What Did I Learn?

It's hard to protect profits AFTER a correction has started.

Sentiment is everything in the short term.   Your profits can be generated by selling joy and buying grief.

There is a time to be a turtle and a time to be a tiger.

Proper set ups take longer than you think to emerge but the swing itself is often shorter.

On the Sixth Day of Painmas

Well, there goes 2010.

 Profits completely wiped out.  Losses now growing.  Sitting through a correction is a bad idea.

 What I did wrong:  I quickly added to declining positions instead of observing that a major shift was taking place.  Had I simply kept my 25% cash position alone for a few days, I could have added at much much better prices instead of being helpless today when finally, some actual bullish, bottoming signals showed up for a variety of stocks.

 In a correction, trendlines will definitely be tested and violated.  It's best to let the first wave get crushed by the fear than enter headlong.  This was a huge learning experience in impatience and stubborn belief.  When the markets want to correct... the entire world of technical analysis changes.  Stocks don't just bounce... they fall fast until exhaustion.

 Some of the signs of a bottom (if this is indeed a bottom -- it probably isn't ) are:  strong buying vol. intraday.  You can clearly see the green bars showing buyers are coming back in.  Dragonfly/hammer candles form at old support levels.   A glimmer of hope from the msg. boards.  I added way too early and now I am 100% helpless should the markets continue to correct lower.

 Should I survive... I will remember these six days forever.

need to learn from this

I just don't think I can go through a drawdown like this again.


Value investing is not always fun or even tolerable.  Sometimes it is just pain.

Five Days Down

Making money should never be easy...  yet it was the first two weeks of January.  I made a lot of money.  But I didn't do anything about it.

 Now -- in five days, I have given it all back.  What the market gives, it takes back twice as fast.  Had I been listening to my inner voice... I would have taken more precautions to lock in the gains.  The market is a beast that can turn on you in a second.

 It does not care about value or anything else.  When it wants to drop, it will drop through all your fancy plans and charts.

 If I'm really an investor then days like this should not bother me.  But the fact is -- I think I need to be more of an active swing trader and take the profits as they roll.  Staying long and giving everything back on each and every major correction is too hard to deal with.   I did quite well taking profits.  It's the ones that I held onto that returned back to their trendlines.

 I did buy a lot of names on trendline support today.  Small caps are broken now. And I'm still losing huge chunks of money every day.

 I wish I could be a daytrader and be in cash all the time but I am terrible at that.  That only guarantees I bleed to death slowly.

 I still have not lost money for the year but tomorrow it goes red.  Hard to keep going after five days of this.

Correction Continues

Taking more heavy losses -- now four days in a row.

My tolerance for pain is reaching maximum.

The market has decided there is too much risk in owning China names and I have suffered by holding on.  The market is saying get out but the market is impulsive.

I learned that the market can turn on a dime and not look back.
I learned that my habit of taking profits is a good one -- one that I need to do more often when I feel like the profits are coming too fast, too easily.  Always recognize that feeling.  Locking in profits is always a good thing.

 Don't be in a rush to put cash back to work.  If you ever feel rushed, fearful, giddy, or greedy -- you are about to make a big mistake.

Destruction:

Today the Dow was down 213.

I suffered perhaps my largest one day loss ever.

What did I do?  I bought more stocks.

It did not feel good. And as I write, GOOG is tanking on earnings.  But the stocks I own are long term plays that are far below fair value.  It makes no sense to sell them because the market is puking on political news that doesn't affect the business.

In fact, my largest position, NEWN.ob was actually up .25 today!  So how's that for ignoring a sell off.  I think last year I would have freaked out on a day like today.  I certainly wouldn't have been a buyer.  It may be a big mistake.  Today was a huge technical breakdown.  And there will probably be follow through tomorrow.

 The market is understandably nervous about the new rules.

 The other important thing to remember is this is one day.  I am focused on monthly performance.  (For the month, I have done quite well despite today's give back.)

 I feel I followed my plan... even though today was a horrible day.  Let's see what the future brings.

Clarity

I feel I'm seeing the market well lately.

 I had shorted the market via QID on one of my best up days ever.  I set a stop that was as low as 4 cents away but it turned.

