Thursday, April 19, 2007

Why I Played Today As I Did


There have been a lot of comments generated by this morning's post, and I think that is very healthy, as there were several ways to play today's action. Each way is not necessarily more correct than another; it is simply a matter of bias, psychology, and risk aversion. In order to flesh out what happened, I will detail the thought processes which led up to me dumping everything except for one position.

Yesterday evening left no time for research. I had T-ball practice, then an engagement which kept me out past Midnight. When I got home, the Nikkei was down over 400 points. I thought, "Well hell....Tomorrow is going to be another gap down." As I went to sleep, I was already mulling over whether or not I would maintain my positions through the gap-down, and hope to sell later in the day, hold them entirely, or dump them on the open or pre-market. I often find going to sleep with these types of thoughts means the next day will bring frantic and schizophrenic trading for me.

When I got to work this morning and got my computer turned on, I saw that SMSI had been downgraded. The day before I was up 1K on the position, and now I was down 150 bucks. Furthermore, the futures were responding just as I had imagined the night before- we were going to gap down on the open. I was able to get a good price in the pre-market for SMSI, selling 500 @ $18.90. This was a brilliant move, as SMSI closed in the low 16s. Now I had to focus on the rest of my positions. I asked myself, "What do you think the market will do today?" My feeling was that the Nasdaq would close down between 20-30 points, and would probably continue that fall for a couple more days to the 2450 level before finding support. Based on this assessment, I decided first to try and liquidate in the pre-market any position that was priced closed to my entry, or break-even. I placed my limit orders, and nothing triggered.

By 9:20 a.m., new fallout from the Tech Tragedy was filtering into my office, and I could see that today was going to be extremely busy. Knowing that I was likely to be wrapped up away from the computer all day, I had to make a decision in 10 minutes about the rest of my positions. I could set stop losses, but many of my stocks were set to gap lower than where I would have placed the stop. I did not want to set the stops much lower, as that looked like a setup to be stopped out at the LOD. This left only one option- set Limit Orders and hope for the best exit prices.

I started with DIVX, as it was set to open close to my breakeven price. I set a limit for 400 @ $22.75. It triggered immediately on the open and I was out of the position for a very small loss. I also set a limit order for COGT, 500 @ 13.75 (my breakeven), but it gapped lower and didn't fill. Limits set for SWHC and SIGM also did not fill due to the gap down. I did not set an order for STKL.

I then got pulled out of the office for a few minutes and was basically informed that I was going to be in a meeting for the next few hours or so. I had just enough time to get back to my office. When I pulled up my platform, the Nasdaq was down ~17 points. I pulled up charts for all of my positions. Everything looked to go lower. I sold COGT on the market, 500 @ 13.526, as it was only a 100 buck loss. Next, I looked at SWHC. It too looked to go lower so I marketed it, selling 500 @ $14.18, losing 200 bucks. That left SIGM, which had gapped down almost a dollar. I had only 200 shares, so I said the hell with it, and marketed the 200 shares @ 26.807, taking a 200 dollar hit.

I now have only 1 position left that I might want to sell, STKL. I really like the stock, the chart, the company, etc. so I didn't want to sell it, but I had 1500 shares, which meant I was loaded up. I was able to watch it for a minute or two, and decided to sell it all, as I had a small profit in the trade. I dumped all 1500 @ $12.21. In hindsight, I should have sold half, as that would have limited my risk enough for my tastes.

Keep in mind throughout all of this that there are people coming in and out of my office, the phone is ringing, etc. My stress level was through the roof, and as I said earlier, something had to give. My trading experience told me to wait for better exits. However, at the time, the Nasdaq had not started back to close the gap, and I did not know if I would have time today to trade at all. Furthermore, the day started off very much like February's crash day, and there were no guarantees that any dip-buyers would save the day. I had in my mind my profits, which although relatively small, would buy things for my family, for example this playground set my 5 year-old is dying for. Remember I spend all my profits every year; I do not compound gains. And most importantly, I knew I wouldn't be able to focus on crucial things at work with the possibility of my positions imploding around me. These were my thoughts as I decided to liquidate everything.

In conclusion, most every position closed the day a dime or two from where I sold them. Looking at my decision from this perspective, I did pretty well. Yes, I noticed several of the positions did offer better exits before retracing into the close. I figure in the best case scenario, at most I could have saved $500-$1000 by not selling at the open, but only if I was in the office to trade, which I wasn't. The worst case scenario could have found the Nasdaq down 1.5%, and my positions down a lot more than I lost selling at the open.

All in all the Nasdaq had a fairly healthy consolidation day on lower volume. There was no crash, no explosions, etc. Had I done nothing, I may have 500 bucks more in the account than I do now. However, the key to winning in the market is taking small losses. I took a lot of small losses today.

