The Penalty Box Journal

[charliehm]

I'm just an bond and mutual fund investor trying to learn to trade stocks, and this journal is just me writing to myself, thinking about what I need to do to fix a problem I've created for myself. Don't brother reading unless you truly have nothing better to do or are finding yourself in the same situation.

I took my account at IB flat just now by closing all open positions at nearly a 2 3/4% loss, because I had gotten myself too far on the wrong side of the market, and I'm putting myself in a one week penalty box of not being able to make further trades until I figure out a better game plan. On sound advice read here at ET, I'm trading 100 share lots of listed. Today at midday I had to admit to myself that I was making too many mistakes, that my unrealized losses were unacceptably large, and that I was trying to use too many different strategies to be effective at any of them, so I put myself on the sidelines. I realize that trying different things is part of the learning process, and that mistakes and losses are simply a part of trading, but I don't like not being able to do a good job on a daily basis, so that I end each day either knowing I traded well (regardless of whether I made money), or having at least the satisfaction of having paid a only reasonable price for the experience gained. In the past couple of weeks, I've done some smart trades, but I've also done some really dumb ones:

Smart: anticipating from the chart where prices were headed, then positioning myself, long or short, with a limit order, then scalping enough of the move when the order kicks in, the same way when you are fishing a lake in the early evening and see a ring on the surface as a trout feeds, and then 20-30 seconds later another ring 15-20 feet way and make the correct guess that it was one fish, not two, and plot his next position and can drop the fly just in front of him as he cruises for a third and fatal snack. I love the game of setting a trap and seeing the quarry swim into it. Fish or stocks, the game is the same.

Dumb: averaging down instead of reversing, which is what got me into trouble today. When my traps fail and catch me instead, I don't have an effective way to repair my position fast enough to get me on the sidelines so I'm watching for my next move with a clear head and flat account.

The purpose of this journal is to figure out for myself (once again) answers to the five basic questions of WHAT, WHEN, WHERE, HOW and WHY, realizing, of course, that an answer to each one influences the others:

(1) What hours I want to trade?
(2) Which instruments I want to trade?
(3) What trading techniques do I want to use?
(4) How big I want to trade?
(5) Why I want to trade?

"WHY" is most important, so I'll begin there. Not understanding how markets work and not being able to participate in them effectively is like trying to ride a bicycle with one leg. You can get yourself to the grocery store and back, but you can't make the long ride out to the lake. I want the skills, and I need the portfolio diversification, that trading can offer, and I'm tired of the lame excuses conventional money managers offer about their underperformance. It took me two years to do it, but I elbowed my way into the junk bond market and built a position that is beating their track records. I got myself out of bond funds and taught myself how to be a good fixed-income investor. (And if you don't think there isn't serious money in owning individual bonds, one of my positions was Riviera's 8's of '04 bought last Nov at discount, just called for a total return, ann. of ~73%.) I'd like to do the same with stocks. I'd like to get myself out of investing in equity funds and teach myself how to trade them instead, especially the index-like EFT's, because managing and growing money is a skill I'll need until I'm dead. Investing and trading are different things, but they are a lot more alike than different, and I'll need both to survive the crazy years ahead of us.

"WHEN" is a function of my day job, which I don't intend to quit because I like the work and it provides medical insurance and a fat pension. I'm a marine machinist (think, "ship mechanic") and I like the rhythms of the waterfront and the diversity of its challenges, overhauling everything from air craft carriers to tiny fishing boats. The pre-market (from 8:00-9:30 AM), the first 40 minutes of the regular session (from 9:30-10:10 AM), and the last part of the after-hours market (from 7:15-8:00 PM) have the reputation of being very hard to trade, but they are the only hours I will always have available to me --I'm in the Pacific time zone-- , because I don't intend to quit my regular day job for another 6 years. I have several months of free time every year, because my job only averages 3 days/week, but often I'm working 7 days a week for several weeks in a row and then I have a couple of weeks off. (That is the rhythm of the industry and I've been doing it for 25 years.) I find that I can make small but steady money doing just 2-4 quality trades in the morning before I go to work. I kill my account when I try to trade full day and go after every opportunity, because I get sloppy and the mistakes snowball into losses. My thought is that is smarter for me to trade every day in the hours available to me than to wait for big chunks of time off and try to catch up then. The learning is better as a daily thing even if the time frame is a tough one for beginners.

"WHAT" is just the four most liquid ETF's (QQQ, SPY, DIA, and SMH), because they have enough volume to chart well in one-minute bars --which I really like compared to longer time segments--, have enough range to trade in small lots, and can be shorted on the downtick.

