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Sunday, 23 September 2018

A GUIDE TO OVERCOMING BAD TRADES, HUGE LOSSES, AND REGRETS

If you've ever bought a stock and lost money - particularly a lot of money - you would know the feeling. What was wrong with my analysis? How can the market be so wrong? Why are people making money off of idiotic ideas and I lost thousands in spite of my super-smart analysis?


Can't argue with this. Source.


We are certain that you can vividly remember your first BIG loss from trading stocks. Perhaps the losses alone are worth as much as a C-Class sedan. Perhaps as much as a down payment for a million ringgit house. Perhaps as much as the house itself. We don't differentiate in terms of your income, wealth or, your trading ability - you will invariably have serious regrets about losing money from trading at some point.


In our own collective trading activity, we have experienced all this and more. Many may not realise that trading isn't simply a numbers game; it's a mental game too. In fact, we dare say that the mental component is far more important than being able to execute a good trade, making crucial decisions in seconds, or being able to utilise both fundamental and technical analysis to make money. Because of this, our analysis, empirical research, and record-keeping go way beyond trading itself. We also extensively look into the mental components.


Without the right mind, and the right mindset, you cannot trade. If you do, prepare to lose money, and to keep losing money.


We have delved into the experience of losing a major sum of money before - well into five figures -  here we will elaborate on the different types of regrets caused by trading that you will encounter, as well as how to overcome them.


The only way to make profits in the tens of thousands is to be able to handle losing money in the tens of thousands; and we speak from experience, as always.


100 KINDS OF REGRET 


This may not come as a complete surprise to you : some regrets are more long lasting than others. In other words, they hurt more. Everyone knows that bouncing back from a bad trade and persevering are key traits for a successful investor. But not many focus on the hows of bouncing back.


Bouncing back always involves feeling miserable outdoors when the sun sets.

Through our observations and painstaking research we attempt to 'rank' the types of trading setback via three main parameters - how it impacts our subsequent trading activity, the time it took to mentally get over the setback, and the time it took to make a subsequent profitable trade.


Our small sample is composed of several individual traders who are part of the team and outside acquaintances; rest assured that we are no pros and are idiots in our own charming ways. The trades in question are fairly sizeable, with profit-and-loss potentials ranging from a few hundred ringgit to a maximum of RM30,000 on a per trade basis.


Percentage means the value of the stake at hand. For a position worth RM10,000 in stocks, a 10% hit means RM1,000. These are high-risk, high reward situations, mostly.


THE VERY WORST KIND


These are the hardest losses to get over. It makes you feel incredibly stupid and will make you question your abilities. If you want to make thousands in profits from short term trades, like we have repeatedly - successfully - demonstrated, you have to deal with these different types of regrets.

Paper profits. Read all about paper profits. Source.


1) Recording a 10% Loss After Experiencing a 10%+ Paper Profit in a Trade


This can be debilitating; it's not something you that you can shrug off easily. When this situation happens it probably means you've got your analysis spot on. Your execution, up to the point of those paper profits, was terrific as well.


But at this point you're likely in one of two situations; either you decided to 'play with the house money' and try to reach for 20%, 25%, 30% profits (meaning you're not satisfied with those 10% returns).


The second one is no better; you simply were too late to exit the position, even if you wanted to. Your sell order was not fulfilled in time. Maybe your paper profits lasted all but 10 minutes before the momentum reversed course.


Whatever situation you find yourself in, here's the worst part: when your position goes from 10% profits to nothing, most of us would be in a state of shock/denial. We let our losses run further.  In many cases, getting out at breakeven is not an option; our minds cling to the notion of heroically recouping those lost profits.


The end result of this? A huge loss in the end that finally forces us to sell the positions. In other words, shame is a powerful motivator to terrible decision making.


Lesson : Set plans and follow them religiously. Otherwise emotion takes over and you'll lose your money, and your head.



2) Recording a Steep Loss of Above 10% After the Position Initially Bounced From a 10% Loss to Breakeven (In Trading, the Opposite of Shame Is Greed)


This is slightly different but the themes are similar to (1). Instead of the 10% gains we envisioned, we ended up with a 10% paper loss instead. But we felt this is temporary; indeed, in subsequent days the stock suddenly recovered to near breakeven.  However, we failed to take this as an exit trigger. Again, our 'heroic' mindset compels us to hold on and hope the stock finally rises to that 10% we initially planned for.

 A visual representation.


Here's where the flaws in this plan emerge:

- The stock could be exhibiting a temporary rebound on its way to the bottom. Hence, the move from a 10% loss to breakeven is as good as it can get.

