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