A Setback, Bounceback, and Milestone in the Gutter

It's been a while since I've posted on trading so I thought I would make a post on my recent trading progress.

Back in May, I had my biggest trading setback ever.  In fact, I started the first week of the month down over $13,000 for the month (although still up on the year).  It was due to a combination of things.  First, I had taken an aggressive long-term short position in CHBT, which was not a part of my core trading strategies.  Yes, I knew the company was a fraud, and I like to short frauds, but shorting a fraud for the long-term was not something I typically did.  It's fine if you have A LOT of trading capital, but I didn't have it.  So I was tying up my trading capital, while missing other good trades.  And I didn't even have that great of an entry into the position.  So over April I was underwater on my short, and CHBT kept moving higher.  Not only that, but I hadn't bothered to check to see the interest rate I was paying to hold CHBT short.  Lo and behold, the interest rate was nearly 100%!!!!  For April I had paid over $1000 in interest just for holding it short.  I was trying to be too much like Citron or John Bird by holding long-term shorts in these China frauds.  However, I don't have the capital of Citron or John Bird, so I shouldn't have tried to be like them.  Eventually, I decided to just eat the loss the first week of May and free up my capital.  Of course, not long after that, CHBT came tumbling down and was halted.  It has now re-opened on the pink sheets.

The CHBT was problematic because it was a gamble.  It was an obvious fraud, so it wasn't a gamble in that sense.  But it was a gamble in the fact that you didn't know when the SEC or other regulators would come in and halt it, and that is what I was betting on.  And unfortunately for me, it took much longer for CHBT to get halted compared to all the other Chinese RTO frauds.  Of course, even if it had been halted, I would've been paying interest on my short, and I would've had my capital tied up.

On top of that, I took an overly aggressive position in the pump AVVC, averaging down as it went down.  I figured it would do what LEXG did.  But we all know what happened to AVVC...it was a pump that never went anywhere.  It kept going down, and I ended up eating a huge loss on that one too, much like InvestorsLive did.  Combine that with some other mental errors, and suddenly I was down $13,000 to start off the month of May.

It nearly got worse.  I had a 3000 share short position in JAMN in the high 2's.  Since I knew it was a pump and dump, the plan was to hold for the dump.  Well, we all know that JAMN squeezed to $6.  I was wayyy down in my position, and scared that I was going to get a forced buy-in at IB.  Fortunately, I didn't, and JAMN eventually fell back below $2 where I covered for a profit.  But if I had gotten bought in (like many people did on LEXG), it could've wiped out most of my profits for the year.  And I didn't even consider boxing my position (which I should have).

It was at that point I made a decision.  As I've stated before, I keep meticulous stats of my trades.  I looked back at my various strategies, and decided to throw away the ones that obviously weren't very profitable based on the stats.  I reduced it to a core set.  Looking at the stats for the core set, I KNEW I would make a significant amount of money if I just stuck with those strategies, followed my rules, and stopped experimenting with new strategies like long-term holds of China frauds a la CHBT.

It was time to stop screwing around, and stick with a certain set of core setups.  Sure, I could refine and tweak those setups, but I needed to stick with those setups.  And it worked.  Not only did I end up making all of the $13K back, but I ended up with a 2K profit for May.  This was a huge confidence booster.  It proved to me that I could dig myself out of a horrible hole if I just stuck with my core strategies.  It also gave me new confidence in those strategies.

I followed that up with my best month ever in June, exceeding my January profits (which had previously been my best month ever).  Other than January, it was my 2nd 5-figure month in my trading career.  And that was even with another terrible mistake where I got overnconfident, took too big of a short position in ORS, trying to hold a longer term short, and got a forced buy-in by IB and by Speedtrader.

July has been even better.  I have already made 5 figures this month and have exceeded my June profits, so July so far is my best month ever.  Not only that, but I have reached the next major milestone in my trading career since surpassing the PDT:  I surpassed $100K in trading capital.  The extra capital is nice, because now I can spread it among more brokers (to optimize my chance of getting borrows) yet still not be bound by the PDT.