- When a stock moves like this, other investors will be highly inclined to take advantage of this temporary situation. Perhaps they will sell their holdings at this point heavily, thus creating a strong resistance point.

- Even if the stock moves from negative 10% losses to positive 10% gains, there is a high likelihood the stock is exhibiting greater (and thus far riskier) level of volatility than expected. This means that any trading strategy is not constrained by short term fluctuations, there may also be no credible strategy at all (when volatility is too high, there is no room for an actual trading plan; any profit and loss could simply be down to chance).


Lesson : Work on minimizing losses, not on turning a 10% loss into a 10% gain. This is mostly wishful thinking and has little to do with the trading plan. Without a concrete plan, it means there is only money to be lost, not made.



3) Losing 10%, or Thousands of Ringgit, in Mere Hours


This is also an ego killer; we thought we were so clever, only to be proven so spectacularly and so quickly wrong. In trading, there is no way around this; you will make stupid mistakes. When something goes really badly, don't focus on the uncontrollable factors in the market. Focus on the flaws in your own thinking, and your rationale with trading this stock in the first place.


Lesson: When encountering huge trading losses, focus on self reflection. Take note of the mistakes, and take actual notes. There's a lot of trial and error involved; we literally take note of all our mistakes in the hope of not repeating them again.



4) Selling Your Positions at Breakeven, or a Small Loss, JUST BEFORE the Stock Rallies by 10-20% - Right Stock, Right Analysis, Wrong Execution


Have you ever bought a stock, only to exit early and miss out on the profits? We have, and we have missed out on tens of thousands in profits, many times. This mistake is in having the right analysis but poor execution, for whatever reason. Worse still, we end up thinking about the money (profits) that we were never able to claim, thinking that we're rightly entitled to those profits. And of course, we end up feeling horrible as the stock keeps rising over the next few days/weeks/months. We were so chastened by the experience that we dare not enter a trade at a higher price, thinking that the stock would finally fall; to be honest, we're desperate to see other investors in the market lose money too.


Lesson : You can't lose what you never had. Don't take things too personally. This also happens from time to time. Wallowing over mistakes like this could hinder you from finding that next big trading opportunity, so don't overdo it.



THE LONG TERM THREATS TO YOUR MENTAL STABILITY



5) Repeated Instances of (4) - You Can't Catch a Break


6) Repeated Instances of (1), (2), or (3) - You're Clearly Losing Your Mind Now


7) Repeated Instances of Being Late to a Trade - These Are the Stocks You've Been Watching Forever


These are all related to streak. The human mind is hardwired to think about winning streaks and losing streaks. But these thoughts are not helpful if you're trying to form a rational judgment. In so-called bad streaks, your thought is framed around your previous successive failures; how effective are you going to be as a trader if you do that?


Lesson : Thinking in terms of streaks will always lead to poor decisions. Especially so when you're on a winning streak; trust us on this.


(Editor's Note : If you're accustomed to thinking of streaks and also thinking of trading as similar to gambling, then by all means go ahead and blame the universe for your own irresponsible failures. We're sure you'd be far happier losing money at casinos than in the market)


8) You're Unable to Find Good Investment/Trading Opportunities, and it's Been Six Weeks!


9) Pressure to Perform - It's Been Six Weeks; Go Make Some Money


This is when your short term mindset takes over everything else. In other words, you're losing a sense of context. As time goes by, you'll become more inclined to make rash decisions for the sake of making a quick buck. Even worse, you're inclined to do something, anything, for the sake of doing. Humans are predisposed to act, thinking that by taking action they're making a positive contribution to the world.


Lesson : Learn to be patient. Sometimes, the best thing to do is nothing, especially in the context of trading. It's not about how it's been or how long it takes. It's about only acting when the right opportunity presents itself.



THE NOT-SO-BAD ONES


10) Exiting a Position at Breakeven After Recording a 10% Paper Gain - You Lost Your Chance at Profits


Again, we have to emphasise; it's difficult to exit trades at breakeven point, when we have our capital intact (except minus some broker fees). Maybe it's just us, or maybe it's the human psyche. It's hard to go from 100 to 0 and leave it at that (Editor's Note : If you're a race car driver, you will relate). We have a desire to always be at the thick of things. Sometimes we (misguidedly) look for excitement when trading; we can't help but feel this sometimes, of course.


Lesson: You shouldn't redeem your lost paper profits with huge doses of regret. What's the point? Again, you can't lose what you never had.


