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DON'T BREAK THESE RULES!!!

Writing this post as a reminder to myself not to do these boneheaded things that usually leads to losses.

• DON'T long stocks that are below (and can't get back above) premarket highs.
• DON'T short stocks that are above (and can't get back below) premarket highs.
• DON'T be long-biased on a stock that is below (and can't get back above) VWAP.
• DON'T be short-biased on a stock that is above (and can't get back below) VWAP.

2016 Highlights Part 2: A Big Loss, A Bigger Recovery and Looking Forward to 2017

The date was November 16, 2016.  We were in the midst of one of the most epic short squeezes in trading history.  The shipper stocks were a high powered momentum train with nothing seemingly able to stop them.  DCIX was on the verge of an epic move to join in on the party and as DRYS was squeezing again premarket, going over 100.  I had determined that I was most likely going to go long DCIX as my main play since it was relatively new and had more room to run and most likely would have a ton of volume on it.  Then it happened.  A series of anomalies that I apparently was not prepared for.  DRYS hits 120 and one of the aforementioned never-ending momentum trains finally came to a halt, pun intended.  At this point, I decided to switch my bias on DCIX from long to short as my rationale was since the shipper stocks were all up on a pure squeeze and had no business being up there, we just needed some event to cause widespread panic and everything would come crashing down very quickly.  This, of course, turned out to be a very poor assumption and a critical error as I failed to consider the fact that since everyone and their mother was thinking short, that this could fuel another epic squeeze.  The herd mentality, a basic concept that everyone knows.  I should have known better but I got too excited about nailing that big short win I was blinded to the other side of the trade. 

I played this trade wrong in so many ways.  Again, it was all due to getting way too excited, thinking that I was going to get the big gimme win after DRYS halted.  I started off shorted the first pop on DCIX 10K starter.  After a few topping wicks on the 3 minute chart I added to about 30K shares with a low-to-mid 9 average, a big mistake which I will discuss later how I remedied this problem moving forward.  I also concurrently shorted ESEA another sympathy shipper stock about 20K shares or so. 

After lingering around in a tight range at the open, the unthinkable happened.  DCIX pops 2 dollars out of nowhere and halts prior to 9:45AM which requires a stock to move more than 20% in a 5 minute rolling period to hit the circuit breaker, something that I've never experienced before and as a result I didn't consider that it could happen, another critical mistake.  At the same time ESEA squeezes as well and now I was holding two very heavy bags and also dealing with the stress knowing I was pretty fucked on DCIX holding 30K shares short on a stock that's now halted to the upside and pretty much anything can happen.  Life flashed before my eyes.  I was down 60K unrealized on DCIX and 17K on ESEA which would be the biggest loss ever already as it stood.  I decided to immediately get rid of ESEA to focus on DCIX.  Like a prisoner on death row waiting to be executed, I knew that this halt would be the longest 5 minutes of my life.  But I had to remain composed and  devise some sort of plan to mitigate the losses and possibly prevent a complete obliteration of my account.  I knew the stock was going to gap up and that the loss was going to be a lot worse than 60K, but I knew that stocks that gap up on halts tend to have a dip before taking off so my plan was to wait for the dip after the gap and stop out completely. 

The stock gaps up over 12 and I was down close to 100K unrealized now on DCIX but thankfully the stock did what I expected it to do, it dipped below 12 and I stopped out of everything just below 12 realizing the worst loss of my career -85K and a total of -101K on both DCIX and ESEA.  The loss was so bad that my account was frozen by my broker.  As I was playing with about 150K at this time, this loss wiped out 2/3s of my account. 

The biggest red day of my trading career.

I decided not to post this for a couple of reasons.  Of course people are going to say that I was being a coward hiding behind my losses which is a fair assumption but the main reason why I did this was because I wanted to get over it fast and wanted to start the road to recovery right away, as in the very next day.  I knew that posted the loss would result in the "I told you so" trolls having a field day with me and also the people with good intentions saying things like "keeping trying man" but to be frank neither would do much in helping my mindset in recovering as fast as I wanted to.  So I thought the best way about it was to just ignore social media until I got my rhythm back, however long it took.  I also decided to start again with just the 50K or so I had left in my account as a way to reprimand myself for making such poor decision and at the same time I had already proven that I could still make solid gains with a 50K account in the past so I knew I could do it.

I took the rest of the day off and did non-trading related activities.  I meditated, worked out and did yoga which helped me calm down and I made sure I ate well and got a good night's sleep.  Tomorrow was a new day, it was a chance to start fresh and make things right. 

I answered with back-to-back 5 figure days and recovered 25% of my losses in just 2 days.  A huge boost in my confidence was badly needed and I got it.  This led me to believe that it was very feasible for me to regain my losses by the end of the year.  By the end of November I had recovered $50K or half of my losses in just 9 trading days.

A fast response.  Back to back five figure days immediately following the big loss.  A huge boost to my confidence that I sorely needed.  After this, I realized a faster recovery was possible.

Over the course of the next 2-3 weeks, I spent a lot of time studying DCIX, ESEA and other charts in an effort to create a set of solid sets prevent a similar loss in the future.  While lots of people told me that this was a "black swan" event that wasn't likely to occur again anytime soon, I simply can't just take a big loss every single time there's another one.  That's not the way to approach things.  After some hardcore studying I came up with the following rules which I would use December to test their validity.

