Humbling Summertime Experiences from the Market

The market is a teacher; unfortunately, the most valuable lessons tend to result in losing money. When a trader oversteps his rules of risk management, the situation tends to resolve itself unfavorably.  Although money is important when you’re trading, recognizing losses and separating yourself from the emotional pull of intraday money management is integral.  Potential reward/profits tend to cloud the minds of an inexperienced trader (not calling myself experienced here). I believe I’ve learned a substantial amount over the past 12 months, the majority have come through losses, mistakes, and observations – lessons engrained permanently in one’s mind. Risk management is the practice any individual trying to trade the market must adopt. Unfortunately any trader will tell you, there are times where you will get caught and sustain unforgiving blows from the market. Mine came at the apex of this year. Sitting pretty in a core account at +8% on the year and an options account up a mild 21%, I was complacent. The breakdown I will detail below.

I, among many, always talked through the spring how the market was in need of a correction.  The majority of us assumed this would coincide with the end of QE2, but the addictive nature of easy money that has been capitalized on over the past two years kept me hanging on waiting for the magic injection of freshly printed dollar bills in the form of QE3. The market had seemingly priced in the end of QE2 and a bullish juggernaut in the wake of the Japan crisis. My timing begins at what is credited for market correction, the US Debt Ceiling debacle. Really, it is nice for television networks to place the weight of the breakdown on inept politicians who appear to have the intelligence of __________ (insert insult here). Ultimately traders and price action determine the significance of an event.

Friday July 29th, I decided enough was enough. We were selling off on decent volume, yet approaching the bottom of our range bound market from early June, and I decided this was meaningless fear mongering before the debt ceiling process – that I and many believed would be no contest, raise the ceiling immediately. I decided a bounce was technically viable, the market was oversold, and I even timed trades well on the Friday and was up respectively 20-80% in various call positions including $WNR, $TNA, and puts on $VXX (the volatility index ETN) by the close. $VIX (volatility) at the time had reached a level we’d found massive resistance on. Totally, I was leveraged long about 60% of my entire options accounting and had closed out my core and common equity positions on stops during the downfall. All weekend I was occupied by the news that I was sure would spark a rally electrocuting shorts – how I was accustomed to trading since September of 2009.  Monday morning came around and I was anxious, excited, and overwhelmed with joy when I awoke and checked the futures seeing, as I hypothesized, a 1-2% gap up in the futures. Needless to say on one of Canada’s best holidays, Natal Day, I was comfortably sitting on a couch drinking homemade coffee from my $GMCR produced machine and listening to the idiots on CNBC talk about how politicians had fumbled the debt deal. I wasn’t worried we were gapping up 1.3% or so and nothing else mattered – the market and price action are the determining factors in rational arguments.

The market opened and I was almost laughing hysterically. From Friday midmorning till Monday at the open, I was up almost 80% in my account. I considered selling my positions in $WNR – which had earnings later that week – and $TNA as it is a high beta and truly risky asset. Instead, I was greedy.  I thought about the what-if scenarios that continued bullish buying would bring. Before I could collect my thoughts and do the rational thing (moving stop-losses up and locking in ridiculously risky profits), the market had sold. The entire gap was erased and we were plunging into blood split by aggressive bears.  I quickly sold my $TNA calls and ate a painful 50% loss, an intraday reversal of 130% per call. I hacked off half of my $WNR position’s riskier out of the money calls, but decided to stay strong in my $VIX short although volatility was spiking. By 1 hour into the open, I had reversed my YTD totals (limited to the options account) from +21% to +47% and impaled myself on -28%.  In that hour of change, I had become overwhelmingly invested emotionally in my account and at -28% I was so upset I was determined my positions would work and battle my account back.  We made an intraday bottom, so I decided to average back into my remaining $WNR position and buy more $VIX puts. These were despair driven moves that I should never have done. Over the next two days I was proven utterly wrong. I finally purged my options account racking up 72% losses YTD on August 4th. I then proceeded to drink an inhumane amount and vow never to trade with options ever again. The worst of the pain was the win-ship the market had presented to me….and I squandered.

I decided that I had lost my edge and needed time to speculate and watch from the sidelines to re-evaluate my risk management procedures, choice of trades, monitoring of my account, and position sizing. These fundamentals define the saying “self preservation”. Without even doing the math I would imagine at the open on Monday, August 1st my options portfolio beta valuation was around 10 – and I paid dearly.

Stepping away from the screen was rewarding as well, giving my time to enjoy the summer. I took some time to examine my trading book records and evaluate my strengths and weaknesses. My strong trades revolved around: are finding companies with strong management, resources, studying futures, balance sheets, in the sector I have greater understanding of: basic materials. This is how I intend to trade moving forward and where I will direct my studying through reading – textbooks, non-fiction publications, and reports/analysis – and additionally the passion I have for studying the daily market and the overall flow of money. You’d be surprised how much you can learn and reflect on while drinking Moosehead in the sun in between swims on the dock at your cottage.

I’m happy to announce I am battling back. I’ve taken advantage of lower prices we’ve been presented with to buy back core positions at substantially lower prices – albeit fractions of my intended positions. Names like $NVDA, $CVE.to, $SU.to are studs I value highly. I am still bearish on the overall macro picture and look forward to buying more of these positions. I’m regaining my mojo and have weathered the storm moving my core account (only common equity) to a satisfactory 14% YTD gain.

…ked

I hope to get back to tending to this blog, but the truth is my new style isn’t conducive to swinging positions and frequent posts – its buy and hold. This is a time tested method that the co-author here would argue is extinct.

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