Thanks for reading, and I hope this helps others out there as they struggle with similar biases and issues of trading psychology.


brent said...

Good luck with everything Woodshedder. I use my my profits to pamper the family as well. I run two manufacturing companies and own Mobile Home PArks. It gets completly overwhelming at times. My wife is due with our second next week.

I completely agree with Shortabull and Cajun. Today I felt at risk and not in control of the near future so I went from 10% cash to about 50% cash. Sold DIVX, MPEL, STKL, WGAT, and BRCM. I lightened up on MVIS and I'm sure I'll be chasing that position back. I own gold and added some QID. There is some weird shit going on in the world and I don't like the feel of it. If the market breaks out on strong volume then I'll jump back in on selective stocks that meet my criteria.

Woodshedder said...

We are in the same boat together.

I completely agree with your statement "there is some weird shit going on in the world and I don't like the feel of it."

Woodshedder said...

Brent, what strategies do you use to trade and be profitable while maintaining all that?

idlesin said...

I recently moved from a night shift job where I could research & read most of the night. I was usually ready to trade or at least watch the market open for 30 - 60 minutes before going to bed. (I live on the west coast.) Now I'm working a swing shift and always miss the open & have virtually no time to read & research, but plenty of time to react before & during work. Not a good combination. I was pretty excited to get off nights, but having no time to get prepared for the market, coupled w/ less time for the kids has me thinking to go back to working nights. I feel your pain. Good luck dealing w/ the VA Tech tragedy. I really enjoy reading your comments & market analysis. Keep up the good work.

Woodshedder said...

Thanks Idle. I know exactly how you feel getting to work with just enough time to react, and little time to prepare. Bad recipe there. Thanks for your thoughts on Tech.

brian5545 said...

I was thinking of unloading everything this afternoon but did not have the time at work to do it. Reading your post give me the "push" I need to end the shift and sit on the bench. I'll just watch and learn for a bit now.

brent said...

Woodshedder, before finding "The Fly" I solely relied on the following:

1. Log in to my VectorVest Account.

2. Click on Research, drop down menu, click on Unisearch,Click on "My Long Searches" wich has my screening criteria:
a)52 week high; <$10/share.
b) I then sort down by Relative Value(click relative value), highest to smallest. I only consider stocks that have a relative value greater than 1.40.

This means that the stock is growing earnings at a multiple of its PE. For instance tonight's top stock is SPPR. It has a RV of 1.56(Earnings Growth rate = 31% and has a PE of 11.14) and has just recently broken out to a 52 week high. This stock has been popping up a lot lately but I have not purchased any as I don't care for REITS. There are 14 stocks with a RV of 1.4 or higher trading under $10 that just broke out to a 52 week high. Out of these 14 I picked up RNO a while back at 2.75 and it was recently bought out for 4.5. I usually will only pick 1 or 2 up a month on average. I cherry pick the list to my liking. I found GRIL, LWAY, HOOK,NTRZ, PRFT, SWHC, etc. this way. It saves a lot of time!!
I also read every night. It keeps me up to speed with the desenting "Gold Bug" view and keeps me in check from getting too caught up in the "Black Box" hedge fund mentality. I know the currency and commodity markets extremely well and how it may affect the general equities market. I performed research for a top money mnager in college for 3 years and I use what he taught me as well. Vectorvest is the way to go if you use the screening methodology I explained. The system teaches look for top VST stocks. I say no!! Look for companies with a high RV that have just broken out. It means that are just starting to realize their value. The 52 week high is crucial as there are a lot of stocks that are undervalued that don't ever meet their real value for whatever reason.

Let me know if you have any questions. The cost is around $50/mnth. It has paid off 100 fold for me.

mdawsz said...

Brent, I live in a trailer park too!

brent said...

HAAA,,Haa.. I am the "poorman's landlord". Everytime you become deliquent, I foreclose and sell your trailer again for 20k and collect 8.5% on 18k amortized over 5 years Xs 100 units. :) Cash cow.

IIO said...

I then got pulled out of the office for a few minutes and was basically informed that I was going to be in a meeting for the next few hours or so.

Work always seems to pick the most inconvenient times to interfere with trading.

GovtMule said...

Wood - I too know how you feel. Because of the nature of my profession (surgeon)...and the fact that my "clients" seem to always have bad timing..I have been known to do the same thing. Seems I usually regret my freak out - but it makes me feel better that day. Better to keep your powder & reload.

Bill said...

@ Brent: of all the things that can be grown on acreage, trailers are the most profitable.

brent said...

Yes, it's a great way to land bank acreage with highway frontage. The key is to get properties with out Park Owned homes. The upkeep can be expensive on park owned.