WHAT TO DO WHEN THE STOCK OPENED PAST THE TRIGGER PX

I have been battling with this questions for a long time. This is a classic case of "Hope meets Greed and Fear" situation. I can use last week's BBRY action on Friday. 

As I stated before on 12.17 post, I was sitting on paper profit of about 4% on 12.16, the day before the earnings report on Friday. It closed on 10.07. 

Friday morning, it opened at 9.20, about 8.7% drop. 

Besides the reason(s) behind its drop, it was WAY past the sell trigger, which was 9.84. I put the sell ticket at MARKET right away, taking about 5% loss on the position. 

Painful? Yes. Necessary? You bet.

It is important to point out that BBRY ended up closing at 10.4 on Friday. That means, had I not sold my position and sat on it, I would have been ok.  

I have to confess. After all these years of trading, things like this make me crazy still.  

HOWEVER, I have to close the position. I have to follow the trigger every time it is signaled. You cannot question your system when the market opens. From 6:30 am to 1pm(Pacific Time), I execute the rules relentlessly. Thinking comes later after the close when you are examining the system.  

That's when you have an open position. What about when you want to open a position and the open price went past the trigger?  

I open the position at the open price anyway.

I do not have a reason. Based on my research, my spreadsheet always tells me to open it. 

One thing I do differently is I reduce the size of the position because the gap between the open price and the trigger that would close that position is now bigger.

For example, AAPL buy trigger was 101 and sell trigger was 99 and last night's close was 100. How much I am willing to lose on this position if I open is $1. 

If AAPL opened at 102, which is $1 more expensive than my buy trigger. What do I do? I buy less so the amount of loss that would incur when I sell at 100 stays the same.

Frankly, this happens rarely. Because I know my algorithm is a profitable strategy, I want to put as much as possible when I open a position. Therefore, I would still buy the same amount at 102, but would raise the stop loss price to 101 instead.  

Again, the research shows me that it is more profitable to do this than sit and not buy just because it is now more expensive. 

I realize what I described above is very uncomfortable for many to even think about executing. Like I said, I am still uncomfortable doing this as well. In fact, it makes me angry the market opened that way so that I am forced to make this kind of decision. 

But sometimes, you just have to take what the market gives you. It will get only easier if you lose money. Therefore, I hope it gets tougher for you. 

 

 

PRE EARNINGS REPORT : 50:50 GAMBLE?

3rd Delta Algorithm signaled LONG on BBRY on 12.17 in the afternoon after it signaled SHORT in the morning. I closed the SHORT position that I opened in the morning and then went long in the afternoon. As of today close, 12.18, it is about 6% up after losing about 2% in the morning.

The problem I face is now, as long as there is no SHORT signal, or for my position, SELL signal, I will have to hold my LONG position. 

12.19 morning, there is an earnings report for BBRY before the market opens. 

Because of the possibility of the gap opening, it is alittle risky to hold it before earnings reports. It prevents me from following one of the rules, which is to cut the losses at a certain point no matter what. It can open possibly outside of the sell point, and probably more likely following the earnings report. 

Don't get me wrong. I will sell it even if it is outside the sell point. A trigger is a trigger. 

It is just scary. 

That's what I said on 12.9 post. It would be easier if I didn't have any paper profit on this position. However, since I do, our tendency to "seize the opportunity" kicks in and makes me want to close the position. 

I have to either follow 100% of the rules otherwise it doesn't work. 

I paid a high tuition to learn that.  

TRADING RULES(and SOME RANDOM THOUGHTS)

1. I do not look at the stocks below 1bn in market cap. It is because bid/ask spread risk increases if you invest in stocks that have low activities. Stocks with smaller market caps tend to have low activities.

2. You stay with the trend until the direction changes. That means you will not confine the holding period to any number of days or obviously one day. Sometimes I do close a position in one day, not to capture profit, but to minimize losses. The average holding period is about a week or so. 