 The next day the markets gapped down and I exited close to my target.  My overall portfolio was hit really hard but there was some recovery end of day and it wasn't so bad at the close.

 What I discovered is that posting my ideas and thoughts on the Mainely Stocks board seems to help me with my trading.  Talking ideas out 'out loud' means I have to be just a bit more analytical and thoughtful.  It forces me to explain my reasoning.  As such, I'm less prone to making impulsive trades.

 I feel that market has reached a top for now based on a number of developments, mostly political, and there may not be such easy gains going forward.  I need to watch out that I don't get bored and try to force a trade.  I have made good profits this year.  If a month or two goes by with no more profits... it would not be a disaster.  The main thing is to focus on waiting for good entries... and finding constructive things to do during slow periods.

 I still think this market is going to reward value so that's where I'm looking.

TraderFeed repost:

Another great set of thoughts from Brett Steenbarger:

1) Turn Every Day and Week Into a Learning Experience - Make sure that you take away from each day something positive that you've learned and will work on in the days ahead. If you grade yourself on your learning and your improvement, you'll be able to weather the trading setbacks;

2) Find Teammates - One way soldiers get through the rigorous training of Rangers and SEALs is with the support of buddies. Colleagues can advance your learning, but can also be a source of encouragement and challenge when times are tough. 

3) Hone Your Niche - Relentlessly identify what is working for you in your trading: what you're doing well when you're making money. By focusing on your strengths, you can build upon those and stay in your performance sweet spot.

4) Have Plenty of Reserves - You can't be pressuring yourself to make a living from your trading when you're just first learning how to trade. Like any business, you need to be well capitalized, so that you can survive the lean times and the start up phase.

5) Make Sure You Have Support at Home - A spouse needs to be part of a trader's business planning. The support at home is key when it comes to facing those lean times and start-up frustrations. To sustain that support, the trader needs to make sure that the financial needs of the couple and family are not jeopardized by the time (and capital) devoted to trading. 

What Was I Scared Of?

Several times this year I have dumped positions at a loss... even though they did not violate mental stops... and watched them all go raging higher.

I think what I learned this week is that all good positions have a scare you out moment... or almost all of them.

As I mentioned before, good value stocks take time... and you don't need to trade every day.  You also can withstand drawdowns.

I have often frequently bought stocks that tanked that I thought were great and very often, I wind up buying the bottom -- because someone else is panicking.

The pros I follow never dump positions for losses.  They just don't do it.  Once you stop doing it too, you will improve your performance... as long as you've done the work and know the value of what  you own.

Is Time On Your Side?

I'm thinking about time today.

As I have shifted from a trader to a longer term value investor, I realize time has shifted to being on my side.  I don't make money every day.  In fact, I lose money on many days.

However, I have two things going for me.  Time is the main thing.  Over time, the value names tend to assert themselves and finally provide the big gains that might have come from hundreds of small trades.

The other thing is I don't have to be in front of the computer all day stressed out, giving me time to think about other things and do other things.

So essentially, I am getting a lot of extra time, less stress, better results.

That's a winning strategy.

Three Questions:

Did I trade well today?

What did I learn about myself?

What did I learn about the markets?

Today was a down day and I made an egregious mistakes by selling part of a large position because I was nervous.  I did not sell all of it.  I was overweighted so it was a relief to get rid of some it.  The stock rebounded and I locked in a big loss at the bottom.  I then regained my composure.  I bought several downtrending names because I felt they were too cheap.  At the end of the day, a big loss ended up being a smaller loss.  The stocks I follow were out of favor.  Meanwhile, all the indexes were up, adding a sense of being in the wrong names.

I learned that I still need to work on my emotions on down days.  This is a marathon, not a sprint.  My portfolio is up -- outperforming all major indexes for the year -- despite two down days in a row.  I need to accept these consolidation days.  I'd rather be up 6 days in a row huge then down 2 then small gains 8 days in a row for a smaller overall gain.  I anticipated the drawdown anyway... I just was extremely uncomfortable anyway.  What's the point?  My targets on many names are far away.  None the stock had specifically negative news.  Today was a normal day.  I was reminded of the importance of focusing on monthly performance and not getting caught up in the day to day movement.  Otherwise, I am just trading like a noob.