In fact, my goal is to trade full-time for a living, and I have met 2 of the 3 requirements for that goal:

1. I need to be exceeding my work salary (I've met this goal)
2. I need to be have more than $100K in trading capital, so that I can withdraw profits and still have money to trade with (I've met this goal)
3. My wife and I need to sell our condo and get a house.  Unless you've got a solid 2 years of trading full time, you can't use that income to qualify for a loan.  So I will need my current salaried job for us to get a loan.  Once we have the house, then I will consider moving to full time trading.

One of the things that's really helped me is keeping very detailed stats of my trades...and I mean VERY detailed.  I use TradePerformance to track my trades, which allows you to categorize trades by custom strategies.  I've gotten more detailed in how I categorize my trades as time has gone one, and that's really helped me eliminate unprofitable strategies, and refine my existing ones.  For example, if I shorted a big runup in the morning, I used to simply categorize it as "Short Big Runup Morning."  However, I saw my trade winning % slowly dwindling, so I re-examined how I could make it more profitable.  I got more detailed in how I categorized the trades.  For example, I might say, "Short Big Runup Morning, Crack Morning Low Green to Red."  By doing this and being more specific, I was able to eliminate setups that I was taking that weren't working, and keep the setups that were working.  And I'm continuing to do this.  In fact, I had 2 losing trades today from the long side.  I bought a couple stocks that were starting to ramp in mid-afternoon off earnings reports.  But they dropped off rapidly in late afternoon.  I was suspicious whether the "mid-afternoon ramp" as I called it was working, so I went back and looked at the stats.  I had a 62% winning percentage, which is good, but my profit/loss ratio was only 1.5.  That's not good enough; I want at least a P/L ratio of 2 to keep a strategy.  So I'm going to toss that strategy out.

Being a part of the InvestorsUnderground chat room is also helpful.  In fact, it's the only trading chat room I use, and I have been with them since they began.  They have good seminars.  While all the alerts might be a bit overwhelming if you're a beginner, just pay attention to the moderators like InvestorsLive if you're starting out.  Now, I am an IU affiliate and I do receive a commission for people that sign up through my link, but as I said, it's the only chat room I use and you can learn a lot.  Keep in mind, though, that trading is hard work.  Too many people get into trading thinking it will be easy money.  However, most drop out after less than a year.  I can't count how many traders I've seen come and go.  It's very hard, and the odds are against you.  The stats show that 80-90% of traders lose money.  My first full year of trading, I was not profitable...I had a small loss on the year.  My 2nd year I was profitable but nothing big...I made about $12K.  This is my 3rd full year of trading and this has been my breakthrough year.  But it has required persistence, constant studying, and hard work.  Many traders I've talked to, such as John Welsh and Michael Goode, have said that it took them at least a couple years to become consistently profitable.  In fact, I highly recommend Michael Goode's series of articles entitled So You Want To Be A Stock Trader?  He details the challenges that you will face in your endeavor to become a successful trader.

One important key is to stay in the game.  Don't have a loss so big that it completely wipes you out.  Trading favors the people who are able to stick with it over the long run.  One of the reasons is that trading is about seeing patterns, and not just seeing them once, but seeing them over...and over...and over...and over...and over, until you learn to recognize them and act on them quickly.  And there are many nuances and subtleties that you will only learn over months and years of constantly watching and trading the markets.  In fact, it's those nuances and subtleties that got me to become much more detailed in how I categorized my trades.

Anyway, I've been very open about my ups and downs in the world of trading on this blog.  Hopefully many of you have found my sharing of my experiences helpful.  Thank you for reading.

James

Thank You For Helping Me Support Kiteboard 4 Cancer

I want to thank any of my readers who made a donation to Kiteboard 4 Cancer.  I ended up having a bad kite accident (we call them "kitemares") so I only made it 1.5 hours through the endurance race.  Fortunately I wasn't hurt but I did have to spend my afternoon untangling a mess of lines.  But it was still a great weekend and we were very successful in raising over $41,000 for a good cause.

Before my kitemare, somebody did grab a cool picture of me with a helicopter flying overhead.

