Trading is 90% Mental and Momentum

If you followed my blog you know that I was betting on the wrong site of the market for a while. I closed all position I was holding today and I am currently down 10% from my initial investment. In order to recover my investment I need to earn more than 10% now. I am not going to be trading as often as I did going forward because I think I made too many stupid mistakes trading in and out. Just a few days ago I shorted 1000 shares of HIG (Hartford Financial Service) at $14.18 and cover it at $15.83 yesterday.

One past experience told me not to take the short side so easily but another one told me if I could hold on to my short position I would eventually see profit. I shorted HIG not without reason backing it. HIG is one of the insurer that needs TRAP money. If HIG were able to return to profit so easily it wouldn’t need TRAP money in the first place. Because of this and the later experience I shorted HIG without carefully evaluating the news that bumped HIG (U.S. insurers to get 2nd-quarter investment boost). I might be right and I might be able to see profit if I hold on to the short HIG position till tomorrow. I might be able to see profit on my puts on Starbucks Coffee and US Bank if I hold on to them. But somehow I feel it doesn’t worth to take the risk. Risk on the short side is much bigger but return doesn’t seem to be better. So going forward I will not take the short side any more.

One last thing I want to remind myself again and again: Trading is 90% Mental and Momentum.. It is news driven. My blog’s commentator also reminded me that. I have got to take it seriously.

Kelly criterion - the Systematic Trading Methodology

In a previous post Systematic Way of Trading - Stock Board Advice I quoted an advice post on yahoo stock board by a trader. It mentioned a term called “Kelly Criterion” which I never heard of before. I did some research and found this is a term from probability theory. I studied probability theory in my MBA classes before but I didn’t recall this term. I guess MBA classes didn’t cover probability theory that deep. The following is an explanation on Wikipedia.com about Kelly criterion

The Kelly criterion, or Kelly strategy or Kelly formula, or Kelly bet, is a formula used to determine the optimal size of a series of bets. In most gambling scenarios, and some investing scenarios under some simplifying assumptions, the Kelly strategy will do better than any essentially different strategy in the long run.

For simple bets with two outcomes, one involving losing the entire amount bet, and the other involving winning the bet amount multiplied by the payoff odds, the Kelly bet is:
f* = (bp - q)/b.
where

• f* is the fraction of the current bankroll to wager;
• b is the net odds received on the wager (that is, odds are usually quoted as “b to 1″)
• p is the probability of winning;
• q is the probability of losing, which is 1 − p.

As an example, if a gamble has a 60% chance of winning (p = 0.60, q = 0.40), but the gambler receives 1-to-1 odds on a winning bet (b = 1), then the gambler should bet 20% of the bankroll at each opportunity (f* = 0.20), in order to maximize the long-run growth rate of the bankroll. If the gambler has zero edge, i.e. if b = q/p, then the criterion will usually recommend the gambler bets nothing

It might be daunting to understand for someone never get trained on probability theory. I seem to understand it well. I presented similar concept in an early post stock trading vs gambling . But to apply this theory on stock trading a very complex mathematical model is needed to accurately determine the probability of wining and losing. I believe hedge fund and trading firm would hire a troop of Phds to work on mathematical model that calculates the probability. Believe it or not a colleague of mine is recently interviewing with a company doing such research. For general investor like me without using any proprietary software the only way is to take a guess.

Having said that it reminds me a period of time when I didn’t watch the market closely and just set up a limit order to buy or sale. Actually that was before I started this blog. I remember I was able to grow my balance from $30,000 to $40,000 within a month. Maybe a programmed trading is better then manual trading. I found my emotions always take control of my buy and sale decision when I watch the market closely.

Repaying Trap is a Non-Event

Today the government announced some of the big banks that were allowed to repay Trap. I thought the banks would take that as an event to push their price up another step. But it turned out nothing happen. On the day when the government released the stress test results the market was like a wild horse. Today I feel it was like a turtle. Sometimes the market just behaves very calm and logical. It didn’t make sense the way that the market reacted to stress test results then but it made sense to me the way the market reacted to the government’s announcement today. After all we pretty much know which banks are able to repay TRAP.

I wanted to short Bank of America this morning but I wasn’t sure if today was going to be another wild day. I did not dare to do that. Thinking back I should have looked at the volume. If the volume is light then it is not going to be a big day. I wanted to take a long position but I didn’t feel BAC worth that much. After all it was not one of the banks that were able to repay TRAP. It should be categorized as a weaker bank.

Verisign Logo

In searching or a tradable stock I found Verisign. It was involved in a price fixing law suite and its stock price dropped 20% in a couple days. It seems to me that $19 per share is its support line so I got in at $19.07. I am losing money right now.


