Sunday, May 9, 2010

Weekend Thoughts - Is It Worth Trading Right Now? (or Ever Again?)

Hi, traders, and happy Mother's Day to any moms out there that happen to read the blog.   I hope you all have a wonderful, restful day - if you're anything like my wife, you deserve it. 

Let's start with the market - we are certainly in an area where a bounce could happen.  Am I getting ready to play one?   No, not even close.   Although we've fallen a great deal and lots of oversold indicators are hitting extremes (for instance, the T2108 is at its lowest levels since March '09 and the T2106 McClellan Oscillator is at the lowest level I've ever seen at -418), I just don't know that it's a guarantee we bounce.   To be honest, I really still don't know what to think about anything.   I don't trust anything.   I know I am not the only one out there that feels the same way.  Because of that, I think any move we see over the next few weeks (and perhaps longer - hopefully not) can't be trusted.   I do know major damage has been done to this market, both from a technical perspective and a trust/credibility perspective and both of those combine to make me think we have not seen the lows for this pullback.   So.....if you feel you just HAVE to play this market, I would do it from the short side, but only after a bounce.

That's about all I can say for strategy right now.   I just don't think there is much(strategy that is) at this juncture.  Let's talk about the more important issues happening right now, and we as traders all know what those are.   The main question I ask myself right now is if what happened Thursday afternoon at 2:40 going to forever change the stock market and the face of investing in our country.   I think it will - what type of change is the real question?

If you follow me, you probably know I have commented several times over the last year or so that trading has seemed to change.   It has gotten a lot more difficult, at least in my humble opinion.  What has historically worked well for ages hasn't worked as well in the past year (at least for me).   Now, I am completely aware that this feeling could just be me trying to come up with excuses for my performance over the past year or so.   I have never claimed to be a superstar trader - I have strengths and certainly many weaknesses like many other traders.  My account was up about 90% in 2008, but I took a loss for 2009 and am down this year as well.  Perhaps I am just trying to make myself feel better by saying "things have changed".  But as I look at charts and the action in not only individual stocks but in the market overall (where for how long have we seen lots of heavy volume selling and lots of lower volume buying but have not seen the market put in a meaningful pullback of any kind until now), I do sense things are different. 

This year, I have made approximately 90 trades.  Ten of those have been on the short side, while the remaining eighty were on the long side.   I have certainly passed on stocks that have made big moves and chosen other stocks that haven't moved, but I figured that being mostly on the correct side of the market, I should have a better performance than I do.   Yet what I see is stocks that continue to breakout, then reverse hard, then move right back up after becoming quite ugly looking.  I see stocks that pull back to support areas, slice right through those support areas, and then reverse right back up after taking out a ton of stops. Again, it's my fault that I am not adapting successfully to these trading patterns, but I keep asking myself, "what exactly is working out there?  What should I be doing instead?"

As I check in on some of the blogs I have followed for the past three or four years, I am seeing changes too.   I am seeing other traders become strictly day-traders.   I am seeing traders become scalpers.   I am not seeing the same mind-blowing performance claims that I saw two or three years ago, even in the heart of the bear market.   I ask myself, "am I the only one struggling right now, or am I the only one being honest about it?"   Again, I am seeing changes and I have been seeing them for a while now - that's all I am saying.  

Most of these thoughts and issues eventually lead me to the issue of computer trading and HFT and things of that ilk.   Sometimes I tell myself that it is nothing and I need to suck it up and stop trying to find excuses for my performance.   Then other times, I just sit and wonder.   I know the "game" was always rigged, but for most of that time it was rigged because the humans traders like myself were competing with always had better information, faster information.   They were more informed and had the ability to trade much better and more successfully because of it.   As a trader, I could accept that and could still win if I just followed their actions.   Today, I don't think that holds true anymore.   Today, I think simple everyday traders like myself are competing against computers and I have to admit that it's a game I don't know if I even have a chance of winning. 

I don't know what happened on Thursday.   The truth may eventually come out, or it may not.   I don't trust anything that is put out there right now to be honest.   I have heard many explanations that a main reason the intraday crash occured was that computer programs shut down and with no real liquidity in the market besides those HFT computer programs, there were simply no bids.   No one was there to step in and buy.  With estimates of 60% of the daily market volume tied to HFT, it makes sense that the market crashes if 60% of the daily volume can be taken away by a mouse click or algorithm. 

I have also asked myself the following question several times - if 60% of all daily volume is made from computers trying to outrace other computers by microseconds for fractional gains much less than a penny, do charts really matter anymore?  Traditionally, technical analysis is based on human emotions - fear and greed.   Support and resistance levels, trendlines, etc - all can be tied back to human emotions.   So what if it is now mostly non-humans making those decisions?   Doesn't that changes things just a bit???

I don't know what is true and what isn't right now.  I do know that I have not read one positive article about HFT.   I have read a multitude of negative ones however.   Actually, I am kind of surprised that there are as many negative articles about it out there.  If what I read is mostly true and because of HFT our markets truly have turned into electronic casinos that normal men or women trying to grow their nest eggs have absolutely no chance of winning in, I figured you wouldn't hear much about it at all.  It would be the ultimate "elephant in the room" that no one wants to talk about it because of fear of what might happen if people knew.

