After 12 odd years stumbling, falling, and muddling through in the markets, I would like to share this reflection of mine.
But don’t get me wrong. I am constantly struggling in the implementation. It’s like we know too much fried food is bad for us; but it’s hard not to nibble or be in denial by saying eating once in a while can’t hurt…
Memory good for longer term positions
By going through market tops and bottoms - I’ve learnt how markets can overshoot and stay frothy longer than that pint of beer that you have been nursing all night; or how markets can plunge and shake out the stoutest of long and hold believers, piercing their betraying hearts twice (entry and exit wounds) by rebounding with such vigour and speed to leave these once zealots shell-shocked…
And one great example is when I was in Shanghai during 2007. The Shanghai Composite Index has just broken 5,000 (a new record) and the media was reporting the frenzy and new record of Chinese citizens opening new brokerage accounts for the first time in their lives.
One company driver was confidently telling me that with the coming opening Beijing Olympics next year, the market will not crash. It's “face” thing he says. And he was “right”!
The Shanghai Composite Index rose to 6,000 (a newer new record!) with the flood of new
dumb retail funds pouring in (record new opening
of brokerage accounts remember?) in the next months.
I started accumulating cash big time. It was a long frustrating 2 years wait before I started employing my cash hoard (OK I exaggerate; it’s more like a biscuit tin) around Sept 2009 – see “My Story”.
I remember I’ve read somewhere about a famous investor who started selling after he got a stock tip from a shoe-shine boy. Reading and knowing is one thing (knowledge). Putting it into action is something else (competency)!
Guess what? 6 months before the start of the Beijing Olympics in August 2008, the Shanghai Composite Index started to tank… A leading indicator before what the rest of the world felt during the Lehman 2008 event 6 months later?
When I was in Shanghai 2 weeks ago, there was chatter in the media that the China authorities will not let the market dip below 2,000 during the leadership transition. “Face” again?
I just noticed the Shanghai Composite Index just dipped below 2,000 inter-day today? Now, is this a bullish or bearish sign? (Tip: It’s not what you may think. And I have no clue either; just a hunch.)
Notice I substituted the word “investment” with “longer term positions”?
The drawback to my longer term position trading style is I am unlikely to get 10 baggers…
But you don’t buy stuffs with percentages. If I got $10,000, I need a 10 bagger to make $100,000. But if I got $100,000, all I need is a 2 bagger to get the same $100,000. If I got a million, I just need a 10% win to make $100,000.
Size matters! You think why all money managers seek to grow their asset under management?
We play according to the cards we are dealt. Be it brain power, personality traits, or chip count.
Memory bad for short term trades
I got into the CBOT mini-silver futures for Dec 2012 recently at an average price of $32 while I was in Shanghai. After seeing the price went up to $32.90 plus, it started to dip down towards $32.00 two Fridays back. I sold at $32.50 for a quick profit that covers all my travel expenses for my Shanghai trip.
I was right for 8 hours. During the night US session, silver dropped down to below $32.10. I’ve stuck with one of my trading rules (I stolen it with pride) – never let a profitable trade turn into a loss.
But if you look at silver prices today - more than $34.00!
Was I wrong? Maybe.
During my early trading years, having a residual short term trading memory hurt me badly.
I’ll remember this silver trade into my next trade and refuse to have a trailing profit stop. Yup, next trade I will turn a profitable trade into a loss!
Or remember the first time you use stop-loss? I’ll get stopped-out a couple of times, and most of the trades will move in the right direction a few days later without me on-board!? I still remember saying stop-loss is rubbish!
Then the next trade I didn’t use stop-loss I got clobbered big time!!! And you look up into the sky and say why?
I learned painfully the no.1 reason for using stop-loss – it’s so you don’t get mortal wounds.
Yes, trading rules and plans are the result of past memories and experiences; but they are not trades. There’s a difference.
Each trade should be zero-based - the market doesn’t care at what prices you have bought or sold previously. Nor should you.
Stick to your trading rules or plans. And if you are wondering – that’s the difference between speculation and gambling.
Reviewing my silver trade, I did not beat myself up too much. I did right for sticking to the rules.
What I did “wrong” was enjoying my chunkier SIMSCI short winning boonanza too much that I fell asleep on the wheel and missed the silver reversal trade last week. Ouch!
Now that's another story all together.