As alluded to last night, this post is dedicated to a recent trading mistake I made, how I did and what I'm doing to prevent it from happening again.
Firstly in terms of context, I've previously mentioned that I've dabbled in many different types of instruments, ranging from micro-caps on the ASX to commodities futures. The markets where I have gained and lost the most is probably the futures markets. I like futures because they are easy to trade (neigh on 24/5), have an inbuilt margin, and understand from a technical perspective.
So over the last couple of weeks, I have been slowly building a position in the Corn Futures, compounding as the price moved in my favour. Over time this leads to a pretty hefty open profit, around 8 to 1 compared with initial risk (i.e. distance from my entry to initial stop). This was psychologically quite thrilling, as I haven't had such a big open profit in quite some time (through meddling with different systems and changing my approach, and generally not having a lot of confidence in my system).
Anyway, so what did I do wrong. You can probably see from the language in the para above, I let my emotions get hold of me. This created a bit of fear for the big open profit. This was then exacerbated by an email from my broker telling me that my position would be auto-closed soon as corn is a physical delivery contract. For some unknown reason, my broker doesn't want to receive several thousand bushels of corn at their office… I can't understand why. So essentially closed my position before my exit point based on the above, even though I had around 20 days until the autoclose. Why did I do this, I was scared of giving back the open profit, and I had the excuse of my brokers' email. I should also add that when I sold, the market was retracing a little, which also adversely affected my emotions.
So what was wrong with this decision:
So what's happening now:
So what have I done to stop me from doing this type of trading error again:
The key thing that I keep telling myself though is to not dwell on the mistake but to learn from it.
Anyway, I hope someone finds this helpful and can avoid a trading mistake themselves.
As always, happy trading and thanks for reading my blog.
Nick the Trader Guy
So you’ve probably noticed that these blog posts are a bit of a disorganised mess in some ways, so I hope you’ll forgive that and enjoy them anyway. I usually have some sort of plan on what I want to write, but the plans typically fall apart from something I see in the market or in the various groups and forums I follow; this week is no exception 😊.
This week, I planned to focus on some of the key lessons I have learned from designing my systematic trading system. However, I’ve seen much chatter on various forums around crypto, so bear with me. I think there is some valuable content that can cover that.
Firstly, before I start, I should say I do have exposure to crypto in my portfolio, but I have limited myself to an exchange-traded bitcoin back product, as it suits my risk management regime better. I believe that crypto assets will continue to grow and that the big names such as BTC and ETH will continue to hold sway over the crypto market, predominately, I think, because they have brand recognition. I liken many of the altcoins to penny stocks. They could make you rich or just as likely lose your entire investment, essentially because they encourage investors/traders to take moon shots on them – more on that later.
If you watch the crypto space, you no doubt would have been watching Doge, which I understand is essentially a meme-based crypto asset, with no particular use case or functionality, therefore no fundamental purpose. So effectively, the entire market for this coin can only be priced on technical and trader psychology, which makes it interesting to watch.
Specifically on Doge, if you look at the daily charts, it is gone from around USD$0.05ish on the 1st of April to approximately USD$0.48, a massive 700% increase in just over 2 weeks. This enormous increase has triggered several emotional responses, which range from FOMO, regret and, in some cases, anger. None of these is overly helpful for a trader or an investor.
There is nothing wrong with taking a FOMO trade, but a few of the points are worth remembering (see last weeks post for more):
So to be clear here, I’m not saying buy Doge or sell Doge. I’m just saying if you want to trade it (or anything similar), do so carefully.
I also think that for many traders, particularly new traders, the reasons that these types of trades are attractive are that it’s the thought that one trade could make them rich, and you know YOLO. This is where many traders blow up, I think, and probably why sound advice on risk management is ignored. Basically, I think this because if you managing your risk, your likely to only take a small position in a massively swinging/volatile instrument, which makes it less likely to make you reach in one trade. TLDR; Risk management is not exciting and won’t make you rich with one trade, but it will push the odds your way long term!