Why do I say this?   Well, can you ever imagine the Fraternal Order of Police holding a nation-wide news conference and stating that we really don't need police officers anymore and we never really did?   Or the National Education Association coming out and saying that we really don't need teachers - that schools are just a scam and no one kids should participate in them?   Or (I'm really stretching on this one) that the U.S. Congress will come out and say that our country does not need them, that they are all scam artists, and that they should be fired?   Now I am not trying to say we don't need teachers or police officers (believe me, I support both groups tremendously, although I do support the getting rid of Congress idea).  I am using these just as examples.  My point is that you would never hear these statements made because those teachers, police officers, or Congressmen (or any other profession - just pick your own) would never destroy their own careers.   No one would. 

Very few people are naturally going to sabatoge themselves and their career (especially when their careers provide them much wealth and prestige) just to protect others and to be honest.   It just isn't going to happen.   So how does this related to Wall Street and trading?   Well, if the people who run the wide range of investment services out there would come out tomorrow and tell all of their clients that the market is completely rigged, completely controlled by computers, and that they have virtually no chance of being successful, what would happen?   Obviously most of those people that used those services would stop using them and there would be a huge loss of revenue and jobs.   The whole industry would likely disintegrate as people realize they have been sold nothing but snake oil for so long.   Imagine Jim Cramer coming out on his T.V. show Monday and telling folks that the market has changed forever, it is just a computer-controlled casino now, and is no longer something that is worth risking money on.   What happens to him?   You think he's still a multi-millionaire?   That's why I wonder if anything will happen or if any change will occur - I am wondering if you will hear any discussion of a "changed game" being put out there by anyone that sells a Wall Street service. 

I include myself in this discussion.   I am obviously not a big-time blogger - I just come on here and share my thoughts about the market and some ideas that hopefully help fellow traders out.   But this website is based on the stock market and trading.   If it is not worth trading anymore, it's not really worth running a website anymore.   I don't want to stop doing this and don't plan to stop, but I do wonder sometimes about the whole process.   I feel weird sharing these thoughts right now to be honest and am a little scared of the reaction.  These are however thoughts that I felt I must get off my chest so that's what I am doing.

I have wondered for the past few days about trading in general as well.   Is it worth it?   In the past I never thought of trading as being that risky - I thought for the most part risk could be controlled through the use of discipline and stop loss orders.   Thursday threw a big wrench in that idea.   Bids and asks were so out of whack that you could have had a stop at one price and be filled several dollars below, if it was filled at all.  I cannot (or maybe just do not want to) think about sitting at my computer and watching my nest egg go right down the drain because computers decided to pull some tricks.   If you read this blog you know I was in cash Thursday so I was not affected this time, but who now knows when the next time will be? 

I have a lot of questions running through my mind right now.   If I don't trade or invest in the market because it truly is a loser's game now, then where do I invest?   How do I go about gaining wealth?   What other options are there?  I unfortunately don't have the answers to those questions - maybe some of you readers do. 

Although I am pretty sure many of you will be questioning my sanity after reading this long, rambling rant (if you haven't questioned it before this that is), I hope some of it makes sense.   I think I am a pretty normal guy.   I have a full-time job away from trading.   I live nowhere near Wall Street.   I don't sell a service.   I just trade as a way to hopefully make money for my family to grow with.   In the past, I have really enjoyed trading, but now I am really starting to dislike it.  I would like to think there are a lot of people out there just like me and that are having the same questions I have right now.   Please feel free to leave any comments - good or bad - about the thoughts above.

I really do hope last Thursday was just a one-time glitch that will never happen again.   Perhaps some sort of change can be made to limit the damage these computer trading programs can do on Wall Street.   I unfortunately am not very optimistic that that will occur.    Going back to my opening comments, I think it is a game-changer.  As it is, until things do settle down and get back to normal, I will not be trading.  It could take a few weeks or a few months before I am comfortable putting my money on the line and feeling enough confidence in my ability to know where the market will go next.   As many traders have said this week, right now there is absolutely no "edge".   It is very smart to wait for one to come back, as long as that wait may take.

Going back to 2008, I don't think the regular American had too much trust in Wall Street to begin with, and after Thursday, I think the little that was left began to disintegrate as well.   That's not good and needs to somehow change.   Hopefully it can.   Good luck to all of you out there.   Be careful.

11 comments:

Rookie_SA said...

It was too easy to make money on the long side .. Everybody had to .. The banks, Fund managers even retail investors bcos of the carnage in 2008. This may be an inflection point. But everybody wants to step aside and see wats going to happen .. Everyone has one foot on the exit door. So when thigs a little worse everyone will flee. Thats my humble prediction for watever its worth. But the only saving grace is the elections later in the year. Im sure the dems wouldnt want to see a collapsing stock market ..

hayfro said...

Ryan,

I totally hear what your saying about trading being extremely difficult this past 18 months. I still believe it's possible to make money trading, it's just more important now to be uber-flexible in your trading style. I was fortunate to be short for the past 6 days or so and caught a big part of this weeks move, went to cash on Thursday afternoon, and waiting to see what the markets do now.