11) Losing Money From a Stock Despite Its Peers Gaining Money - You bought SUPERMAX But It Fell; Instead, HARTA and TOPGLOV Rallied Like Crazy


This is one of the best 'mistakes' you can make. It immediately tells you something about the market, or the sector, or the stock, or your pick relative to its peers. Perhaps one company is better diversified than the other. Perhaps one company is simply more efficient and generates better margins and cash flow (if we worship anything in the markets, it's these two things). The point is, when the stock performs worse relative to its peers, it will immediately shed some light on how the stock is being perceived by the market. The clue is there; you just have to figure it out.


 A relative comparison of the performances of the big glove stocks. What do you see?


Lesson: Don't be lazy. Do some further homework. And sell that stock if it doesn't fit your time frame. It is certainly possible that the stock may also be an undervalued laggard...


12) Being Overly Conservative due to a Bad Market - You Repeatedly Miss Out on Good Trades that You Have Identified


This is a no-brainer; we used to feel bad about this, but nowadays we believe this is just good old fashioned conservatism. We prefer to maintain our capital instead of slowly losing them from a series of bad trades. A bad market exacerbates bad trades, and bad decisions leading to them.


Lesson: When it comes to capital preservation, there is no such thing as 'overly conservative'. When you're managing your own money, you're only answerable to yourself. A bad market may be signaling a simple fact to you: there is nothing good to trade right now, so just don't.




HAVE SOME MORE CONTEXT : FIVE YEARS LATER


A bit of input from our team members who have survived for at least five years of trading.


You will make a lot of money and you will lose a lot of money too sometimes. But at the end of the day it's just money. Do whatever works for you, but you can't risk your life or livelihood with your money from trading. Make enough money for it to be meaningful to your lives; otherwise don't waste time. We trade to make 15-20% gains per annum, and these are without question higher risk trades. If you aim for 3-5% gain, just don't trade; throw it into ASB, unit trust, or fixed deposit instead.


One day you will get to a point where you will never lose any sleep from trading, even after losing RM10,000 on that day. Sanity, stability, and happiness are the most important things. If you let your trading losses interfere with your mental state or lifestyle, you have failed as a trader. Be grateful for good health, family, and whatever it is you have to be grateful for.


And when you do nail that trade and make RM20,000, or five times that, don't think of yourself as a genius. Take five minutes, be grateful, or happy, but move on. Same goes for losses of the same amount. Take some time, but do move on. Losing money won't kill you, but losing your mind just might. 


If you get to a point where you feel exhausted and clueless about trading, just stop. Take a month off. Go on a holiday. Or read a book or two about trading, or finance, or something non-finance related. Only come back when you're ready to trade and when you have some good ideas. Overdoing things and unnecessarily doing things will lose you a lot of money. Learn about restraint; it's among the hardest things to acquire.


 A visual representation of what happens when you overcome your post-trading regrets.





















Sunday, 16 September 2018

DOES TECHNICAL ANALYSIS WORK? WE PUT IT TO THE TEST WITH SKPRES

We recently received a lot of queries on how to use technical analysis for trading. They range from the mundane - figuring out double bottoms and dojis - to the exotic - figuring out if the tides and moon phases mean that it's now time to buy a million MYEG shares (OK, we exaggerated a bit, but you get the point).


We're completely fine if you stop reading this post now; this sums it up. Source.


We have some strong opinions about technical analysis and the practice of charting in general, but bear in mind where we are coming from. Think of our philosophy as more myopic - it's from the perspective of a trading team that has done the following over the past year:


1) Conducted at least 100 trades, with different thematics, and different profit targets.

2) Realised the occasional five figure profits on a trade, and the occasional five figure losses.

3) Conducted sizeable trades, with total turnover of stocks worth at least several million ringgit a month.

4) Concentration on price and volume activity, over all other indicators.

5) Substantial exposure in high volatility situations, and sentiment based trades, which we consider to be our key competitive advantage.


Our readers and Twitter followers tend to ask us this : what's the best indicator for trading the kind of stuff that we usually go into? (Editor's note : we had usually gone into (4) and (5) in recent months. We are wary of long term positions right now because of the jittery broader market).


The answer may surprise you: we don't use technical analysis at all - at least not the fancy indicators and wacky terms. We can tell you now that things such as RSI and moving averages are completely useless. And we largely agree with this guy who says that technical analysis to trading is what astrology is to science.


But we do utilise their applications in our beliefs and understanding of market psychology. In other words, we don't use TA but we absolutely believe that most investors put a lot of faith in them. This helps us in anticipating possible entry and exit points; we always try to wrap up our trade before the rest of the market does, even if it means losing out on larger profits as you will see.