Anyway, on with the post as I originally intended. In the way of introduction, I’ve been building my system on and off for around four years. I’ve experimented with a number of different ways and paid for several various programs and tools. All of them have involved some sort of systematic methodology, and all have been based on trend-following of one kind or another. Some have been less successful than others, and some have worked really well in specific market environments and not others. But I’ll now go through some of the common themes that I think are great take-aways from my experience to date (noting, of course, I am still on my trading journey here, and I certainly don’t want to portray myself as some sort of trading guru).
You’ve probably identified in a couple of my posts to date, but the critical thing to me is managing risk. For me, in all of my systems to date, risk has been managed via stops. Well, of course, aside from my initial trading ‘system’ where risk management was to panic sell a falling penny stock – I’m not really counting that though :-P.
In terms of stops, I’ve tried them at various levels, percentage, ATR multiples, Moving average levels, support/resistance, recent lows etc. All work to a different extent, but I think the most consistent I’ve found is ATR multiples. But that’s just me.
So to me, this is the first key take away. Regardless of how you trade, you have to have a way to manage your risk upfront, and to me, the cleanest way to do this is to set a stop. I know there are other ways, such as hedging or selling/buying options. But they’re not something I’ve explored – so I won’t comment.
I think closely linked to risk management is position sizing. As mentioned previously, I used to take big trades based on the hope that if they moved up one pip, I’d make enough to cover the commissions/brokerage fees (I was trading with a big bank, so it was expensive, lol). In my subsequent systems, I’ve refined my thinking away from how much I could make to how much I could lose if I’m wrong. This was a big shift! As noted above, all my recent systems use a stop, and I use this to define my risk and position size. I’ve tried various levels, but I think less than 1% is the way to go. I like what Steve Burns repeats throughout his books, with 1% risk; each trade is only one of the next 100. I personally use a lower percentage, 0.25-1%, but this suits my risk tolerance and allows me to aggressively compound if the trade goes my way. But that’s me.
The final point I’m going to cover in this post is around asset/instrument selection. I’ve tested several ways of screening stocks and instruments to find the right trade. Some have been complex, some simple. I’ve found the really simple screens give a lot of results which means lots of manual filtering. The more complex methods often give fewer results, but can be harder to apply consistently. Currently, I have two main screens that I use on tradingview.com to screen stocks; both have around 6 variables. For me, this is the happy medium, I often get a lot of results (50+), but I usually only do a screen once a week and then manually check the charts, which all up is about a 1-hour process. It works for me, but it may not for everyone.
o the TLDR version of this post:
Once again, I find myself with a post that hasn’t entirely gone the way I thought it would, but hey, I guess that’s the creative process? Anyway, I hope you’ve found this interesting or useful. If so, I’d love you to leave a comment below and to share this page.
Nick the Trader Guy
So this one’s going to bit of a hypothetical and it’s based on a recent post on Whirlpool where a new investor was seeking advice about starting out. It’s also inspired by a recent tweet by Steve Burns asking this very question.
The two questions got me thinking, what did I wish I knew when I first started trading, what were my key turning points and what would I do differently.
So first up, what do I wish I knew before I started trading:
So what was the turning point for me.
Really it was reading a post on Whirlpool where someone had asked for recommendations for trading books and one of the recommendations was a book called Trend Following by Michael Covel. I thought that sounded interesting and went out and got a audible version of it (I can speak highly enough of Audible, it’s made it much much easier for me to smash through trading books). This book really changed my approach to the markets and trading (and enabled me to make some more painful mistakes – but that’s probably a whole other blog post).
From trend following, the biggest shift for me was really point three above around cutting losses fast. After reading the book, I cut a couple of positions I’d been holding for months hoping they’d bounce back (3 years later and I think they are still about the same level they were when I sold out, if not lower) and freed up my capital to deploy else where. There’s a lesson there too I suspect 😊.