• ·         Do not add to starter position unless stock is clearly going in your direction (lower lows if short, higher highs if long)
• ·         If short, stop out immediately if stock goes over and holds premarket highs as new support.  If long, stop out immediate if stock goes below premarket lows and gets rejected as new resistance.
• ·         Do not assume a sector run is over unless you literally see the lead stock in the sector actually tank (not just halt).
• ·         Always be cautious of halts, always be constantly be doing a running calculation in your head about where the circuit breaker would trigger.  20% before 9:45AM and after 3:35PM, 10% between 9:45AM and 3:35PM.  (Reference for Circuit Breaker rules: Investopedia - http://www.investopedia.com/terms/c/circuitbreaker.asp)

DCIX Chart 11/26/16

My old rules had already yielded a very high win rate but a major issue was the few times I was wrong, the loss was very disastrous , so concrete stop out rules were needed as well as rules pertaining to adding.  The first rule prevents me from adding and sizing up while the stock is still in limbo with regards to the direction it's going to go.  This basically allowed me to only play the backside on shorts and frontside on longs.  Had I had this rule I wouldn't have had 30K of DCIX but rather just 10K and the loss, while still would have been bad, it wouldn't have been near catastrophic, blow up sized. 

The 2nd rule places a clear stop out point with no ifs or buts.  That's the problem that people have, they have arbitrary stop out rules which leaves too much room for emotion.  I'm sure you've experienced that situation where you thought about stopping out but decided to "wait and see if it would come back".  That's not the way to go about things and I made this rule to address that. 

The 3rd rule prevents assumptions from being made about the end of a sector squeeze which would blind me from seeing the other side of the trade.  If the lead stock is not crashing and burning hard, the squeeze is NOT over.  Simple as that. 

The 4th rule allows me to always be aware of the risk of halts as being stuck in a halt on the wrong side of the trade is simply one of the worst feelings ever and it's definitely not a healthy situation to be in for you or your account so I want to avoid that at all costs.

These rules proved to be the saving grace of my trading career so far as I went on to recover my entire -101K loss by December 16th, just 17 trading days after the major loss and went on to finish the year going green 27 out of the 30 days since the loss recovering everything and making an additional 80K on top of that, effectively turning that 50K that I had left to over 200K, more than quadrupling my account in the 30 days.

While this was a pretty epic comeback.  I shouldn't have put myself in this situation to begin with.  We always tend to shift into a higher gear when our backs are against the wall but it shouldn't have to be that way.  We should always be going full throttle regardless of the situation.  Since I tend to trade like a madman after a major loss I will try to play with my psychology a little bit and attempt to trick my mind into thinking I blew up by wiring out very aggressively (i.e. resetting my account to 100K or even 50K).  When I didn't wire out enough, I just felt too complacent and comfortable because it felt like I had a "cushion" but after a big loss the cushion was gone and as a result I had to work very hard to get it back so I could regain that high level of comfort again.  It was a brutal cycle of getting my account to a certain level and then taking a big hit that occurred way too often and moving forward I will try to remedy this by wiring out a lot more aggressively so I will always be pushing hard and trading every day like it's my last.

Looking Forward to 2017

December was a final dress rehearsal for me to test out the rules I had developed.  I wanted to iron out any kinks I had left.  I finished with over six figures in profits for the first time in over 2 years which showed me that these rules were pushing me on the right track.  If I can pull off a few month solid 80K-100K+ months, there's going to be some sort of realistic belief that I could hit my first million dollar year next year.  But for now, I'm not going to jump the gun and make any assumptions, because who knows, perhaps market conditions might not permit consistent 100K months.  But definitely, this is promising and I feel like I'm moving in the right direction.  

I will work hard to refine these rules to prevent major losses.  I want to make them as concrete and to a T as possible, leaving no room for ambiguous interpretations which will eliminate any emotional decisions.  I see too many people with generic rules such as "don't short frontside".   Well, what exactly does that mean?  "Don't short frontside"?  What is "frontside"?  If you are one of these people with very vague and arbitrary rules, consider refining your rules to be more precise such as "don't short stocks that are making higher highs and higher lows".  If you have a rule like "don't trade lull", you're going to have to define lull.  Make the rule more specific like "don't trade between 11AM-2PM EST". 

I will also be looking to add more tools to my arsenal.  After learning this year that spending money on tools was well worth it, I will continue to be open-minded into trying new things to that will add value to my trading.  I will definitely be adding Vision clearing at Centerpoint in addition to ETC this month (as a matter of fact I'm going to fill out the application next week).  Centerpoint is now offering a 25% discount on locates at Vision and I noticed many instances that having Vision for those additional HTB would have yielded me a few extra bucks on the P/L, so it's definitely a nice addition to have especially if it helps me cover all the bases with respect to borrows.  Seeing how I was already doing well with ETC and was on a $1.5M pace ($6,000 per day average) in December,  adding Vision as a clearing option for me will probably increase my chances of hitting that seven-figure year greatly.

Alright guys, let's absorb the lessons from 2016 and apply what we've learned in order to make 2017 the best year ever!

Madaz