"HOW" is an PDT account with IB and LiveCharts Basic as my data feed. (I've seen snickering comments about LiveCharts, but I'm find their tape prints right in step with IB and is very dependable for the regular session. Their extended hours data is flaky, and this weekend I'm going to demo eSignal.) I've got a three-monitor set up, so I run TWS on one screen, and either 1- minute and 5-minute charts on the other two for the same security or 1-minute charts for two securities, with no indicators, just price and volume and whatever trendlines I draw. What I see myself as doing is buying support and selling resistance (or shorting at resistance and covering at support), catching the ripples of the trading day, rather than the waves or tides. My net assets (excluding a paid-for house) are $275k, so I've allotted 10%, or $27.5k for stock trading, with the intention of increasing that to 25-35% if/when I've proven that I can trade 100-share lots and be consistently profitable. Authors whose books I depend on: Weinstein, Mamis, Chande, Tharp, Kaufman, Schwager, Nisson, Talib, Edwards and Mcgee, Bolinger, Sweeney, Murphy, Wyckoff, etc., but mainly for chart reading and risk management rather than systems building.


As I said at the beginning, this is mostly notes to myself. I keep trading journals, but that isn't the same as going public, and I swap e-mails with a couple of friends, but they are doing different things (position trading small caps or mechanically trading futures.) This forum --Thank you, Baron-- is the only place on the web where beginners can post a journal and experienced readers might offer constructive comment.

Thanks in advance, Charlie.

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"The game taught me the game. And it didn't spare the rod while teaching. " (Lefevre, "Reminiscences", p. 36)

 

[charliehm]

Writing the previous served its purpose of catharsis and redirection, and I'm discontinuing it with this entry. Everyone has their own idea of what the trading process is like, and for me it is fishing, along the lines of the following which I posted at the Motley Fool board for bonds last spring. ------------

Investing Like a Trout

A weekend morning, when markets are closed and the daily hysteria of Wall Street has faded away, when it’s still dark and quiet outside and covers are warm and snuggly, is good for thinking about the larger and more important things in life, like trout fishing and past times spent on lakes or streams, casting to rising fish. Classically, trout fishing is dry fly fishing in creeks and rivers, but for me it was small lakes, almost ponds. Late afternoons, as shadows lengthened toward early evening, we’d slap on enough bug juice to thwart mosquitoes and row to where the fish were working, flip for bow or stern position, and begin an hour or two of casting flies as fish fed on the surfacing hatch.

Not much to do with bonds in that picture, but consider another one. You’re a trout who lives in waters such as W. D. Wetherell describes in his collection of fishing essays, “Vermont River”. When you’re hungry, you don’t drive to the grocery store. You move from your resting station, that is sheltered and away from the current, to your feeding station, perhaps at the downside edge of a mid-stream boulder deposited there in the last ice age, and you begin to watch the conveyor belt of objects floating past you, selecting between the debris carried from land to water by wind and the truly tasty stuff also fallen there. If you’re an experienced trout, you know bugs from things that might look like bugs, and ignore the #12 Gray Drake that guy in waders just drifted past you, sipping instead a true Siphlonurus from the surface, and ease back to your station.

Such a picture describes late spring or early summer, when the raging, discolored, winter floods have receded and the river has resumed what we, as fishermen, think of as its normal pace and rhythm. But all stages of the river, from January’s floods to August’s low waters, is the cycle of the river, with each year’s cycle being a variation of previous ones, and Wetherell does a good job of capturing the misery of cold, wet days when wading was foolhardy and fishing an exercise in frustration, as well as the blistering, hot days of July when fishing was equally a waste of time.

It occurred to me this morning, still snuggled in bed, that fishing for trout according to the rhythms of nature and the seasons of the river had a lot in common with buying bonds, which also have their seasons, driven not by rains but interest rates, and not annually, but in longer, waxing and waning, but recognizable and repeating cycles of 4 to 5 years.

Trout don’t buy bonds. People do, but how would a trout buy bonds if he were to? My guess is that he’d accept the fact of rhythms and seasons and cycles and wouldn’t go charging into the full current of the river at just any time of year, madly chasing after every apparent opportunity that floated by. Instead, he’d look at the larger picture of things, see where in the cycle of interest rates he was, then choose a feeding station, out of the buffet and torrent of daily events but at its edge, and patiently watch the conveyor belt of market events bring the opportunities to him, selecting those he recognized as genuine, rejecting those that were merely fancy feathers and a hook.

One could argue that bonds are as varied in their kinds as are fish, and the methods to pursue the individual kinds of each must be as individually chosen. But emphasizing the admittedly event-specific, equity-like nature of junk bonds, for example, over the fact they do relate to interest rates, however complexly, ignores the forest for the trees and loses the main value of the metaphor, namely investing is about the long haul, about history and patience. And right now isn’t the Spring of the year for bonds.

Go fishing instead. --------------------


Investing? Trading? It don't make me no never mind. For me the game is the same. Set up and execute. Set up and execute. Watching the market this morning, I decided that QQQ doesn't have enough range for me to mess with compared to SPY and DIA, and that trading pre-market is too much work. (Positioning myself pre-market to capture the opening gap, however, is another thing, and that is fairly easy to do.) From there on, for the next 30-40 minutes, my trading is just chart reading and grabbing small pieces of the action, and then I'm done for the day, out the door, and off to work or other things. When I confine myself to that time frame and that style of trading, I make money. Not big money, but steady money. If that's what I can do, then that's what I need to stick with instead of trying to be an all-hours trader. I'm just an investor who does a bit of trading, and I'm comfortable with that.

Charlie