We will demonstrate the shortcomings and advantages of TA using a recent trade. But we're not trying to repudiate an entire school of thought and legions of technical analysts who work full time at banks. We're just saying that this approach does not work for us; we've been researching this extensively over the past 5-6 years and we concluded that our way is better for our own style of trading.


But first, a little rant about TA and why it's bad for you and your wallet.


BETTER TO LOSE RM1,000 FROM TRADING THAN PAYING THE SAME AMOUNT TO ATTEND A COURSE


In this country, we are saddened to note that most thought leaders and seminar speakers tend to preach what they claim to practice, instead of the other way around. The easy money is not made by trading, or putting their money where their mouth is, but by charging for overpriced 'introductory' courses on stocks, as well as technical analysis.


We have heard from a large number of people who paid RM5,000 and above to attend a weekend course on what was purportedly called 'the basics of technical analysis'. They later found out that the same information can be gleamed from books on technical analysis costing RM50 or less. Even worse, some courses go to great lengths to promise instant profits, an exponential increase of your capital at low risk, and worst of all, explicit tips to buy lousy penny stock companies.


(Editor's note : this is why this blog will never try to market our expertise or charge fees to get special access, whatever that means. We do not run a syndicate or try to influence people by front running them in Whatsapp/Telegram chat groups. Some blogs do these things, so be very cautious. We're OK with making money from our trades alone - practising what we preach - and sharing our knowledge here, free of charge, because we love you.)


 Some seminars can make a monkey out of investors. Source.


Let us put it this way:


1) If the technical analysts were so good, they would have traded on their own ideas and make hundreds of millions of dollars as money managers, not by peddling seminars and getting people's hard earned money as fees.


2) There is no such thing as instant profits or an immediate multiplication of your capital right after you attend such seminars. But we see this being promised all the time.


3) Don't believe the grand claims made by these people ('I predicted the 2008 crisis', 'I bought gold at USD100 per ounce', 'I bought Bitcoin at 15 cents') unless they have direct proof, and the wealth to show for it. The last thing they need to do is conduct pricey seminars to pay the bills, unless they're full of shit, of course.


What we recommend instead:

Don't judge a book by its cover; we think it has a dumb title, but the content got us hooked. We would not be any good at trading if we hadn't read this. Link to buy.


1) Buy a couple of books on technical analysis and use Google for everything else. We dare say that you will get results that are better than if you had paid thousands of ringgit to attend a seminar.


2) Test out your own set of beliefs, using your own money, at your own discretion. If you're into TA, find an indicator that works for you. Don't be afraid to make mistakes and lose money. Proper trading and risk management comes from real life trading and from making mistakes, not from a weekend seminar. We also have to note that paper trading and virtual trading can only go so far; you have to learn how to actually trade and lose real money, and develop from there.


3) Never, ever, take stock tips. Always do your own analysis. If you take 30 minutes of each day to focus on trading, each week you would've done 3.5 hours of solid homework. You can get ideas everywhere - hopefully by reading this blog, too - to start with. Did you know that in this country (Malaysia) we are blessed with easy access to all sorts of stock research reports at no cost?


4) Attend free seminars instead, such as the ones organised by Bursa Malaysia and many investment banks from time to time. You may be strong-armed into opening a trading account, but that's nothing compared to reminiscing over that RM5,000 that you just wasted on seminars.


We're not anti-learning, but we are against unscrupulous operators who charge people hefty fees for information that is about a hundred times cheaper. Especially those who prey on people's hopes and expectations of easy riches.


Now on to our second sort-of rant.


TECHNICAL ANALYSIS WILL ALWAYS BE IMPERFECT


In the past, we admit that we too have been avowedly anti-TA. We used to completely reject the notion of using past performance to determine the future outcome of stock prices. We were also mildly amused by the colourful terms associated with chart patterns and candlesticks - we still are, actually. Do let us know if 'Abandoned Baby' has helped you reap tens of thousands in profits.




And yet, we have encountered situations where an understanding of technical analysis, in relation to market psychology, has helped us greatly in our trades. We do obsessively look at price charts, probably like most of you, but we don't assign any significance to most indicators, except for a couple. We will share them here.


Note that our findings have helped our own trading activity. We only speak from experience and our own painstaking research. Like everyone else, we really wanted to gauge the effectiveness of TA, but our philosophy is based on what works for us. We've looked at TA applications in more than 400 trades that we've executed - sometimes they work, sometimes not.


