Sunday, January 3, 2010

2009 Year End Trading Review

Here it is - the 2009 year-end trading review. I broke this into sections as I thought that would help me best organize my thoughts. I am sure I will ramble too much and get off track, but I hope it ends up somewhat readable when I get to the end of this post.

Recap of My Trading Experiences in 2009

I am going to look at my trading year in sections, the first being from January to March 6, when the market bottom. To start, this looks at only my main account, not my IRA accounts, just to be fair. With the market falling precipitously during this time, I was short with 30 trades and long with 19 (probably trying to play oversold bounces). Looking back on these trades, many were in the Proshares ETFs (SSO, SDS, QID, etc) or the real devil for me this year - FAZ, the triple inverse Financial ETF. I made a few nice trades on the short side (MR - 1/2 and 1/7, ACM - 1/29, and ITRI - 2/27) but really at this point all I did was chop my account up with many small losses and a few small gains. Staying away from the ETFs would have likely helped a lot - perhaps overconfidence from a good 2008 hurt here.

The second section of the year I want to look at is from March 6 through May 4, which was the bottom and first thrust up for this market move. Quite possibly the most important trade I made all year was on March 6, when I entered FAS at $2.88 (it has since has a reverse split so the chart prices will look different now). Here's what I wrote at the time - I made a very small trade today in FAS near the open - entered at $2.88. I kind of expected another one-day bounce today, so I took a chance with a tight stop. I was stopped out a little later at $2.81 with a loss but the position was so small it didn't bother me. The fact that we once again sold off a rally attempt did bother me. And the fact that it still didn't lead to a selling crescendo is disappointing. Perhaps we won't ever get that washout. Perhaps just too many people are expecting it, waiting for it. Perhaps this painful grind lower is exactly what Mr. Market has in store for us. I hope not, but I don't know what to think anymore.

Anyway, as I look back, that was a long put on at the exact bottom of the market, but I was stopped out and from there fought the trend up, going short 25 times between March 6 and May 4 and long only 7 times. This stretch really defined my trading year I believe, as this is where my confidence was shaken and I really started to experience a drawdown. I also played around with the inverse ETFs here way too much and was chopped around mightily by them, not only hurting my account but also likely my psyche. I wonder if that one FAS position put on right at the bottom had worked out right away, would my year have turned out differently? Perhaps not, but it is something I will continue to think about.

The third section I want to look at starts from May 5 and goes to July 27. I made a total of zero trades in my main account during this time. That's right - zero. In hindsight, it was probably a good thing because all the market did during this time is move sideways, but I think I was more frustrated than anything else and wanted a little break. Going almost three months without making a trade was a long time but I think it will help me in the long run - more on that later.

The last section I want to look at goes from July 27 to the end of the current year. During this time, I made 32 trades on the long side and only 10 on the short side. I jumped back into the market on July 27 with trades in ININ, CPSL, LCRD, and most importantly, BEXP (around $4.37). This is another trade that really defines my year, as I was stopped out the next session after setting a stop that was too tight (basically scared of taking a loss - psychological wounds from March to May). BEXP is now trading at $13.55. Would I have held the whole way? Probably not. But missing a big winner right after stepping back in and watching it run without me was not easy to take.

From there, I did trade mostly long as the stats above show (so all those of you that think I am an uber-bear, there you go), but really didn't have much to show for it. The big money this year was likely made from March to May, and after that I think the market became extremely difficult to swing trade for more than a few days at a time as historical technical analysis started to become much less reliable and patterns became much more volatile and choppy. More on this in a little bit as well.

So overall, take a little early overconfidence, mixed in with playing with fire via the ultra ETFs, and mix in misplaying the main move of the year, and you definitely have a recipe for trouble, which is what I had in 2009. My main account took a large drawdown (over 20%) after being up 90% in 2008. I guess it happens to all traders at some point, but it certainly wasn't a fun year for me trading. Now, I have had a lot of other important life events occur this year as well (adding a second child to the family, moving to a new house) and I do think those contributed at least slightly to the struggles I had - time became much more difficult to come by and the work that goes along with trading sometimes took a backseat to other things. However, in the end, I have to overcome those and simply trade better next year and that is what I hope to do.