I think one of the key take-aways for me from Trend-Following, beyond the above, whilst buy and hold does work, it can be optimised (to an extend, you’ve got to be careful to not over optimise) to work better for the investor. I think Covel sums it up nicely when he calls buy and hold, buy and hope.
So the TLDR summary of what I’d tell myself if I had a time machine:
Cheers for now,
Nick the Trader Guy
Firstly apologies to my regular readers (do I have any yet – if so, leave me a comment below 😊). The Easter weekend has seen me focusing on family, and the creation of this blog post has taken a distinct second fiddle.
Anyway, on with the post.
Upfront in this post I talk about ASX:88E – the Author at time of publication does not hold a position in 88E and this post does not make any recommendations for anyone reading this to take a position. Please do your own research and make your own decisions as to what do with a stock like this.
So in my last post, I talked about FOMO and how managing your emotions in this aspect is an essential aspect for a consistent trader to control and provided some techniques for this
This week I'm going to talk a bit about how you can use FOMO to your advantage (well, at least how I do it). Specifically, I'm not talking about your own FOMO but that of the market. For context here, I genuinely believe the primary driving factor for the market is participants' emotion, and if you can understand this, you can work it into your trading system.
Lately, I've seen a lot of talk and chatter about a small-cap stock, 88 Energy (ASX:88E), a small oil producer (once again technical trader here, so really understanding the specifics of the company isn't my thing). The stock itself has been on a wild ride over the last few years, and it's popped up on my scanner for unusual volume a couple of times now.
As such, I decided to take a stab at trading it. Once again, for context, this is a stock I've traded before, and if I look back through my records, I have made money off before. In the past, I probably would have traded this stock in large lots of 50,000 to 100,000 shares (or larger), hoping to scalp a $0.001 off the trade. Nowadays, I'm more sophisticated (I think…) and manage my risk differently (more on that later).
So why's this a FOMO trade? Well, if you look at the chart, you can see the stocks been a real bull run from the start of March 2021, where it was trading sub 0.02, and it closed last Thursday at 0.073 (1 April 2021). A nice 3 bagger if you were in it Feb 2021. So essentially, I've been watching the charts and seeing print new highs and I've also seen increasing mention of the stock on various stock groups and forums. Both these tell me that there is plenty of FOMO trading happening.
For me the stock meet my long entry criteria at around $0.050 and bought in; I looked at the daily movements and determine my risk level and chose the position size (I think about 10k shares from memory), and took the trade, given the growth of the price I took a smaller position that I would usually take and then compounded as the price rose. By focusing on my entry criteria (i.e. my plan), I ensured that I was falling for a FOMO trade but taking a trade that met my rules. In the end, I got out for around 2x my initial when the price pulled back sharply, hitting my trailing stop.
As mentioned previously, I would traded this stock differently in the past and taken a lot more risk. In this scenario, the old me would have been day trading (or at most T+3 as it was then) the stock looking for a small scalp trade. I was doing this as I took big positions based on the hope that I would never actually need to settle the position. I think my broker loved me, and when I changed strategies, I actually got a call asking me why I had stopped trading (I think I was one of the more active – top 20%, if memory serves – traders on their platform). This meant that I would sometimes be in and out of position in minutes.
The pros of this approach were:
The Cons were:
In summary the trades often worked, but given the speeds that some these small caps pump and then dump, when your trading 100k+ shares, quick moves of 0.005 can be both very profitable and very devastating.
These types of trades have given me some of my greatest lessons learnt that I have now built into my trading rules.
So pros to taking a trade like 88E now are:
So in summary, I’ve learnt a lot over the last few years and I can now respect FOMO, I understand it myself and I know how to take advantage of it in other market participants.
Nick the Trader Guy
Since drafting this blog post (on Monday 5 April) 88E has had a spectacular fall from grace (something to do with a well in Alaska not producing anything I think) and ended the day down around 65%. To me this highlights the risks with these types of stops and why position size and risk management is so important
Also, I have to admit I did briefly trade 88E today on the rebound and exited for a small profit – this was a bad trade as it wasn’t in plan. More on that in another post.