much choice. Let me tell you, it was not fun to see what happened.

My stop in UAUA was hit at $10.8999 (high was $10.908) and then it immediately reversed lower. I took a 3% loss on that one - not a big deal, but I could have been up around 12% later in the session. My stop in RRGB was also hit in the first minute or two of trading at $12.80 (high was $12.87), giving me a 2.2% loss. It reversed almost immediately without me. Again, the loss is not a huge deal, but again, later in the session, I would have been looking at a 7% gain. PNC was also hit at $35.11, giving me a 2.4% loss. That also reversed, although it moved higher at first. So once again, my read on these patterns appears to be correct, but this choppy market got me out of them prematurely and I did not benefit. I used trailing stops as well which supposedly can't be seen by the market makers, so I doubt they were trying to take stops out at the open, but who knows?

To add to the frustration, the one financial I did not get stopped out of only to see it reverse (JPM) just decided to stay higher all day. I was stopped out of that around lunchtime at $26.49 for a 2.7% loss. It was all over the place today - yuck.

Later on in the session, I did short ECA at $44.28 as it looked to be breaking through its 50 day moving average and a bear flag on its 5 minute chart. I once again got whipsawed there as it bounced right back up and stopped me out about an hour later at $44.77 for a 1.26% loss. It also reversed lower soon after my stop was hit.

The action of the past two days puts me down about 7% overall for the year - not a big deal and definitely something I can climb out of, but it is hard to deal with when most of my calls and reads on the market have been correct. It's not like I am shorting when I should be buying or vice versa - I have shorted when the market started turning lower and bought when the market started turning up and have absolutely nothing to show for it but losses.

Basically, this is the year has gone for me so far. Back on January 3, I was calling for a major pullback in the indices and told folks to not chase stocks. I went short some names along with FAZ at some point. I was stopped out early from FAZ and of the shorts I picked, only one worked (MR) while the others did nothing even though the market went much lower. Then around January 12, I was warning that a bounce was very probable based on what I saw, and so I entered both SSO and DIG at this time. My timing was a little off here, but the call was overall correct and we started moving higher a few days later, but I was stopped out of both positions way before that with small losses. Finally comes this week, when I have been clearly stating that we were due for a pullback here and here and that I wouldn't be chasing this government-induced supposed breakout. I got short some good-looking names yesterday that mostly did work, but I was shaken out of them early and now see only one out of six positions that gave me a gain.

As you may guess, I am somewhat frustrated right now. Honestly, days like today make me want to just quit this stupid game sometimes. I am not going to do that - I know it is all part of it and these things happen to every trader - but I may take some time off if it continues like this. My reads on the overall market have been pretty accurate I believe but I continue to carry this losing streak on despite of it. I don't know if there is luck involved in trading or not - probably a little to an extent - but if there is, right now all I seem to be having is bad luck, and I can't take that for much longer.

I know what I do need to do is look at how I am trading (specifically setting my stops in an extra volatile market) and change accordingly so that my correct reads will lead to profitable trades instead of frustrating ones. You never stop learning and growing as a trader, and perhaps this is my next challenge in terms of growth - how to manage this issue. I know controlling losses is the number one rule for trading, and I think I do a good job. My stops probably have been too tight on positions, but I do base them all on technical levels on intraday charts, so it is not like they are just placed randomly. What is happening is those levels I look at have been broken just enough for my stop to get hit, and then the action reverses without me. I don't know what to do about that. I think I need to figure it out before trading heavily again.

There is always debate about whether to use stops or not, or which type of stops to use. It is a tough question. It is easy in hindsight to just say, "oh, you should let your positions ride", but in this type of market, which is completely unpredictable, I can't do that. I would much rather wake up with a small loss of a few percentage points that have a loss of 10-15% after the market gets squeezed again on some new made-up rumor by CNBC. Days like today definitely suck, but I guess it is just part of trading. I am guessing I am not the only one who was stopped out of his shorts this morning - this market does a great job of frustrating as many participants as possible.

