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.

Trade well,

RJ

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.

Trade well,
RJ

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.

Trade well,
RJ

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.

Trade well,
RJ

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,

Trade well,

RJ

Here’s the update on my trades since I put up a post on Feb 26th.

I have had both winners and losers but my losses were huge and winners were small. I lost 2000$+ on my SRS and FAZ positions. After the major setback, I decided to stop trading these ETFs. These losses made me realize why Tim doesn’t play these ETFs as well as those high volume stocks. As a beginner trader, you have absolute no edge what so ever against the pros.

After making the decision to not trade the ETFs, I was doing better. On April 1st, I shorted SAH after they reported horrible earnings. I think I made good 10% on the trade. Later on, SAH reached 1$ from LOD of 0.72, so I reshorted 2000 shares of SAH thinking that it will not be able to crack 1$. I did not cover my position on that day and decided to hold the position and wait for SAH to crack.

Well, SAH was hovering around 1.10$ the next day and I was quite comfortable holding it. Suddenly in the last session of the day, it moved to 1.20$. I was very surprised and I started wondering whether I should cover it or not. I checked fundamentals of the company and foudn that they have billions of dollars of debt and they are in auto industry. I decided to hold little longer. [Isn't it amazing that as soon as I am in losing trade, you start finding reasons to stay in the trade?] It has been roller coaster ride since then. SAH never got back to 1$ again. As of today, April 14th, SAH closed at 2.35, hitting high of 2.74! I am currently down by 2700$ (more than 100%) on this position! The worst part is that these losses made my account balance fall below 25k and IB is not letting me re-short it.

I have still decided to hold it as GM bankruptcy is looming and auto sales have been dismal. I think SAH is mainly spiking because of the short squeeze. I want to short this bugger when it shows little weakness (already, the volume is steadily decreasing everyday.).

This is all for now,

I have few thoughts about what I did wrong and what I should be doing next, I will make another post about it.

Trade well,

RJ

Also, did a small trade with DRYS, lost 15$ or so.

The last two days has seriously impacted my confidence and I think I need to re-evaluate everything.

I am not sure if I will be trading today, if I do, will post an update in the evening.

Trade Well,
RJ

P.S.: As I am watching pre-market action right now, FAZ is back at 65$!

So far here’s what I have done:

1. Closed RMBS in TOS at 9$ for 220$ loss.Covered my RMBS in IB at avg. price of 8.72 for gain of around 100$. Net loss of 120$.

2. Covered PALM at an avg. price of 7.31 for total gain of 200$.

3. Shorted HIG at 7.3 (only 250 shares), covered at 6.79 for gain for 120$.

4. Shorted 1000 SFI at 1.35, covered at 1.25 for 90$ profit.

5. Shorted DRYS at 3.8, covered at 3.79, loss of commissions.

6. I shorted 500 CAB at 7.7, covered at 7.64 for a small gain. I reshorted 500 CAB at 7.51 and covered by order entry mistake at 7.74. Again shorted 1000 CAB at 7.71

7. LONG FAZ from 60.5 to 61.52, gain of around 49$. Currently LONG FAZ 150 shares at an average price fo 62.21.
I will update this post again at EOD.

Trade well,
RJ

Update:

I fucked up. Couldn’t take the pain of FAZ tanking, got out at huge loss wiping out my mornings gains. In total, down by 1332$ for the day!

I am still holding my CAB short. I am currently down on it by 400$ but I think it should come down in day or two.

2nd Update:

Well, what would you know, FAZ moved from 50 to 56 in last 30 minutes! I need to start fresh.

1. Went short RMBS even though I was planning to play it LONG. I went SHORT because Muddy in the chatroom said he is going to short it. I couldn’t go LONG after that and I got confused about the price action after that. Mind you, I am not blaming Muddy for this. He shared what trade he was doing, it was my fault that I didn’t trade as per my plan.

2. Getting spooked out of WFC too soon. I was long at 11.80 but couldn’t handle the little dip to 11.50. WFC closed at 13$!

3. Waiting on the sidelines instead of going LONG on FAS. After Bernake’s speech market was ripping but for somehow I am very bearish and couldn’t get myself to go LONG on FAS. Again, I need to work on myself and ride the momentum as I see it.

Status as of end of Feb 24th:

Positions closed for Gain: CAB (29$), FAZ (44.51$)

Positions closed for Loss: WFC (-75.75$)

Open Positions: PALM (1000 @ 7.52), RMBS (800 @ 8.72)

2. PALM – islandminister has a very nice blog titled ‘Trading to fund Mission Trips’ where he tries to short what Tim describes as ‘SuperNova’. His latest post about PALM reading is excellent. I agree with his analysis and I will be ready to short PALM based on the price action.

3. DRYS – Another stock which trends slowly but surely. It can be either a LONG or a SHORT.

4. AIG – AIG wants to go to zero. For some reason, I am finding it really hard to short AIG. I have the psychological barrier against shorting a stock which is already 50 cents. I need to get rid of that barrier. Based on the price action, I will try to take a very small position (say 500 shares) and short AIG.[Other insurance companies worth shorting are HIG and PRU. I think PRU is also a very high probability short.]

5. FAZ/FAS – The best stock to trade tomorrow. I am thinking there could be another sell off OR a rally. Either way, I don’t care. I am just going to jump on either FAZ and FAS train and make some money.

The biggest thing in this market is to realize that ANYTHING can happen and keep your mind open. I am still not there. I try to decide a lower limit for stock (e.g. AIG) or upper limit (e.g. FAZ, I thought it won’t go to 79$ today). It’s important to let go of any pre conceived notion and only trade the price/volume action.

I will also watch pre-market gainers and trade if there is right setup.

Trade well,
RJ.