If you followed my blog you know that I was betting on the wrong site of the market for a while. I closed all position I was holding today and I am currently down 10% from my initial investment. In order to recover my investment I need to earn more than 10% now. 
I am not going to be trading as often as I did going forward because I think I made too many stupid mistakes trading in and out. Just a few days ago I shorted 1000 shares of HIG (Hartford Financial Service) at $14.18 and cover it at $15.83 yesterday.
One past experience told me not to take the short side so easily but another one (I Can’t Help Thinking About my Big Short Trades) told me if I could hold on to my short position I would eventually see profit. I shorted HIG not without reason backing it. HIG is one of the insurer that needs TRAP money. If HIG were able to return to profit so easily it wouldn’t need TRAP money in the first place. Because of this and the later experience I shorted HIG without carefully evaluating the news that bumped HIG (U.S. insurers to get 2nd-quarter investment boost). I might be right and I might be able to see profit if I hold on to the short HIG position till tomorrow. I might be able to see profit on my puts on Starbucks Coffee and US Bank if I hold on to them. But somehow I feel it doesn’t worth to take the risk. Risk on the short side is much bigger but return doesn’t seem to be better. So going forward I will not take the short side any more.
One last thing I want to remind myself again and again: Trading is 90% Mental and Momentum.. It is news driven. My blog’s commentator also reminded me that. I have got to take it seriously.
In a previous post Systematic Way of Trading - Stock Board Advice I quoted an advice post on yahoo stock board by a trader. It mentioned a term called “Kelly Criterion” which I never heard of before. I did some research and found this is a term from probability theory. I studied probability theory in my MBA classes before but I didn’t recall this term. I guess MBA classes didn’t cover probability theory that deep. The following is an explanation on Wikipedia.com about Kelly criterion
The Kelly criterion, or Kelly strategy or Kelly formula, or Kelly bet, is a formula used to determine the optimal size of a series of bets. In most gambling scenarios, and some investing scenarios under some simplifying assumptions, the Kelly strategy will do better than any essentially different strategy in the long run.
For simple bets with two outcomes, one involving losing the entire amount bet, and the other involving winning the bet amount multiplied by the payoff odds, the Kelly bet is:
f* = (bp - q)/b.
where
- f* is the fraction of the current bankroll to wager;
- b is the net odds received on the wager (that is, odds are usually quoted as “b to 1″)
- p is the probability of winning;
- q is the probability of losing, which is 1 − p.
As an example, if a gamble has a 60% chance of winning (p = 0.60, q = 0.40), but the gambler receives 1-to-1 odds on a winning bet (b = 1), then the gambler should bet 20% of the bankroll at each opportunity (f* = 0.20), in order to maximize the long-run growth rate of the bankroll. If the gambler has zero edge, i.e. if b = q/p, then the criterion will usually recommend the gambler bets nothing
It might be daunting to understand for someone never get trained on probability theory. I seem to understand it well. I presented similar concept in an early post stock trading vs gambling . But to apply this theory on stock trading a very complex mathematical model is needed to accurately determine the probability of wining and losing. I believe hedge fund and trading firm would hire a troop of Phds to work on mathematical model that calculates the probability. Believe it or not a colleague of mine is recently interviewing with a company doing such research. For general investor like me without using any proprietary software the only way is to take a guess.
Having said that it reminds me a period of time when I didn’t watch the market closely and just set up a limit order to buy or sale. Actually that was before I started this blog. I remember I was able to grow my balance from $30,000 to $40,000 within a month. Maybe a programmed trading is better then manual trading. I found my emotions always take control of my buy and sale decision when I watch the market closely.
Before I used RSI - Relative Strength Index as a buy and sell indicator I didn’t really understand what it means. Now I lost money on using it and I started to dig into its meaning. Relative Strength Index is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. RSI is calculated using this formula, RSI = 100-(100/(1+RS)). The RS in formula is the ratio of the average ups in the past time interval divided by the average downs in the past time interval. The time interval can be a number of days or a number of hours.
Now I understand that and I don’t think it will be very effective. It could be more effective considering the recent news on the stock abd the over all sentiment of a sector. Well I guess it is easy to say and the hardest part is to turn it into gains.