3. My algorithm is based on US stocks.

4. It does not work with day trading using high leverage. I do however trade using a margin account with 2:1 leverage.

5. You will not quadruple your money in a year. At least I don't know how to. The system you will be subscribing to will help you maximize profit while minimizing the risk as much as possible.

5.1 There are certain classes of stocks that I just cannot find a way to squeeze anything out of. However, I realize that the algorithm minimizes the losses even for those stocks.

3RD DELTA ON TESLA (11.19 TO 12.11)

"There is only one side to the stock market; and it is not the bull side or the bear side, but the right side." - pg 20, Reminiscences of a Stock Operater

It is alittle unsettling holding a position for 15 days when you are supposedly 'trading' a position. 15 days is almost a month. But when the system tells you to hold, you hold. No questions asked.

I shorted TSLA at 250.6 back in 11.19 by following the trigger set by my algorithm. Since then there have been no cover & buy trigger until yesterday. If any, there have been about 7 sell &short trigger.

When TSLA opened high on 12.11 and the buy trigger of 213.37 was registered, I covered my position and opened a long position right away. The short position obviously made a large profit of 213.37/250.39 = 14.7%. Actually, I did not wake up in time to open a position at that price. I put the stop loss price at that trigger the night before so it was closed before I woke up. I got lucky and bought it at 212.

That's not bad at all, 14% in 15 trading days. While trading $26 Billion dollar market cap company, that is not bad.

Currently, my long position is not showing my progress. It closed today(11.12) at 207, now a loss of 3%. That's fine. Once that sell and short trigger kicks in, I'll close it in no time. Otherwise, I will be holding.

I think it was a legendary trader Ed Seykota who said if you think the stock is going a buy, you buy. It doesn't matter where the current price is.

My algorithm follows that philosophy 100%.

If I had a long position and a sell trigger comes in, I not only sell my current position but also OPEN a short position right away.

 I believe in maximizing my exposure to the "RIGHT SIDE".

In the last 250 trading days, which is about 365 calendar days, 3RD DELTA ALGORITHM produced 68 triggers on TSLA, generating accumulative 188% PROFIT while buy & hold strategy produced about 15%.

I love Model S. It's fast and environmentally friendly with great looks. I am, however, too afraid to get involved personally. It will be alot harder to short the company when you endorsed the company by buying their product. In that regard, I am all too human.

I DON'T KNOW. MY SPREADSHEET TOLD ME TO...

We want reasons. We want to know why the market went down today. We want explanations. We want to know how TSLA keeps going down when Model S looks so cool and drives so fast. It is very uncomfortable not connecting the dots and even more difficult to accept the fact that we may never know.

Neuroscientists believe that our desire to connect dots and gather explanations is how we make it easy to remember what goes on around us. Instead of remembering three pieces of information like 2, 3, and 5, it is far easier to remember 2+3 = 5. Chess grandmasters remember all his moves and his opponents months after their match because they could see the connections in their head.

I dread talking stocks with friends. They ask me what I buy or sell. I say I bought AAPL. They ask for a reason why. I usually say :

I don't know...

Here comes silence, followed by oh.. ok.  haha.

I cannot tell them it is because my spreadsheet told me to. I cannot tell them that the qualitative analysis based on news and company data will surely lead to the poorhouse. Remember Enron? Remember Lehman Brothers? Fundamentally, the companies were doing great, right before they crashed. Of course there was trouble looming and if you had dug deeper, spending 20 days buried under the financial statements, you might have been able to predict what was going to happen.

However, while you were in the library, I'm sure good traders who did the quantitative analysis must have been shorting the stocks already.

Of course, I would like to give a smart sounding explanation as to why this stock will go up or down at parties. However, I have been trying to suppress that part of my brain for years. I have to accept the world as I see, not through the contexts I created. You wear the sunglasses, the whole world look dark.

I suppress not because of some philosophical purpose. It just costs too much not to. 