I do think it will take a few weeks for trading to get back to normal and every now and again something like this happens to scare the beejesus out of everyone, calling them to question their trading careers. Have faith in your system and make sure you follow it, not allowing your emotions to get in the way.

BTW, send me an email with your number to zentrader@live.ca I'd like to talk to you about a few things when you get a chance and run a few ideas by you as I'm on the computer enough and I'm not into lengthy emails...

Jeff

Anonymous said...

thanks for sharing. I think edges come and go and the one you use to trade will most like return at some point but if it is not working, you really have no choice but to take a step back and wait, or find another one.

Jeff (Chicago) said...

You can do what I've done and stop trading in this rigged market and earn your money the old fashion way, through hard work.

But this would idea would suck because I wouldn't be able to read this blog any more.

positiontrader said...

Excellent post Mac! You are certainly not alone in thinking all this. I, for one, have been questioning the value of keeping hard stop losses since Thursday.

Also, since I have been on a break from trading, I think I am seeing things more "clearly". I feel just like a detached observer to what's going on. Hopefully, a similar period on the sidelines will help you answer your questions.

Good Luck!

Mac said...

Rookie - I do agree that things will get worse before getting better. I think we'll likely bounce a bit but I would be surprised if we saw new highs anytime soon. of course, I've been surprised before.

Zen - I am not really questioning my "career" - just sharing my thoughts and I think echoing the thoughts of many right now. Hopefully things will get back to some semblance of normalcy in a few weeks.

Anon - in terms of edges, the problem lies in the fact that with computers controlling absolutely everything, is there any edge, regardless of your strategy??

Jeff - Hard work, what's that? JK. I think that's part of the problem - the Wall Street types can get so much money so easily that they could care less if things are "fair" and if the strategies they use affect the integrity of the entire system. It's been this way for a long time however.

Position - agreed, I am just fine being in cash here and "observing". I think it's the only real thing to do right now.

Anonymous said...

great comments Mac -this gap up tomorrow may attract so many shorts that I would not be surprised to us climb over the next week or so and maybe make new highs, take out the shorts and then selloff.Also just going to watch and maybe short a breakout

Andrew said...

Hi Ryan

Basically what you wrote about in your blog sums up 100% how I feel. These markets have changed in the last 8 or so months and nothing seems to work that worked before. I am very good at sticking to discipline but have foudn that about 80% of my trades have been losers. I trade professionally and I'm also begining to wonder if things will ever look up again! I live in South Africa and our market has definately changed shape dramatically and I think it it is also due to computer algos that are taking over. I also agree with you that confidence to the markets in general has taken a big dent and it appears as if this volatility is here to stay in the short term. I wonder where we will end the week and wonder if this will just be another buying oppurtunuity like we saw in Feb? Who knows, but these markets continue to confuse me. Cheers Andrew

Andrew said...

Hi Ryan

Basically what you wrote about in your blog sums up 100% how I feel. These markets have changed in the last 8 or so months and nothing seems to work that worked before. I am very good at sticking to discipline but have foudn that about 80% of my trades have been losers. I trade professionally and I'm also begining to wonder if things will ever look up again! I live in South Africa and our market has definately changed shape dramatically and I think it it is also due to computer algos that are taking over. I also agree with you that confidence to the markets in general has taken a big dent and it appears as if this volatility is here to stay in the short term. I wonder where we will end the week and wonder if this will just be another buying oppurtunuity like we saw in Feb? Who knows, but these markets continue to confuse me.

Anonymous said...

Really great post.

I've lost a lot over the last year by being stubbornly bearish and not having the discipline you show.

Without getting too conspiracy sounding - I think the evolution of manipulating the country's confidence via manipulating the stock market - and allowing insiders to benefit from that policy have a lot to do with it.

Really interesting that you've had a hard time making money long too - because that's also been my experience.

It seems like price stability has become way more elastic - subject to buying/selling pressure of the moment. Programs probe and determine just how much they can stretch reality on any given day. As traders step away and it's just the computers it seems like a self-reinforcing loop, because low volume markets can really be pushed around.

As I sit here, we are reverting from fear again to euphoria - I heard that institutions were selling friday. Was it just the final stop running for the huge up day Monday? NQ and ES futures are both up well over 4% on the EU quantitative easing. Almost 3 hours to the open.

Anecdotally, I got a call from a relative saying he was glad he was out of the market (as I'd recommended from an investing point of view.) But I'm sure he had felt tortured during this crazy run up since Feb. It will be interesting to hear reactions if there's a perception that we will get another year of "only up" market action because another trillion in liquidity is being thrown out into the world (actually just the banks.)

Ed Heath said...

Excellent honest post! I also agree with the Congress suggestion! Anyway, I am so glad to see an honest trader talk about what is happening this year. I am an amateur part-time swing trader that is having trouble this year also. I'm only up 2%, but most have been with day trades which I hate to do. This market anymore is not kind to swing traders. I just found your blog a couple of days ago, so you now have me as a fan with your honesty!
Ed Heath