I have finished reading ‘Trading in the Zone’ and I highly recommend the book as Mark explains why trading is so difficult and what approach you should use if you want to be successful. [My only quibble with the book is that it would have been even better book if it was edited properly.]
Armed with this knowledge, I am going to give trading another shot. Before I place another trade, I am going to prepare a list of trading rules which I will follow.
Here are few:
1. Define and accept the risk for each trade before I execute it. [The book explains what it means by 'accepting' the risk.]
2. Never trade without a stop loss in place. Depending upon the trade, I have decided to keep 5% as my maximum stop loss amount.
3. Never add to a losing position.
That’s it for now. I have few more thoughts and I will write about them as I explore the trading world again.
Even though I closed my SAH position, I have been following SAH price action.
Yesterday, SAH announced that they will be restructuring their debt and that caused another spike in the price. As of this writing, SAH is at 6.5 and heading higher. Obviously, some folks were in the know about this restructuring and they started accumulating SAH after it hit 52 week low. Anyway, it just goes to prove that there is no point in rationalizing about what should be the price for a particular stock. You don’t have all the information to make that call. I am glad that I closed out my position SAH [wish I had done it sooner]. SAH has taught me a lesson which I will never forget.
On similar lines, almost all the financial blogs I read talks about how this is a bear market rally and it’s going to pullback soon. So many folks have tried to short this market thinking that rally will end but it refuses to die. I have read quite a few comments where people have lost thousands by buying short ETFs in anticipation of the pullback. I can completely relate to their pain. Even though I am watching market go higher from sidelines, my hunch is to go short and not long.
I think I understand what’s happening here. The problem is that our brains are logical (too logical?). The economy fundamentals are horrendous and our brain tells us, ‘SHORT SHORT SHORT’. It is telling us that market is acting ‘illogical’ and it’s bound to get ‘logical’ soon. The only problem is that will you be able to survive while market takes time to make a u-turn and start behaving logically? When Scott, Fear and Gree Day Trader fame, wrote that he doesn’t care about company’s fundamentals, economy, news etc., I couldn’t believe him. Now I know what he was doing. He was studying the only action which matters, price/volume. I don’t think I am there yet, but I think I know what to do when I return back to my trading.
Trading in the Zone is an excellent book. Though writing is sometimes repetitive, Mark has done a great job at identifying some of the psychological blocks which hurt traders. He explains you what it really means to accept the risk involved with trading. He explains what it means to take responsibility.
One of the favorite part which I read today was where Mark explained why leaving money on the table is more painful than taking a loss. If you agree with the statement, you ought to buy the book and understand the psychology behind this effect.
I am still not finished reading the book and I plan to read the book by end of coming week. By May 10th, I want to come up with my trading plan, my rules and potential watches for Monday.
I finally covered my SAH position yesterday at 3.55, losing little over 5000$ on this position! I don’t have words to describe how painful it was to lose such a huge amount in one trade. I swear, this is the last time it’s going to happen to me. As my friend sJ keeps suggesting me, from now on, no trade without stop loss in place.
Mind you, it’s not that I don’t think SAH will come down [most likely it will start cracking as I have covered]. Looking at the chart, the next major resistance is at 4$/4.20$ and it’s most likely that it will test those levels. I think it was a high time I covered my position before it makes even a bigger hole in my account.
You know why I kept holding SAH? It is because SAH is in auto industry and it’s almost bankrupt [SAH has more than a billion dollar in debt]. But wait. I am supposed to be technical/momentum trader not a fundamental trader. Why am I trying to analyze the company and decides what should be the *right* price of particular stock? Market is already telling me what should be the price for SAH.
So what’s next? I am going to start from scratch again, studying my past trades and finding where I messed it up and what were the right moves. Another shift is thinking about trading in terms of probabilities. [Yngvai's post and experience has been very helpful in this area.]
Thanks to Blue Collar Trader, I watched video of Mark Douglass, author of Trading in the Zone, explaining what it takes to be consistently profitable in trading. It was very enlightening and I have bought his highly praised ‘Trading in the Zone’ book and will start reading it.
Mark Douglass shared a very useful comment about paper trading. Most of the pro traders (including Muddy) think that paper trading is useless. Mark doesn’t think so. He says that if you are able to consistently make money while paper trading but fail to make money in real trading, it’s a great way to realize the mental weakness you have. It’s like a mirror which shows you how mind buckles under pressure. I think that’s a great point. I have never tried paper trading before, but I am going to give it a shot. I want to see if I can make money while paper trading.
Also, if you have been following my blog and have any thoughts or suggestions about articles/books please share them.
I have been watching SAH closely everyday and looks like there isn’t going to be an end to my pain in near future.
As I look through the chart again, SAH has a very solid resistance at 5$. But to hold through 5$ means, I will be down by almost 8000$ on my position. I don’t think I can handle that.
On another note, if you go back in past (Nov. 08 and Jan 09), SAH had multi day runups like this and then it gave away all those gains in coming days.
As of this writing, SAH is at 3.17 continuing the upward movement. I think SAH is basically continuing its momentum as the week comes to an end. I think it will start giving back these gains on Monday. If it does not, I will cover my position.
Overall, I am learning the biggest lesson on my small trading career i.e. never to trade without stop loss.
My friend SJ has been suggesting me to use stop loss all the time and I think SAH taught me the importance of stop loss the hard way.
Wish me luck,