WHY FOLLOWING TRADING RULES GETS TOUGHER (ESPECIALLY WHEN YOU SUCCEED)

One time I read  a book about rich people and their habits and mindsets. Among a lot of interesting ideas, one stuck with me: while having the mindset leads to success, success itself also leads to having successful  mindset. It means you are a different person when you have $1,000 in your account from when you have $1,000,000. It sounds obvious, but I personally felt the changes in my mindset when I had 300% in profit from trading for three months out of college.   

The story does not end well, however.  Just like making free throws gets a lot tougher when it’s the seventh game of NBA championship, when each trade size became larger, I crumbled under pressure and started ignoring rules. 

What is the first rule of the trading? 

Cut your losses. 

The idea itself is very easily executable. You just close the position and start over. While I had no problem closing a position when 10% of the position meant $100 or $500, when the account grew, I started to hold onto these positions when 10% of the position meant $1,000 or $5,000.

 I became gun shy.

 I started hoping instead of executing. 

Once you ignore one rule, it gets easier to ignore another. I started ignoring the triggers and trading ‘qualitatively’.  I am sure there are people who can make money by analyzing the companies. However, that was not what I was doing. My trading was based on my own quantitative analysis.

I was basically throwing three point shots when I was supposed to play a center. 

I wish I could tell you once you follow my rules, it will get easier. It won’t. Success will challenge your ability to stay disciplined. It will get more difficult to execute what used to be a simple click of a button. You will lose more sleep over your current position and somehow wake up earlier than 6:30 PST everyday

Including the weekends!

There is a good side to success in trading, besides obviously money. Once you become good at or immune to cutting cut your losses, not just when you are trading but in everyday situations as well. You become more rational and less emotional. It will be surprising how things get solved when you view sunk cost as sunk cost and eliminate it. 

WHY TRADING WILL BUM YOU OUT AS MUCH AS GOLF.

“Mike: "In Confessions of a Winning Poker Player, Jack King said, 'Few players recall big pots they have won, strange as it seems, but every player can remember with remarkable accuracy the outstanding tough beats of his career.'" – the Rounders

I was teeing up with a couple buddies one afternoon.  I was licking my wound after having a bad week, actually a bad month in the market. Usually we start drinking before the first tee off and get two or three bloody mary’s by ninth hole.  It keeps me sane by forgetting about all the mistakes I made and all the money I could have made. However, like everything reminds you of your ex after a terrible breakup, everything reminded me of my trading behavior. 

Starting with golf. Golf is, especially the way it’s scored, designed in a way that rewards are limited while penalties are bottomless pit.  A birdie does not feel as good as a bogey and obviously a double bogey. And especially if you shoot low 90’s like I do, out of 90 shots you would be lucky if you had three good shots. 

As hard as it is to be a scatch golfer, it is very difficult to be consistently profitable in the market. Just as hard work and practice will probably not going to make you a scratch player if you do not know the fundamentals, trying hard at trading will not make you a profitable trader if you are using a wrong method.

Good golfers always talk about hitting high percentage shots. Bad golfers always talk about that lucky break, off trees or off cart path. The difference? Good ones approach golf like a card counter. Bad ones approach golf like a drunkard throwing dice at a craps table.

However, good golfers are not happy golfers! Have you ever played with a guy who shot 75 compared to your 92 and got depressed or even angrier than you? I remember the time I shot 2 over front nine and got really excited, changed my mentality and got defensive and had 3 double bogeys in a row. I ended up shooting 87, my best score of the year. And what did I think about? Not seven pars in a row I had, but that shot that I hooked into a pond, that tee shot I chunked with a seven iron.  That bogey putt I missed…. 

Everyone loves hitting the driver.  Nobody practices chipping. Drivers give you hope.  Practicing putting and chipping?  You are basically practicing cleaning up your mistakes after admitting that you made the mistakes. 

Admitting it didn’t work out is half the battle. In golf and in trading. You DO NOT persevere through adversities. Hard work will not guarantee success especially when you are working on hitting the driver only.