Lessons from 2009

It was certainly a good year for the market from a percentage gain standard, but from where I sit, it was kind of a weird year as well. We saw a bottom that in hindsight did not have massive volume (check out the Nasdaq in early March), no new highs on the VIX (not even close), and no historically oversold readings. Readings were much more severe back in October of 2008, but the bottom occured in March and it is what it is. In addition, many times this year, we saw the market move up on low volume, sell off on heavy volume and break support levels, only to keep moving higher on low volume and repeat the process.

Why did this move occur this year, especially in the face of an economy that continues to lose jobs and by most peoples' accounts is not really improving that greatly? Well, I have written about this before, but I think it comes basically down to two things - the Fed lowering rates to 0% and short covering, perhaps aided in part by the government. When the Fed kills the dollar with a 0% return on holding cash, it forces people to look for other returns, and this year it was the market. With no apparent real economic recovery accompanying gains in the market however, people start shorting the rallies. "Forces" come into prop things up when support starts to break, and then shorts are forced to cover when the market doesn't break down. This process is repeated and each time it gets a little weaker, which is what you can see in the grind we've watched the second half of the year. That's one theory - who knows if it is true?

So what do we learn from 2009? Well, without trying to be overdramatic, I do honestly believe the game has changed (whether due to computer trading or the losses of 2008 or the government getting involved in the economy - take your pick) and because of that, it is up to traders to adjust. How I have traded in past years (and usually at least somewhat successfully) did not work the same and so I have to adjust. Patterns and technical analysis don't work the same as they have in the past and so trading strategies have to change as well.

If 2010 is anything like 2009, this means I will pay less attention to volume. It was not just the market that sold off on heavier volume only to rise back up to new highs on lighter volume - it happened in many, many individual stocks I watched this year. Historically, this has been a warning sign but in this new environment, maybe volume just doesn't matter that much. This will admittedly be very hard to do.

Support and resistance doesn't matter as much either if things stay the same this year. In individual stocks, I have seen too many examples to remember of stocks breaking out to new highs, falling immediately back down through their breakout points (again, historically a very bearish sign) and then bouncing right back up and taking off to new highs. I have seen quite a few bearish reversals where stocks have given back all of their intraday gains and closed at their lows for the session (again, typically bearish) but then just move right back up to new highs the next few days after the reversal. I am sure some people out there will disagree with me, but typical charting ideas haven't worked as well as they have in past years and as such I need to focus on some new ideas in 2010.

This articles was posted by a reader in the comment section recently and I wanted to link to it because I think it really summarizes well how things have changed for smaller, retail traders (mainly due to computer trading) and what us retail traders can do about it - please check it out.

Personal Lessons from 2009

I did learn some important things this year even admist the struggles I had. I learned that I don't have to trade to be happy, and that trading isn't my life. This may sound stupid, but I think it is important. In the past, I wondered if trading was a sort of addiction, where I just did it for the thrills it brought, both good and bad. This year, in contrast, there were several periods of time when I went a month or so (or longer) without making a single trade. Perhaps this is partly caused by my disinterest in what I saw happening in the market (i.e. government intervention, etc.) so maybe my skill didn't develop as much as I think. However, if my patience developed at all, I think that is good for the future - knowing I can sit back and not do anything if necessary. Livermore said something to the effect that the waiting is the hardest part of trading to learn and the most important as well. I think in past years, I overtraded a lot and that got me into trouble. I perhaps undertraded this year because I know there were many opportunities I recognized but passed over. Perhaps in 2010 I can find the right balance between overtrading and undertrading and have my best year yet.

I also learned that trading is a fluid endeavor, not a static one, and to be successful, you must be willing to adapt and adjust as things move. What has worked in the past may not work in the present and future, and I think this year proved that well to me. This is a very hard lesson to learn and to accept because certain principles have worked for so long and have worked so well for so long, but this past year was different. If I am going to be successful, I have to be able to adapt my thinking and adapt quickly. My opinions and beliefs don't really matter in the grand scheme of things - the only thing that matters in terms of trading is making money and finding the best way to do that. Finding that way will continue to be a fluid endeavor and I hope this year that I will be more flexible in my thinking and more willing to adapt. For someone who is stubborn like me, it is not an easy thing to do, but I am hopeful I will learn.

Psychologically, I learned that I am not yet a master trader. Reading Mark Douglas's books again is a top priority to perhaps get my mind straight again.

Oh yeah, one more lesson - let's stay away from the ultra ETFs this year. Of course, one of my two positions right now is DUG - I really am stubborn, huh?