I learned the markets are very much focused on daily performance... the markets are quick to overreact to the downside as fear is a strong motivator.  I learned value names rarely perform with the indexes -- they march to their own drummer.

Clocked in the Head

Today was a very big loss although not as big as yesterday's gain.   Nonetheless, it was a wake up call.

I took profits in LPIH which hit a new high but closed red.  I also took profits in LTUS.

I bought several names that got crushed but most of them closed near the lows.  This may get uglier as the SPY/NAZ leadership names are extremely weak now.  Many of the big cap names are extremely overbought.  The first six days were just so strong... profit taking is inevitable.

 However, my strategy as a value microcap investor is to not get shaken out as my price targets are still far away for many names.   The profits I have taken so far may be foolish and too early.

 Still, a big correction would be difficult to sit through.  Many charts were broken so it's possible the next few weeks will be nothing but losses or flatness.  It's best to protect gains when all signs point to a looming correction.

  It's time to be extremely vigilant now.  If the markets are sensing the easy money is over... there will be an over-correction to the downside before a new upwave.

Running Hot

Another strong day for micro China names.

I was going to focus on RNWK -- which I immediately sold for a small loss as it tanked at the open.  But as it turns out... I was probably premature.  If I had waited until end of day I would have seen it closed forming a massive dragonfly candle... so perhaps I was once again correct in my buy but too hasty to exit a losing position without waiting for the end of the day.  In fact, today was the best dragonfly candle I've ever seen in a long time in any stock.

Nonetheless, the rest of the portfolio was strong and my only real mistake has been taking partial profits instead of leaving it all alone.  However, it is never a mistake to take partial profits either.

My niche of following strong value microcaps far outperformed the markets today and last week.  I will continue to follow these names.

Finding Your Niche

I am reading "Enhancing Trader Performance" by Brett Steenbarger.

The first major idea in the book is the idea of finding your niche.  Only once you find a way of trading that is comfortable for you can you consistently make money.

I have found that I am drawn to deep value and using charting to find excellent entry points.  I prefer finding the bottom of the range, when sentiment has gone deeply negative, and then looking for reversal signals (often the 'dragonfly' candle) to begin a position.

At the same time, I find myself excited by those big breakout stocks and watching them burn up for 50% weekly gains... I feel like I'm missing out.  However, this is not my niche.  By waiting for the low points, I often make a lot of money over a longer period of time.

That said, I have entered a position in RNWK on a classic 3 bump pattern.  I can see that if it falls below 3.70 -- I need to exit immediately.  This pattern is a bottom pattern and you can't give it room as a break means many weeks of dead money.   I know the stock is trading at book value but with no positive earnings... it can easily drop 10 - 20% if there's no more buyers.

 Other than that, I am mostly sticking with my various microcaps which performed well last week.

2010: New Beginning

Well, the first two days of the new year have been quite successful.

I'll start by mentioning my first big blunder, chasing CBTE on a 'tip' and getting caught for a sizable loss.  The only mitigating thing is that I committed less than 3% of my trading capital and the paper loss is less than 1/2 of 1% of my capital.  I suppose this is not the most egregious mistake, especially since the overall gains are around 4% YTD.

 China small caps are doing well.  My goals again are to trade less, hold for price targets, be more of a value investor, and get out of losing positions fast.  This means taking the loss on CBTE so I can focus on the winners.

  The people I follow now are the smartest of the web.  I notice I am really not using charts as much except mainly to add to positions ON DIPS.  I used to sell out on these big dips.  That's why CBTE was such a mistake.  I don't know this name and got excited to get into something.

 The fact is - this makes sense.  Today everything was going well for the 2nd day in a row and I took some time off and felt like... I wasn't 'doing' anything and felt well... bored.  Feeling bored is a recipe for disaster.  It leads to impulse trades and I definitely fell into the trap.

 Professional traders must have a solution to deal with boredom or their bottom lines will suffer.

 Twice a week I am away from my desk and this is good.  Now that my strategy and positions are secure, it'll be easier to step away and come back refreshed.