Stock Traders Blog

Act out of emotion:
I keep reminding myself that the most dangerous enemy is my emotion. But still I can not help being emotional today. When I thought about how Goldman Sachs manipulated the stock price of Wells Fargo and Bank of America for their underwriting job, when I thought about those so called influential financial analyst are only corporate puppets, when I thought about how investors are given investment suggestion without providing with sounded quantitative analysis my emotion and my angry build up.

What kind of investment environment this is. Investors are put into very unfavorable situation when they are not connected with one of those influential investment banks. And don’t think that the US market is big and efficient. It can be easily manipulated by a number of institutions. In fact this is where the systematic risk of financial system lays in. Company like Goldman Sachs, BOAC and Citi and Well Fargo should be broken down into small pieces. However the government is going about the opposite. It is trying to build up a smaller group of bigger financial institutions which can direct where the market goes on a daily based. Market messages are frequently miss-interpreted to suit institutional needs. I seriously belief some kind of mechanism similar to those preventing price fixing needed to be implemented into the financial system to prevent market manipulation.

Surprised Gain:
Anyhow my trades today are totally acts out of an angry and gambling mind. I covered my 1000 share of BAC short position at $12.08 and a few minutes later I took 4000 shares of BAC short position at $12.11. I set up a trade trigger to cover it once the ask price hit $11.80 before I left for work. I was preparing to get cooked again. When I was on my way driving to work I kept thinking what BAC’s price would turn out to be when I arrived at office. If BAC’s price was over $13 how much lost I have to suffer thoughts like that. Fortunately my short position was covered at $11.79 when I arrived at office. So I feel relief and my angry subside.

Reflection:

I start thinking probably my blog is not able to provide me the control I want any more. In just a few days after I set up this blog I starting acting out of the guidelines set forth in this blog. I have to admit that today’s gain is completely surprise to me.

I went over the exact same situation when Wells Fargo offered new shares. Wells Fargo’s stock was actively traded above the closing price in after market on the day it announced the offer at $20 ~ $22 a share. The next day Wells Fargo was traded higher in pre-market and it trended upward toward market opening. The same thing happened to BAC yesterday. It was actively traded above the closing price yesterday. It opened higher in pre-market and trended upward toward market opening. This was happening with the same pattern.

A vice strategy would be to go long yesterday after-market or to go long today early in pre-market then sell on market opening. If I went with that strategy I would net the same gain with a lot less money at risk. I actually thought about that yesterday but I chose to fight the tide because of emotion get involved. In any case I shouldn’t do that again.

Account Balance Change: +$508.51

I frequently asked myself these couple questions. Is trading stock equal to gambling? Are you an addicted gambler if you are tempted to trade stocks? I answer both questions, “NO”. These are the answers that I prefer. But I really don’t know whether I answer these questions based on my own bias.

I answer both questions based on a fact that I believe to be true. I already mentioned that in my blog mission. It is that when you are gambling you are always playing on the side that statistically the probability of losing money is always higher than the probability of winning money. You may win from time to time in gambling but if you are playing long enough or the number of times you play is large enough there is only one out come and that is you lost. That is how the casinos games are designed. Interestingly a lot of people keep playing in an attempt to win their money back. Casino will tell you who won a million but they won’t tell you who lost a million. It is a marketing effort to entice you to keep playing. People have no problem sharing their joy and victory with the public but they tend to keep the sadness and failure within their closest friends and family.

Theoretically there is one casino game that you can beat the dealer. And that game is black jack. There are all kinds of card counting strategy out there telling you how to beat the dealer. And those strategies have one common nature that is to identify a situation where the probability of wining is greater than losing and increase your bet accordingly. I believe the same applies to stock market. The stock market is emotional and it derails from reality from time to time. The more it derails the high the probability it will heading back toward the rational level. If we can identify those irrational price levels and take the right side then the chance of making money is higher then losing money. If we are always able to find the irrational level and trading on it long enough then we should be able to see substantial gain. With that said I am not saying you will make money on every trade. I mean if you are able to do that you will find you can win more and lost less.

Well I am just talking and I am trying to prove my point with my blog. Successful or not time will tell. Nevertheless the hard work lays in how to identify those irrational pricing. That is the critical part. In traditional financial theory those irrational price is not existing because the market is efficient enough to prevent them from appearing. That is so called the efficient market theory. In that theory no one is able to beat the market index in terms of return per risk. But we can see this market is far from efficient with all kinds of manipulation in place.