I apologize to anyone who has emailed me or left comments on Weightology Weekly  for which I haven't yet responded.  I am currently in a big back log from being gone the entire weekend and will be catching up this week.

Kiteboard 4 Cancer is Almost a Week Away! Please Help Me Support This Good Cause

As mentioned in this post, I will be participating in the 5th annual Kiteboard 4 Cancer event at Hood River, Oregon on July 9th.  I will be doing as many laps as possible in a 6-hour endurance race.  Money goes to advocacy, prevention, research, and survivorship programs.  If you are willing to make a donation, please visit my donation page:

https://www.athletes4cancer.org/athlete_detail.cfm?a=259

Here's a cool video talking more about the event:

A big thank you to those of you who have already made a donation!

Please Help Me Support Kiteboard 4 Cancer

All my readers,

On July 9th I will be participating in the 5th annual Kiteboard 4 Cancer event at the Hood River event site in Oregon.  It will involve a 6-hour endurance race where I will try to complete as many laps as possible in that time period.  The goal of Kiteboard 4 Cancer is to raise money for advocacy, prevention, and survivorship programs.  Kiteboard 4 Cancer is under an umbrella of multiple events known this year as the Tenacity Games, which will include a stand-up paddleboarding event and kiteboarding relay race.

If any of you are willing to make a donation, please visit my donation page:

https://www.athletes4cancer.org/athlete_detail.cfm?a=259

I participated in this event in 2008 and it was a joy to gather with other kiteboarders to raise money for the battle against this difficult disease.  Here are some pics from 2008:

This is in memory of my Uncle Bob Raper and grandfather Glenn Van Wieringen, who both passed away from cancer.

Thank you for helping me to support this cause.

Sincerely,

James

Bye, bye, PDT!!!! (Again)

Back in November, I wrote about how I finally overcame the limitations of the pattern day trader rule in my Interactive Brokers account.  However, I was still limited by the PDT in my Speedtrader account (which partly influenced my horrible trading decision and loss in December...I didn't want to use up a day trade).

Well, that limitation is no more.

I made enough money on this month's MCP short and MCP puts to put me at about $59K in my two trading accounts combined.   So I moved $24K into Speed (already had about $4K there), so now I have about $29K in each account.

This was the next big milestone in my trading journey and it feels great to get over that PDT hump again!  Now I'm no longer worried about missing trades or being afraid to take a loss because of the PDT in either account.  And now if Speed has borrows for something, I can freely trade it if I wish.

This will also dramatically speed up my progress.  My Interactive Brokers account has been growing much faster since no longer being limited by the PDT.  Now that I'm over that hurdle in Speed, both accounts should now grow quickly (as long as I stick with my rules, that is).

Now the next major milestone...to reach the $100K mark.

Bitten by the Black Swan...Don't Let It Happen To You

Back in 2009, I wrote a blog post about avoiding black swans when it comes to trading.

Nassim Taleb talks about black swan events in his book Fooled by Randomness.  A Black Swan event is a rare but high impact event (similar to how sightings of black swans are very rare).  Black Swan events have caused many a trader to blow up his/her account.  In his book, Nassim talks about a trader who was a dip buyer and would average down on losers.  It worked for him for a long time...until he got involved in one trade where he continued to average down on a loser and the trade continued to go against him.  He eventually lost all of his money.

Well, I was bitten by a black swan yesterday.  Fortunately I was not severely hurt.  However, I learned some valuable lessons and I will share my experience with you.

Prelude to a Black Swan

Yesterday I got off to a bad trading start before the market even opened.  In my Interactive Brokers account, I played VRGY premarket off the bounce off 13.80; they had a $15 buyout offer.  I got in at 14.07.  However, I went in too big...normally I only do half position sizes when trading premarket.  My stop was below 13.80 and I got stopped out.  But then I made the mistake of trying to re-enter despite the fact that my "trading hypothesis" had failed.  This time I went in smaller, but it continued to fade, and I was stopped out again.

I then shorted HDY too aggressively near the market open, and got squeezed.  I reshorted and made the money back, fortunately.  However, I also shorted BOOM and miscalculated my position size and was in twice as large as I should have been, and was squeezed.

