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.