Verisign half year graph


Frankly I think the law suite has a lot of merits. Verisign owns network solution Inc which monopoly the domain name registration business. I didn’t understand why the market which was installed with anti-monopoly laws could allow a company like network solution Inc operated as monopoly in the first place. If you have an explanation of any kind I would love to hear it. I had the thought back in the DOT COM era that network solution Inc was a monopoly and would be suited. Basically everyone has to purchase domain name from them. I didn’t expect to wait till that long to see a law suite. That is one of the reasons I want to take a shot a VRSN. After all it down 20% and loss $1 Billion market capitalization already


Account Balance Change: -$79.49

Stock Market is a Box of Chocolate You Never Know What You Are Going to Get

Stock market is just as life. It is a box of Chocolate you never know what you are going to get. It makes you feel surprising, fulfilling, stock market is a box of chocolateexciting and happy at some time and makes you feel lost, sad, miserable and angry at another time. Its ups and downs are like the ups and downs in life. The differences are you can experience it all in a few days with the stock market.

Right after I created a “learn from the past” category for my trading. I made another mistake following one of those lessons I learned: Trading Out of Discipline and not Knowing How to Stop Caused Big Lost. Well I didn’t completely follow the lesson though. I still trade out of my discipline but I did KOWN HOW TO STOP and I stopped it too early.

As you know in my previous post I Had a Short Squeeze First Time in My Life I lost on a trade that I should have make money on. CCO is currently trading at $5.18. I shorted it 2000 shares at $5.60 but covered it too early at $5.87. I would have made $800 on that trade if I don’t follow my lesson learned. But I was holding other position and because of that I was a little bit scare.

After a few months of trading my account balance is not going anywhere. It was up to around $43,000 before I started this Blog from around $30,000 in a little more than a month and now it went back to where it was before I start day trading.

What do you think my balance is going to be down the road say half a year or 3 years from now? Going to zero? Going to double, triple? Take a guess here if you like and there may be interesting finding by the time when we look back.

I Had a Short Squeeze First Time in My Life

Wonder what is short squeeze? I just had one and made the most laughable mistake in my entire trading life. Yesterday I shorted 2000 my account balance falling off a cliffshares of (CCO) Clear Channel Outdoor Holdings at $5.62 after it jump 56%. $5.62 was close to yesterday’s height but I covered it this morning close to today’s height at $5.87. What a stupid decision. Now CCO is trading at $5.09. A typical short squeeze.

Bank of the Ozarks another issue I bought yesterday is going against me droped another 2.5% after dropping 6% yesterday. But I feel much easier to hold on to a long position so I am going to keep it there. Still think it is a bank that is much healthier than its bigger peers. Let me know if you have different thoughts

Big loss again today dropping $1,150 at the momment. My account balance is falling off the cliff

At market close

Account Balance Change: -$689.99

Minutes on of Learning From the Past Stock Tradings

I listed some of the mistakes I made more than one times here and hope to avoid them in the future. Of course history not always repeat itself and making the same move when the same situation appears in the future may turn out to be correct. Nevertheless these minutes can remind me what major mistakes I have made in the past.

1) Mistakes of trades on WFC and BAC when they did secondary offering.
Don’t Short a stock when it is trading higher then the offering price in after market on the day when the secondary offering price is announced especially when Goldman Sachs is the underwriter. I did this kind of shorting on WFC and BAC and both lost money. In fact I should long in after market and sell next day in pre-market.

2) Mistake of rushing to take a short position at market opening.
Don’t rush to take a short position at market opening even when the price of a stock runs up an unbelievable percentage. I made the mistake more than one times on LINTA, WFC, and BIDU. Seems to me the best time to take a short position is at market close given that you still believe the price up run is too much.

3) Mistake of miss judging the market trend.
If the US market opens higher after the world markets it tends to trend higher during the day given no major bad news.

4) Mistake of rushing to sell and not waiting still earning release day comes close.
Don’t rush to sell depressed issue even you believe earning is not going to be good. At least wait till the day before earning release. I ever held VISN but didn’t wait till release day come close when the price run up began. When earning release day comes close many depressed stock will become the target of price manipulators. Manipulators may identify depressed issues and push up the stock price in hope to mislead the market that good earning has been leak. There may be a good selling point when we hold the depressed stock long enough before earning release even we believe earning is not going to be good

I originally wanted to keep this minutes in a private post because obviously these are specific to my trading experience. You might experience the exact opposite and it could appear totally nonsense to you. But this is a blog and this is what blogging is about. I should still feel good if you have a good laugh reading it. Comments of all kinds are welcome!