Suddenly I was down nearly $2K early in the day, so already I'm not in the right frame of mind for trading when starting in a big hole.  However, I have yet to be bitten by the black swan at this point.

On a Path to a Black Swan Rendezvous

I had shorted 1000 shares of XOMA overnight at 4.50 in my Speedtrader account.  I wanted to grab some shares while they were available, and I was out of day trades as I'm still limited by the PDT in that account.  XOMA spiked a bit in the morning and started to fade.  However, it then spiked again.  Right there I should've taken the $300 loss and gotten out.  But already down nearly $2K on the day, I didn't want to take another loss.

XOMA spiked over $5.  It hovered up there and looked like it was having trouble.  And this is where my risk management got worse and worse.  I started to average in higher, knowing full well I was out of day trades and would not be able to exit without my account being frozen.  Now, I had done this before with PIP and VHC and had made some huge gains off of these.  But, like Nassim Taleb's dip buyer who averaged down on losers, I was about to get bit by the black swan.

Now, normally you're allowed one PDT violation every 90 days.  However, I had already violated it a while back and signed a form that unlocked my account.  So I knew I would be locked if I exited.

I was eventually short 2800 shares at a $4.80 average.

And we all know what happened to XOMA yesterday.  It kept going higher, and higher, and higher.

Bitten by the Black Swan

I should've simply taken the loss earlier, but I didn't and it kept spiking.  Eventually I was underwater in my Speedtrader account, with negative equity.  I had to wire $2K to the account to keep it from being underwater.  But they called me and I couldn't hold the position overnight.  I covered 1900 shares at 7.20 for a nearly $5000 loss.  And I'm still short 900 shares (down over $2K on that) which I will cover on Monday if XOMA continues higher.

And on top of that, my Speedtrader account is now frozen, and I can't unfreeze it until early January (as I signed the form on October 7th).

Despite yesterday's massive loss, I'm fortunate that my month has been so good that I'm still up $3K for the month (I was up over $10K on the month).  And I'm still up overall in regards to trading.  Here I just wrote about rule adherence and my best week of trading ever, and I followed that up with my worst week ever!  But obviously I'm continuing to have the problem of getting sloppy when I'm winning.  And my rule adherence for yesterday?  30%.

Black Swans and Short Squeezes

I had gotten overconfident with shorting big runups, and had gotten away with averaging up on stocks like PIP and VHC.  The vast majority of these stocks, while squeezing, don't squeeze like XOMA did.  However, it's easy to forget that XOMA-like squeezes can happen, although not very often (hence why they are like black swans).

Here's XOMA's chart, going from under $2.50 to over $7 in 3 days:

Now look at NLST from November of 2009, where it went from $1 to $7 within 4 days:

And here is RPC in early 2010, where it went from around 20 cents to over $2 within 5 days:

Can you imagine what would happen to you if you shorted these and averaged up like I did on XOMA?  You would have likely blown up your account.  Again, these types of short squeezes are rare...ones like PIP and VHC are more common and you can get away with averaging up.  But all it takes is one black swan for you to lose all of the money in your account, and then some.

The PDT and my Risk Management

What is clear to me is that I have issues with the PDT and hard-to-borrow stocks like XOMA.  In this case, XOMA was hard to borrow and IB didn't have shares, but Speedtrader did.  I'm not under the PDT in IB, but I am in Speedtrader.  I was out of day trades, but I didn't want to miss a tank if it happened in XOMA.  So I got into a position that I should have never been in....a position where I didn't want to take a loss.  In my IB account, I have no problems taking losses because I'm not worried about the pattern day trader rule.  If I had shorted XOMA in IB, I would've simply been stopped out.  But, as I've written before, I find that the PDT messes with my head and influences me to take on more risk than I should, and makes me hesitant to take a loss.  And thus you get me averaging up on a hard-to-borrow stock, something I would never do in IB.

In fact, when I look at the equity curves of my various trading accounts I've had, I lacked consistency when I was under the PDT.  Here's my equity curve for Thinkorswim (which is now closed):

You can see that there's no consistency.

