More Things that Cause Losses

More Things that Cause Losses

As you know I took a break from posting on twitter the past couple of days just to reset my mindset after a silly loss involving a fat finger.  It was a bad loss but it wasn't horrific however I went from an emotional high to an emotional low in a matter of minutes because of a technicality and I wasn't ready for that so I just wanted to focus on my trading and recalibrate some of the parameters of my strategy.

So I just wanted to do another write up on more things that cause losses again as a reminder to myself to not make these mistakes moving forward to eliminate more ways to lose and giving me more chances to win.

Trading with size after 11AM (including revenge trading):

It's very apparently that the volume after 11AM is clearly substantially lower the volume at the open like 99.99% of the time (barring some random catalyst like a major news event).  When volume gets low, range also tends to get tighter, both of these things combined causes the retail trader to lose edge and market makers with algorithms tend to take over and hence we why see more "controlled", "grinding", or "choppy" action during these hours.  

Note to self: It's very tempting to trade stocks like UVXY which typically has decent liquidity the entire day but choppy, whipsawing trading during lull makes the action very disadvantageous for us. 

Here's an example of a choppy, whipsawing UVXY chart from 1/12/16:

The bulk of my money is made in the first hour (where the edge is optimal for the retail trader because of substantially higher volume and liquidity) and the temptation of finding a "make-up" trade if I mess up the big money, easy trades in the morning is very tempting.  I'm sure this has happened to everyone.  Imagine your niche setup shows up at the open and you're excited and expecting  a nice profit.  Ding ding! The opening bell rings, but for whatever reason you screw up the trade.  You  hesitated and missed the entry or you chased with a bad entry.  You end up making nothing or even worse taking a loss.  Because you were expecting a nice profit off the trade and didn't get what you wanted your emotions get stirred and you start looking for a trade with inappropriate sizing to make this up.  This is revenge trading and 9 out of 10 times, you will turn your no-gain or small loss into a big loss or even a blow up.  

Easier said than done, but the thing that is preventing us from making a clear decision here is our ego.  We're too stubborn to be wrong, so our emotions cloud our judgment and we pay the price.  The correct move here is to understand that the edge is less or perhaps even nonexistent after a certain point and that we must adjust our profit expectations on the day.  With the lower volume and liquidity, we must accept that the result is fair and that even if you're down a few bucks from messing up your niche play at the open, that is the best course of action.

Trying to get long with size on a small cap big mover while it's consolidating (even if it's near the highs) around 10:30-11AM EST:

Back when the market wasn't so poor this used to be a great chart setup but the recent trends show that, aside from a few exceptions, these small cap runners tend to top out and fade to oblivion around 10:30AM-11AM (if a stock consolidates near the highs before 10AM it has a much higher percentage of a second leg because volume and interest is still typically high).  A tempting trade would be to try to get in while it's consolidating closer to the highs thinking that it will accumulate more shorts and break out but these market conditions has really put a damper on a lot of those setups and the majority of them diminish in volume greatly and just fade back slowly on air the rest of the day.  

The correct move has and always been to wait for the breakout and buy dips based on the previous resistance which now should be acting as support rather than let "fear of missing out" (FOMO) goad you into buying during the lull hoping to capture the home run move.  Alternatively, you can still try to buy washouts BUT watch size because of the higher probability of getting dumped on here.

Here's an example on ATV from today, 1/13/16:

Essentially 10:30AM-11:00AM is the "make it or break it" moment for these small cap, low float runners. Since this is when volume and interest fades, it needs a reason to keep going.  Typically, what would fuel a move would be enough shorts getting caught in the morning spike which will lead to a move higher.  If a stock continues to make higher lows and higher highs around 11AM, then it has a much better shot at squeezing these shorts, which brings back volume and liquidity and draws the attention of longs back as well.  Of course, these were more common when market sentiment was better but for now they seem to be relatively rare and for that reason we need to be more cautious when looking for these setups.

Here's an example of when a recent small cap stock, LEI, was able to do just that and ended up running beyond 11AM:

Fat Fingers

Not much to learn from here other than, don't try to multitask while trading (I was trying to talk on the phone while nonchalantly scalping UVXY) and always pay attention to your orders and positions at all times.   Really silly but costly mistake which ruined my day and mindset for a bit.

Hope my thoughts help you guys as well in eliminating more losing trades and habits.  

Until next time!

-Max