Personal Goals for 2010

My goals in 2010 include become more streamlined and focused in my trading while at the same time being able to manage my time correctly. By correctly, I mean dedicating most of my time to what is really important in my life (family, friends, etc.) and not letting trading dominate it. 2009 was a year where time was tough to manage and I hope I can find the right balance this year to help me become more successful. Streamlining my trading strategies will hopefully help me do this as well.

I hope I can break some of the bad habits I got into in 2009, namely not keeping track of my trades as well as I should (bookkeeping-wise) and not studying my trades as well as I should have in order to learn from them. I got sloppy in this respect and I am sure it contributed to my struggles this year. Managing my time better should help in this regard as well.

I hope I can continue to write and share videos on this blog and I hope that the information is valuable for readers. I do put time into this website and I hope it is worth it. I hope I can develop relationships with more readers and share insight or suggestions as I can offer them.

Finally, simply put, I just want to get back on the winning track this year. 2007 and 2008 were both very good years for me, and I want to get back to the gains I saw in those years. I am confident I can do that, but I also know I need to adapt in order to be successful. If I start seeing some success early, then perhaps that winning track will be much easier to get back on.

Prediction for 2010

I am not even going to try and make predictions about what 2010 will bring us because I honestly have no clue. I guess the first step in making longer term predictions is deciding whether we are in the middle of a new, fresh bull market or if we are actually in a counter-trend rally within a secular bear market that started at the end of 2007. I was not trading back in 2003 when the last official bull market started so to be perfectly honest, I don't have enough experience to have a strong opinion on whether we are in a new bull or not. I kind of envisioned it a little different than what we saw this year but maybe I am wrong. The CANSLIM/IBD method for market timing has not worked as well as it normally does - it caught the first move in March but since then it has been whipsawed many, many times like many other traders.

I am going to take the attitude to trade small until things become clearer for the new year, and focus less on the overall market and more on individual setups. I think this will help me be more successful next year. As I find time, I would like to refine my strategies and perhaps come up with new ones using Telechart - if I do, I will share them as I go.

Some of the greatest lessons in life come out of failure, and I do believe that 2009 was a year the trading gods decided to remind me many times of some key lessons I seem to have forgot. I am not yet where I want to be as a trader, but with work and experience, I am still optimistic that I can get there. You are never going to be perfect as a trader, but learning from your mistakes is a big first step to getting close to that level of perfection everyone strives to achieve.

I know this was long and probably incoherent, but I hope it helped some of you out there. It is always a good idea to look back at your trading moves every so often as you can learn many things from your mistakes and your successes. I am still going to try and get a video out of the best performing stocks of 2009 but it probably won't be until the middle of the week - watch for it. Best of luck to all of you out there for 2010 - I hope it brings all of us good luck and great trading success. Take care.


Tim said...

Very good post sir! Good luck in 2010!

Anonymous said...

Outstanding wrap-up; thanks for sharing

positiontrader said...

Am sorry but find it hard to agree with you on some of the points Mac. Take volume for one. I would never reduce the emphasis given to volume. Price and volume are still the starting points of all TA. Indeed, the market has gone up on lower volume but this could be just due to the holiday volume or we are in for a correction.I would instead look for slight tweaks to the trading system rather than drastic changes. Swing trading is hard these days due to the volatility. So, you could look into modifying your system into being more of a day trading or position trading system. For example, look into taking profits on half of your position after a 4% run up and move the stop loss for the rest to your buy price. This doesnt make you a day trader but it does protect your profits. Or if you think the market is going to go down, one could enter in small sizes and lay more emphasis on position management. Maybe wider stops too depending on your confidence in the position. Whatever your system is, it has obviously served you well in the past. I would rather go for small changes like above than give less importance to volume. All the above just my opinion, of course. You are obviously a much better trader than I am but just thought I would put my two cents in. Good Luck for the coming year!

Mac said...

My point with volume is that in 2009, volume didn't matter that much. I'm not talking about just the last two weeks either - I'm talking about most of this nine month rally. If you used it as a clue to what might happen next (which is what I and many other traders did and have done for long periods of time) you got screwed many times. Look at the IBD system which places a heavy emphasis on volume. How many times from May on where they whipsawed and basically embarrased with their calls, all using a system that has historically been proven to work very well.

I hope volume comes back to be important, but for 2009, you would have been better off focusing on price only and not volume. I don't think that can be argued much. We'll see if 2010 is any different - I am certainly hoping it is.

I won't be making huge changes, but my focus I think will be more on individual setups rather than letting the market overall influence me too much. Good luck as well.