Here's the equity curve for Sogotrade (which is now closed):

Again I was inconsistent early on, although I eventually had some big gains towards the end (due to getting lucky by averaging up on PIP and VHC mainly).

Here's the equity curve for Speedtrader:

Again you can see some inconsistency.

Finally, here's the equity curve for IB:

There's much more consistency with IB, and you can see the dramatic surge in my account late since I'm no longer under the PDT there.

Now, for a long time, I was under the PDT in IB as well, but there's a key difference between IB and the other brokers.  IB won't let you enter a trade at all if you're out of day trades.  Thus, my XOMA scenario would've never happened because IB would've never let me enter a position at all.  I remember how frustrated I was sometimes about IB not letting me enter a trade that I was planning on holding overnight, but in retrospect, this was a good thing.

The bottom line is that I should not be trading when under the PDT.  It adversely affects me psychologically and it impairs my ability to manage risk and stay disciplined.  Thus, I will no longer be trading with Speedtrader until I have enough funds to day trade in it.  I have about $37K in IB right now; once I grow that to over $50K, I can move some to Speedtrader and be free to day trade in both accounts.  My Speedtrader account is frozen until early January anyway.

Having a Max Loss Per Day and Some Other Steps

Another thing that I will now implement is a maximum loss per day.  John Welsh does this as well.  Basically, once your daily loss exceeds a certain amount, you stop trading for that day.  I decided to make it 5% of my total trading capital.  I have about $40K total in trading capital right now, so a 5% loss would be $2000.  Thus, my maximum loss per day will be $2000.  Since I follow Van Tharp's rule of position sizing where I risk no more than 1% of my capital on a trade, a 5% loss would mean either I had 5 losing trades in a row, and/or that I broke my trading rules too much.  Since I started with a $2K loss yesterday, I would've stopped trading, and the XOMA issue would've been prevented.

Another thing I'm going to do is keep charts of XOMA, NLST, and RPC on my desktop as a constant reminder of how much a stock can really squeeze.  Sometimes it's easy to forget.

Down But Not Out

Yesterday's event definitely knocked me down but not out.  I'm fortunate that it wasn't worse, and that I'm still in the trading game and still profitable for the month and overall.  Like with my past setbacks, it will help me improve as a trader.  I've had big setbacks before in trading only to persevere and come back.  And that's what will happen again.

Rule Adherence and My Best Week Ever

This week has been my best trading week ever so far, mainly due to some nice gains with HHWW, GASS, but also my two biggest winning positions to date...CWST ($1878) and BSFT ($4323 in IB and another $372 in Speedtrader).  I was short 3500 shares on CWST at 6.75 and it gapped down the next day.  I took a large short position in BSFT (2000 shares at an average of nearly $25.50), knowing that a big selloff would be coming given that they have a lockup expiration approaching on December 22nd.  I need to thank both InvestorsLive and MarvelMeister of Investor's Underground for the trade idea.

My total profit this week so far has been $7700.

I've been working a lot this week on remaining disciplined while winning; I've had problems in the past of getting sloppy while winning.  To help with that, I've started keeping a log of how much I stick with my trading rules.  Every day, I write down the percentage of trades where I stuck with my rules.  For example, if I make 5 trades and follow my rules on 4 of them, then my percentage is 80%. The goal is to hit 100% every day.  So far this has been my tally:

11/30:  100%
12/1:  75%
12/6:  100%
12/7:  100%
12/8:  100%
12/9:  71%
12/10:  86%
12/13:  89%
12/14:  100%
12/15:  100%
12/16:  100%

I know some traders like to set profit targets, but personally I don't like to do that, because I think it can make you undisciplined.  You can start to take trades that maybe you shouldn't take, especially if you are down for the day or month and you haven't met your target.  The fact is, if you consistently follow your rules, and your strategies are profitable strategies, then the profits will take care of themselves over time, just as I showed in my last blog post.

Until next time...

Disclosure:  I am an affiliate of Investor's Underground and I receive a commission when people sign up for the service through my affiliate link.  However, I would never recommend anything I haven't used or don't use myself.  I have found IU to be very helpful in my progress as a trader.  You can also see independent reviews of the IU chatroom here.