Today is a big up day especially for the financial sector. Meredith Whitney upgraded Goldman Sachs dragging up the whole financial sector. All the big banks were up 6% to 9%. That was a lot in a single day for one analyst call. Of course it was not all attributed to Meredith Whitney. But she did choose the right time to show off her power. I on the other hand traded in and out of Bank of America and lost almost $250. At the end of the day I hold 2000 shares of short position on Bank of America. I feel uneasy at the moment because that is a lot of shares and I will lose $200 dollars for every 10 cents if BAC is going up. I take the short side most of the time today because I bet the big bank’s earning is not going to be as good as the market expected especially for Bank of America. Meredith Whitney didn’t upgrade any other big banks except for Goldman Sachs. She said big banks in general were in better shape. That is something we have already known however.
I made a lot of trades on Bank of America. I don’t usually make so many trades in large amount in a single day. I did that today because I found a technical indicator in my trading tool seemed to be pretty effective for the past couple of days and I wanted to see if it really worked again. The technical indicator I was talking about is RSI (Relative Strength Index). See the bottom part of the following graph. If it is over 70 then it means the stock is over bought and if it is under 30 the stock is over sold. I short sold 2000 shares at $12.80 when RSI was above 70 but it kept going up and it was above 75 at the end. Today’s trading pattern looks familiar to me. Short covering pushed up stock price at the end of an up day. I lost on the same pattern more than a couple of times by taking the short side too early. Looks like I am going to make the same mistake again.
The following are the transactions I made today.
 Tansaction 2009/07/13 |
At closing price I lost $242.29. BAC actually went up to $13.07 in after hour so I lost $160 more already.
 Account Balance 2009/07/13 |
Account Balance Changes: -$242.79
Yesterday I kept my 800 shares of PCX (patriot coal) in hope that it would rebound when oil price rebound. In early today there was report that oil price was held stead above $60 a barrel and PCX was up at around $5.45 not long after market open. The DOW was up 40 some points at the time. I thought that was it and the rebound of PCX was disappointed to me. I was eager to find a chance to sell PCX. I sold it at $5.47 early in the morning. Looked at how it closes. PCX was at $5.63 and the Dow was only up 5 points. So once again don’t under estimate the tie between oil price and energy stocks. Energy stock can be affected by oil price more then by the general market. So this is a bad move I made today. I brought these 800 shares at $5.76 a couple days ago.
I did make a good move. I bought some Bidu (Baidu) puts and sold them later net about $120. So my total gain today is about $250. Not a lot but my account is back above my initial capital of $30,000. I have learned to be happy with small gains and I love this thinking “Go slow. Preserve capital. Learn the fundamentals. Achieve consistency”
 Account Balance 2009/07/09 |
 Stock Trades 2009/07/09 |
I feel the overall sentiment of the market is still bearish. The market is waiting to see how the financial sector was doing in second quarter and is very cautionary. I bet the University of Michigan Consumer Sentiment Index tomorrow will not have a good reading since unemployment rate is still going high. And I feel good holding only cash.
Account Balance Changes: +$259.67
I came across a blog post that talked about foreign currency trading basics. The following is a quote from the post that I found extremely helpful.
“Abandon all notions of getting rich quick. Because of leverage and due to the fact that even a broken clock is correct twice a day, the FOREX market can give you the illusion of being able to make a huge amount of money quickly. The market can randomly reward you for bad trading behavior. Until you execute your bad trading habit one too many times and the account proceeds to blow up. Capital preservation is critical simply because you need enough time to be able to discover those “bad trading habits.” Go slow. Preserve your capital. Learn the fundamentals. Achieve consistency.”
I found that if I replace the word “FOREX” with “STOCK” then it perfectly describes what I have learned from my past couple months of stock trading experience. It is a very concise summary of my “Stock Trading Lesson Learned” Category”. I couldn’t agree with this more. I guess FOREX trading 101 equals to stock trading 101.
Yesterday I was planning to sell PCX and DRYS today so that my account could be up above my initial capital. I saw this opportunity in early morning but I didn’t act on it. I was expecting more. Actually news already pointed out early morning that oil was continue dropping., It made sense that it would put pressure on energy stocks however I didn’t pay attention to it. I kept expecting a 4% bounce backup on PCX after yesterday’s almost 10% drop. It certainly wouldn’t happen when oil was continue dropping. I just didn’t sense the connection between oil price and energy issues. That’s definitely another lesson learned.