As it is, I am going to step away for a bit and not trade. As a trader, sometimes you have to be able to recognize this need and do it. I have one open short in ACM and will manage that, but I don't plan on adding any other positions for the near future. Basically, I think I've reached my breaking point. I don't know for how long I will stay away - I probably should step away for a while because with all of the rumors, volatility, and government interference, the game has become almost impossible to win in my opinion, at least for me. Maybe others of you out there are doing great, and if you are, congrats. Trading is a lot like poker, and right now for me, it is like trying to play a game of poker, but after each hand, the rank of hands change without the knowledge of the players that are playing. One hand, a full house is better than a straight, but the next hand, two pair are better than a flush. How could anyone be successful in that type of game? That's what we got right now in this market.

I need to let myself recharge, get some confidence back, and then maybe I will be ready to go again and get back to making money. But I kind of think right now if I try to keep trading, I will do nothing but pile on more losses and I definitely don't want to do that. Besides, my Steelers are in the Super Bowl so I can at least focus on that this week and hopefully enjoy a victory celebration for them (although I am worried about the game).

Sorry for the rant - sometimes it is necessary and theraputic to get thoughts out in words. I may be around and try to share some thoughts over the next week or so but if you don't see posts for a few days, you'll know why. This market isn't much worth writing a lot about for me right now. Take care and best of luck out there. Hopefully you'll have better luck than me recently.

15 comments:

Anonymous said...

Maybe you can figure out an indicator specifically for your trading style that tells you when the environment is right and when it's not, for example an indicator that measures the kind of choppiness that goes against your style, and then you figure out what level of choppiness on your indicator sets a trading stop for your style. I've programmed some of my own indicators and strategies according to how I trade and it has helped me tremendously in many ways, from analyzing the weaknesses in my trading style and finding new solutions to them, to staying more objective and relaxed.

With all the chopping around going on, I do believe there is a lot of fishing for stops by professionals these days.

Maybe this helps.

Anonymous said...

First of all the news get's worse..Arizona will win.
Thanks for all your posts. They are very insightful and yes you have been pretty much right on. But, unless you are sitting by a computer all day and trading there is no way to win in this market. Now factor in how the government is manipulating the market everyday there is no way to win. Get back to playing some of the inverse ETF's and keep it manageable. I believe like you do, we will test some of the Oct, Nov lows. BTW, I have been in cash for most of Jan.

bmbull said...

When things aren't working, you have two choices - back off, or try to adapt to the market. As Dave Landry would tell you, by the time you 'adapt' to the market, the market will change.

This quote is from a Landry column of three years ago:

"Some of you may have noticed that I haven’t been writing as much lately. There just hasn’t been much to write about from a momentum trader’s perspective. The market has changed directions 8 times in 12 days. Most sectors have exhibited a similar choppy behavior. As I picked up the phone to cancel my column for today, it hit me–years ago, I wish someone would have told me when to stay out of the market. In fact, the more I thought about it, the more important it became for me to do a column. The “secret” to any methodology is knowing when to back off during less-than-ideal conditions."

Whether you're trading momentum or otherwise, every methodology has its 'sweet spot', and other times, it may not work well. The job of the trader is to recognize when conditions are right for their methods -- and when they're not.

At least, that's the way I see it.

Anonymous said...

Hi,

Cheer up first of all. I am relatively new to trading but just wanted to ask if you considered using more room for your stops especially during the first day of opening the position and then adjusting it using ATR. I do think it could keep you in the market longer.

bmbull said...

And just in case anyone's interested, here's an article on "The Art of Protective Stops".

Of course, stops are never perfect. There is no 'perfect' in trading.

hs1935 said...

Why not short the market via ETFs. instead of individual stocks. That way, if you have the direction of the market right you make money.

Anthony said...

You are not alone in your frustration. Unfortunately, I chose to trade angry after similar things happened to me and i ended up compounding my losses. since you know you have the right ideas, i would advise holding your positions with much wider stops but hedging the daily b.s. moves with the ETFs. for example, if you're short the mkt but support was tested and held then maybe go long one of the 2x long ETFs to hedge. My problem is that i identify many of the breakdown/breakout patterns but either sell too early or am gunshy and dont trade the breakdown/out at all. Its a rule of mine to stop trading when this happens and i get angry, nevertheless, i kept on trading and compounded my losses with bad bad trades.

Mac said...

Thanks everyone for the great comments.

BMB - I will definitely check out that article. As you said, it is probably just good to step back right now. Hopefully I can learn from this.

All of the suggestions and thoughts mentioned here are things I have thought about, and I think what I am going to do over the next few days as time allows is that I will look at these more in depth and see what fits best for me. The inverse ETF's have worked well at times, but then other times they just chop you up as well.

