17 June 2020

Trading updates

May ended up a month of dismay (no pun intended) as my trading account fell from a net gain to a net loss. The losses came from 2 CFD positions that I made on just a single stock -> Expedia. (Sold short at avg $61.33, covered at $73.)

Managing risks


Before we trade, we need to know what and how much we are risking. (That is why now I don't touch Options. ) Sometimes, acting on a spur of the moment may make us take on more risks than we would like to. It could be in the form of leveraging or averaging down.

Time and again I have to remind myself to exercise prudence and to think twice before clicking the BUY / SELL button.

Quick money = quick disaster.



Expedia case-in-point (where I have made really stupid novice mistakes):

1) I didn't stick to rule of position sizing and averaged down on my losing position.
2) I didn't set a fixed stop loss point. I eventually cut my losses albeit not timely enough. If I didn't do that, it would have snowballed to an even bigger loss.
3) I didn't analyze the chart and sentiments on the stock thoroughly. 
Was too late in the trend and entered when it reversed. Imagine like someone cut losses at the bottom of the Mar market or purchased stocks in Jan / Feb at the peak.

I blame that on complacency (after a fantastic month of April) and my spur of the moment decision.

Do not regret that at times we did not enter a big position to reap big gain as the price rises. With big positions come big losses. Always remember that it is better to get limited gains than unlimited losses for not sticking to the rules.



There's no absolute in an irrational market, only probability


We cannot predict how the market will pan out no matter how many factors we try to put into analysis eg. Covid situation, FED's decisions, oil prices, economic outlook. We have no crystal ball. Period.

The only thing we can do is to position ourselves so that we can maximize outcome of winning probability while limiting controllable downside risks. Action only when probability is in our favour and be patient.


Expectation of return = Probability x Payoff ($)

The above equation is from Nassim Taleb.

When there is a "high probability of a modest gain and a low probability of losses in any period.", we want to position to maximize returns.

On the other hand, we want to avoid being vested when there's "high probability of a small gain, and a small probability of a very large loss".


However, probability may be difficult to calculate per what is known as 'Knightian uncertainty'. The market is different from a game of Poker!




When Expedia reversed from its downtrend, there was a straight 7 days of jumping up (green candles) before a pullback (despite its RSI at crazy level). So we cannot predict when the trend will reverse until we know the trend has indeed reversed.


Consistency in strategy execution


Further to what was mentioned, we must stay consistent in executing our strategies.

Acknowledge that for every uptrend there will be pullbacks, for every trend (up or down) there will be a reversal down the road. If we get too fearful or greedy and fail to execute what we have planned, it would be efforts and money gone in vain.

Only when there's consistency in place can we fine-tune our strategy to ensure that it can withstand the wrath of the market.

An interesting read/ video: 
https://www.tastytrade.com/tt/shows/market-measures/episodes/the-expected-payoff-of-trading-options-08-06-2018


Final words


That's me rationalizing after my losses last month. For those who are not ready to deal with risks, inner demons and all that psychology associated with trading, trading would be just another speculation game.

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Trading P/L YTD: -2.9% (only US portfolio)

If you refer to the chart at the start of my post, you can see that I am slowing recouping my mega Expedia-trade losses. When you sustain damage from a bomb, the aftermath recovery is slow and painful. It is better to take multiple bullets than bomb damage, even though in trading / investing loss (damage) is inevitable. Damage control is part and parcel of trading and I am still learning.

Yesterday I closed out my AMEX short position at a small loss and initiated a long position due to sudden shift in sentiment after FED's announcement on continued economic stimulus efforts.
The bull/bear tug-o-war is based on FED more than covid!

Oh by the way, garbage stocks like Hertz has been blocked from shorting. If you think you are smart, the platform is smarter.




"It's not a matter of how many times you are right or wrong, but how much money you make when you are right and how much money you lose when you are wrong."
- George Soros

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