I want to add a few lines after I post this yesterday. I found for all the mistake I made if I had hold the issues I lost long enough say two trading days. I could have realize profit on them.

ADR Tends to Follow its Home Market and the World Financial Markets Tend to Echo Each Other

I have know for long that the world financial markets tend to echoing each other and ADR issues have the tendency following its home market performance but I hardly pay attention how much the world market went up yesterday.

I just found out that China and Hong Kong index went up almost 4% yesterday. Japan went up 1.63%. Most Europe market went up 3% yesterday. For Baidu which is a high beta stock usually the percentage it went up or down will be bigger then the index. In fact its change is usually two times of the Nasdaq or its home market.

So I don’t understand why I took a short position this morning when the market was up only 100 point (DIJ). That was 1.3% only. And I don’t understand why I took the short position on Bidu when it was up only $9 which is 3.5%.

First I was wrong on taking short position. Second I was wrong on taking the short position before the market running out of its potential today. Third I was wrong on taking the short position on Bidu and fourth I was wrong on breaking two of my guidelines. I didn’t think twice the probability of a better entry point. I have doubled my initial bet of on a trading day.

What a messy day. Should I take lost right now?

Trading Out of Discipline and not Knowing How to Stop Caused Big Lost

I tend to win small but lost big. Is that a typical day trader’s fate or just me? I can not defy the temptation of the surprise gain. And of course I miss judged the market. The US market opened higher following the world. I thought the market should be trending down during the day because of the GM bankruptcy news. So when BIDU jump $9 at opening I thought it was a good opportunity to short. I took a short position at $272. I was so wrong and when it went up to $279 I increased my short position again but it went up over $287. I lost $2500 currently.

The market hardly pay attention to the GM news. In fact it seems to be celebrating it. It almost wipes out my entire gain for the past month. Just as my trade on Wells Fargo wiped out my two months of gain for about $10,000 before I started this blog I feel history is repeating itself again. I am being punished for not being discipline.

I was not convinced that this would be a bull market so I frequently took the short side. Now I am convinced that life on the long side would be a lot better. Another lesson I learn is that I don’t know how to stop. I should’ve cut my lost when BIDU went above $275 but I didn’t. I really don’t know what to do now. Let me know if you have suggestions and I would love to hear from you.

I am still holding the short position at the end. At market close my account lost $2,119.40


Account Balance Change: -$2,119.40

I Should Increase Holding Position When Obvious Earning Opportunity Presents

I maintained a long position of Bank of America yesterday because it was left out of the rally of the financial sector. I maintained a short position on US Bank Corp yesterday because it ran up 6.5% yesterday. It is not the first time I applied this kind of trading strategy. Long one issue and short another in the same sector. It turned out it was a good move.

The best scenario just happened at market opening. US Bank Corp retreated and Bank of America advanced. I net $260 right after market opening. Thinking back I should’ve double yesterday’s position. The down side with that was potentially low since USB ran up 6.5% in a single day and BAC had been losing ground for a number of days. The chance that they both move against me will be little. After all they are both big banks. If they both move in the same direction then I will end up making money on one issue and losing money on the other and my lost (or gain) is potentially limited. However in the case when they both move in the same direction I can take further measure like take profit on one issue, stop loss on another or increase holding on one of them etc.

Anyhow the situation of Bank of America and another big banks presented yesterday was a rare earning opportunity and I should’ve seized the opportunity and be bold on it. I was looking for more trades after the existing home sales number released and found BAC was trying to play catching up. I took the short side again and make a few more bucks. I wish I keep the short position on BAC till the end of the day. My account balance was up $325.78. It took me 2 days to recoup the lost on May 22th. It is a up day and it feels good not holding anything but cash

Account Balance Change: +$325.78

I Have Got to Treasure Selling Opportunity

My prediction yesterday was right for the indexes but wrong on Bank of America and financial. The indexes are holding higher right now.

Bank of America was trading higher in pre-market. The highest price change hand today was $11.78. I waited till market open and I had the opportunity to sell at $11.65 at market open to net a profit but I was looking for higher. Financial stock were traded lower right now and they lost whatever percentage they should’ve lost yesterday. I lost big too. I sold 1000 share of USB at $18.20 and bought 1000 share more of BAC at $11.05. My BAC shares are all under water. Lost -$1,300 at 8:56AM.

Lesson learned, I have got to treasure selling opportunity. Goldman Sachs’ bump and dump skim on Bank of American couldn’t be more obvious. I should have sold them in pre-market. I could gain $600 but lost $1,300. What a day. Looks like I am going to hold over the Mermorial Day weekend. Hopefully everything goes well over the weekend around the world.