I have also considered loosening stops but there are many instances I have had where a tight stop saved me from a much larger loss, so it's kind of a catch/22. The times you use a tight stop, it gets hit, and when you loosen it up, that's when the stock falls big time. You just never know.

After a few days to a week off to gather myself and regain my focus, I should be fine. You always have to work on growing as a trader and I think I need to do that here.

And for the anonymous Arizona fan, believe me, I am worried. I am not the typical Steelers fan that thinks they will win by 50 points. I think they are better than the Cards, but I know anything can happen. I think if Fast Willie hits 100 yards or more on the ground or more, the Steelers win - that would keep Arizona off the field. Good luck though - I am a big Pitt fan and watched Larry Fitz in person several times in college.

van said...

HI MAC!

I feel bad for your lost today! and I'm getting nervous that you wanted to quit. I read your post everyday, and you are very accurate about the market up or down next day or so. that's all I need to know because I'm trading SRS, SKF, and USO options. I'm really appreciated for all of your effort taking time writing thought about the market, I'm a guy who know nothing about the market, nor technical chart, all I know is to buy low and sell high. and I made 66.84% in this year trading option. So without your work, I'll be lost. I learned from someone that if you take 10% for each trade, and you set 10% for stop lost, so whenever you get stopped out, you only loose 1% of your money, I think this way, you don't get stopped out so early. I know you are using some kind of 5 minutes charting to get in, I just want to share with you that I'm using Metastock Professional. In the program, there is a program built in call Rahul Mohindar OSC (RMO), it calculates the movement of the stock, and It gives signals to get in or out the stocks, it has 1 min chart, 5, 10, 15, 30 minutes chart, daily, weekly, and monthly chart. I use it to trade options. you should try it out, if you talk to the saleman, he/she can give you 2 months to try, if you don't like it, you can return the software for the refund. If you combine your knowledge with this program, and 10% stop lost. I think you would do better. you can learn more about the program at www.equis.com. It's a Thomson Reuters company. Again, please don't give up, keep up with your work, a stupid trader like me need a good smart guy like you. Last year, I lost over 100G because I was greedy, stupid and lousy money managerment. That's was about 95% of my hard working money. But I don't give up, because I think this is the only way stop me from working harder for little money. so please stay and keep up with your work. Thanks god I found you Mac, God bless you and your family. Thank you very much. Van

Anonymous said...

"The action of the past two days puts me down" - Mac

Yeah that sad, dude, given that you've been right about your bearishness since SPX @940!! yikes!! Everyone would have thought you already book double digit gains by now.

To add salt to the wound, you also bearish since big FOMC rally on Wednesday, yet you got killed shorting during these 2 down days!! yikes!!

But I am not worried about you Mac, you are a good trader, your right call about the market shows just that.

Mac said...

Van - I don't think you need to worry about me quitting. I just know that I need to take a few days or a few weeks off because the market is beating me right now. Good traders have to admit that from time to time because if they don't, they will get beat up even more. Right now, after the past two days, we're back to being neutral anyway, so there isn't much risk/reward anyway on either side.

I am going to take a few days to just think about what I am doing and how I can do it better to break this losing streak. As I've said before, it's something everyone goes through but hopefully it will make me a better trader.

I'll share thoughts as I have them this week as I can. Thanks for the kind words.

Anonymous said...

I went through a very similar situation in December where I have up about 1/3 of my gains from 2008 in one month. It really hurt my confidence and unfortunately, taking Christmas week off didn't help with that much. I am currently trading at 1/4% risk per trade down from 1-2% at risk per trade (of portfolio equity) and the confidence is slowly coming back. What happened is the smaller positions have allowed me to loosen everything up without stressing and I am able to let things play out a little better. I'll never make much trading that small but regaining confidence is top priority at this point. I wish you the best.

bmbull said...

I remember posting this column from Quint Tatro months ago. The advice will always be good, since sometimes traders forget how big a factor psychology plays:

"Bounce Back From Bad Trades"

Anonymous said...

You are doing the smart thing to just take a break from trading.

Closing all positions can do wonders for your mind set.

Now, when you do feel ready to start up again, use SMALLER positions. Make fewer trades. With smaller positions you can have looser stops.

Good luck to you!

Rockon said...

Thanks for the great comments.