There is always ups and downs in a trading day and there is always opportunity to make profit. To train myself to make more right decisions than wrong is the purpose of the “Stock Trading Lesson Learned” category. I also watched Baidu today I wanted to trade on its call options and I set an order to buy its Jul 280 Call at $6. The price was set too low however. My account was down almost $300 at today’s closing price
 Account Balance 20090707 |
Account Balance Changes: -$272.80
I paid 180 dollars of commission today. As you know I am using TDAmeritrade. Its stock trading commission is $10 per transaction. How did I get to that far? Well I thought trading option is also $10 per transaction. So I bought 100 contracts of Microsoft Jul 24 Call option at 0.32 per share and sold them at 0.36 or 0.37 per share. I thought I was able to net about $400 on that transaction. In fact I was only able to make about $230 on that.
 MSFT option commission |
It turns out that there is $0.75 commission per contract in addition to the 10 dollar transaction fee. I was trading 100 contracts so there was $150 extra commission in addition to the $10 transaction fee. That is a lot and that is something I didn’t know before I did this trade. It was lucky that I was still able to make money. A lesson learned from this is when dealing with option it is better to trading those options that prices are high. If you know any broker that offer low commission on option trading please let me know
It is a big down day. Unemployment number is not good. But my account was up thanks to the option trade. I am still holding 500 shares of Beat that I bought yesterday and at the end of the day I added 500 shares of USB (US Bank) at $17.13. I became more willing to take the long side. But I wish I shorted Bank of America this morning.
 Acount Balance 20090702 |
Account Balance Changes: +$114.81
PS
I have to revise the gain today to +$94.81. Closing price of USB came in a bit late and it turns out to be 17.04 instead of 17.08.
Today I sold everything in my account. I mean the 2000 shares of Bank of America. I sold them at $12.59. I made some profit on that trade and my account balance went up a few hundred dollars from yesterday. But look at BAC it is closed at $12.75. From time to time I told myself not to take action too early and try to see how it close first. I just don’t believe that feeling. It is more than a few times in the pass few trading days that I regret taking buy or sell decision too early. I really just need to sit back and take it easy and not to watch the market frequently. I just need to take a peek at market close then decide whether to buy or sell. I am going to try to that next week.
I regret buying PCX and I regret selling it too early. I lost $1400 trading PCX. My account is still down $600 from its initial capital of $30,000. Hopefully I can get back to my feet next week. One thing I always feel good about is to hold only cash but nothing over the weekend.
Account Balance Changes: +$471.36
As you know I am taking the long side right now. I am holding Patriot Coal and Bank of America and I am losing big. When I say big I mean it is over $1,000. I remember there were a few trades that I lost big by taking the short side. The first one was on Wells Fargo (WFC). I was shorting 3000 shares of WFC at an average price of about $24.50. The second one was on BAIDU (BIDU). I was shorting 200 shares of Baidu at an average price of about $275. The third one was on Bank of America (BAC). I was shorting 2000 shares of BAC at an average price of $12.50. I lost on all three trades when I covered those shares. The total lost of the three trades was bout $15,000.
Looking back I felt I entered all three short position at a price that was not so bad. I was just not strong enough to hold them for a long period of time. For the trade on WFC I could’ve made profit if I had held it for three trading days. I clearly remember someone told me on yahoo board that I would be fine if I held them for a few days but I was too scared. See the following link to yahoo board
http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_W/threadview?m=tm&bn=19829&tid=118335&mid=118431&tof=-1&rt=2&frt=2&off=1
It was the same for Baidu. For BAC if I had held it for five days I could’ve make profit. For any of those trades if I can hold till now I can make over $1,000 on each of them. Of course I can’t own all these three positions at the same time. I am just assuming. If I hold the short position on WFC till now I can make $4,500 instead of losing almost $10,000. In fact my trading started to fall apart after the big lose on shorting Wells Fargo.
Before the big lost on WFC I strongly believe in a trade methodology that you can start a position with small money then keep adding to the position when it goes against you and eventually you will see the turns and you can get out of it with break even or profit. I was able to make $10,000 in just a few weeks. But the problem with this is that your position will get very big when your holding keep going against you and it can max out your account before you see the turns if the entry point you choose is not a good one or you start too big. Eventually your position will get so big that you are too scared and give up. That was what happened on my trade on WFC. Thinking back this methodology may still work I just need a strong mind and a better decision to choose an entry point with the right amount.
I forgot to mentioned I had another big short trade. I ever shorted 10,000 share of LINTA at $5.16 average back in April before I started this blog. Same thing if I had waited for three trading days I could’ve made profit. I didn’t make any trades today. My account was up a few hundred because both of my holding went up a bit. I will update with you again tomorrow.