10:16AM:
Just add 1000 share more. Don’t feel good right after that. Now holding 4000 share at $11.25 average. The average offering price is $10.77? Hopefully that is the bottom and going up from today.

1:05PM:
Lost $399.44 at closing price

Account Balance Change: -$399.44

Totally Gambler Today but Feel Balanced

Act out of emotion:
I keep reminding myself that the most dangerous enemy is my emotion. But still I can not help being emotional today. When I thought about how Goldman Sachs manipulated the stock price of Wells Fargo and Bank of America for their underwriting job, when I thought about those so called influential financial analyst are only corporate puppets, when I thought about how investors are given investment suggestion without providing with sounded quantitative analysis my emotion and my angry build up.

What kind of investment environment this is. Investors are put into very unfavorable situation when they are not connected with one of those influential investment banks. And don’t think that the US market is big and efficient. It can be easily manipulated by a number of institutions. In fact this is where the systematic risk of financial system lays in. Company like Goldman Sachs, BOAC and Citi and Well Fargo should be broken down into small pieces. However the government is going about the opposite. It is trying to build up a smaller group of bigger financial institutions which can direct where the market goes on a daily based. Market messages are frequently miss-interpreted to suit institutional needs. I seriously belief some kind of mechanism similar to those preventing price fixing needed to be implemented into the financial system to prevent market manipulation.

Surprised Gain:
Anyhow my trades today are totally acts out of an angry and gambling mind. I covered my 1000 share of BAC short position at $12.08 and a few minutes later I took 4000 shares of BAC short position at $12.11. I set up a trade trigger to cover it once the ask price hit $11.80 before I left for work. I was preparing to get cooked again. When I was on my way driving to work I kept thinking what BAC’s price would turn out to be when I arrived at office. If BAC’s price was over $13 how much lost I have to suffer thoughts like that. Fortunately my short position was covered at $11.79 when I arrived at office. So I feel relief and my angry subside.

Reflection:

I start thinking probably my blog is not able to provide me the control I want any more. In just a few days after I set up this blog I starting acting out of the guidelines set forth in this blog. I have to admit that today’s gain is completely surprise to me.

I went over the exact same situation when Wells Fargo offered new shares. Wells Fargo’s stock was actively traded above the closing price in after market on the day it announced the offer at $20 ~ $22 a share. The next day Wells Fargo was traded higher in pre-market and it trended upward toward market opening. The same thing happened to BAC yesterday. It was actively traded above the closing price yesterday. It opened higher in pre-market and trended upward toward market opening. This was happening with the same pattern.

A vice strategy would be to go long yesterday after-market or to go long today early in pre-market then sell on market opening. If I went with that strategy I would net the same gain with a lot less money at risk. I actually thought about that yesterday but I chose to fight the tide because of emotion get involved. In any case I shouldn’t do that again.

Account Balance Change: +$508.51

Wells Fargo Is Over Valued at $25.70

Tags: Stock Trading Diary, Stock Trading Lesson Learned

Well that is what Wells Fargo Logo I feel and that is why I end up with a short position on Wells Fargo at the end of today’s trading. Well Fargo is the stock that I love and hate. I love it because I personally bank with Well Fargo for more than 10 years and I believe it is indeed providing high quality of services to customer. Wells Fargo acquired Wachovia and Warren Buffet recommended Wells Fargo more than one times in public as the best bank worth to invest. I recalled that was when its price was at around $8 and $20.

Trade Account Balance 5/14/2009I hate it because it is the very single stock that caused me to lose over $9,000 in a single day and wiped out my three months of hard work. Yes just last Friday before I started this blog I took 3000 share of short position at $24.76. It was the day after Wells Fargo announced offering new shares at about $22. My reason behind this was new share sold at $22 and lower there was no way that it could be trading at 10% higher than the offering price given that Wells Fargo was traded lower than $22 just a few days before the offering. I was right in the early morning on 5/8. It ever went down to $24.45 but after that it went straight up to $28. I was nervous because I was highly leveraged when shorting these many shares. After keeping it over the weekend I covered the short position on early Monday 5/11 losing more than $9,000. Looking back if I were to keep it a couple days longer and cover it yesterday at close I could have made handsome profit.

The lesson I learned from this is that I have to have discipline in trading. I shouldn’t have put all my leveraged bet in a single shot even a good entry price is identified. If I were to short 500 shares instead of 3000 shares I wouldn’t have problem to keep it for a week.

Anyhow passed is passed. One of the purposes that I setting up this blog is to remind myself that the public is watching me and I can not behave like crazy gambler. I have to have discipline and I have to be persistent with it.

I made some trades on USB today and my account balance is up. Again I am going to keep my short position on WFC over night to see what happen. See you tomorrow!

Account Balance Change: +333.77