Our personal viewpoint is this : TA is important, but not as important as most people think. Our focus on TA is the chart and what it represents, not the silly terms and indicators. We value risk management and trade execution as far more important considerations in trading. TA is also a real time visual representation of market psychology, and this finding alone has helped us derive large profits. Ignoring tTA has also cost us greatly past trades as we did not react fast enough to save ourselves from steep losses.


If anything, we urge people to learn TA as a tool, not as gospel. It helps greatly in understanding charts and price movements. It can never be relied on as a 100% surefire money making tool, but the reality is that most investors still see it as such. Most importantly, please don't pay stupid sums of money to learn this.


 THE SKPRES TRADE : WHERE TECHNICAL ANALYSIS WOULD HAVE HELPED


We love to trade the stocks of fantastic companies that are hitting new lows. We have made up our mind up about SKP Resources a long time ago (Editor's Note : we stand by our analysis but remain horrified at the same time), and we do not fundamentally see it as a loser. But the market currently does, hence this year's long term decline.


We were wrong about the stock's near term price potential, but we still see is as a fundamental winner. The market reacted badly to expectations of lower profits and lower margins on a quarter-to-quarter basis, but ironically, for a team of traders with a short-termist philosophy, we see SKPRES as a long term winner.


We do not care if the profit margin falls slightly from 10% to 8% q-o-q; if we see profit-beating margins and a sector leader, with a proven business growth trajectory, low debts, and great cash flow, any stock price decline is a buying opportunity for us. SKPRES is one of those companies.


[Editor's note : there are loss making companies that have held up better than fundamentally solid ones this year. It underscores our concerns about the current disparity between value and sentiment, and how we might be facing the next stock market apocalypse soon ;) ]


At the same time, it is also possible to utilise a short term trading viewpoint to express our long term views. Let's look at a recent trade on SKPRES, our thematics, and the relevance of TA in the process.



 Our trading period for SKPRES. (It's a contra trade)


SKPRES has lost half its value in market capitalisation since the beginning of the year - again, we can name lousy, loss making companies that have not experienced this - even though it's still showcasing steady profits, if not consistent profit growth. We have to note that earnings from contract manufacturing orders tend to be lumpy at times, so it's unrealistic to expect constant earnings growth. 


After a recent, particularly bad run of price declines, we found that the stock offers attractive short term rebound prospects - we've done similar trades before, so our conviction was somewhat strong. We spent a few days just looking at the price decline - they were rapid and occurred at low liquidity, amplifying the stock's fall. We sensed signs of desperation somewhere; perhaps a large shareholder was trying to dump the stock quickly at all costs.


SUPPORT POINT


So one day the stock hit below RM1.20, signifying what is known in TA as a 'double bottom'. Simply put, it's the lowest point the stock has been for a long time. A double bottom is (supposed to be) a strong price point. A trader who uses TA may be inclined to load up on the stock at that price point, in anticipation of a brief but potentially highly lucrative rebound.


That's pretty much exactly what we did; we used TA, but in the context of how the market will perceive the stock. We loaded up on the stock at RM1.18, RM1.19, and RM1.20 at first. We bought more at RM1.22 and RM1.23 as it began meeting our expectations of a short term price recovery.


SKPRES 19-month daily price chart. Notice the Double Bottom, indicating that RM1.20 is as good an entry point as any.


 RESISTANCE POINT 


Our holdings, at an average price of RM1.21, went up to RM1.25 within the contra period. At this point we stood to gain RM5,750, or a 3% gain; a fantastic return for a 'no-money-down' trade. But we were actually aiming for the RM1.30 mark, which would by now be seen as the 'resistance point'.


Ideally, we'd have liked to sell as the market begins pushing up the price. We had hoped to sell at the RM1.28-RM1.29 mark, just before buying sentiment peaks at RM1.30. Resistance points are exactly that; heavy selling pressure is expected at that price point due to the recent price weakness, as well as from short term traders that are eager to sell (people like us).


We thought long and hard about holding on to this position until it hits RM1.29, which would have netted us an additional RM5,000 or so in profits. But we decided to sell at RM1.25 and exit the position.


MOMENTUM INDICATOR 


For us, charts are just visual representations of things we prioritise the most; price and volume activity. We dictate our entry points, exit points, profit targets, and stop-loss thresholds.


Our exit at RM1.25 on 3 September signified a somewhat conservative approach when we could have alternatively decided to ramp up the position. At this point, the contra angle no longer applies since our expectations of momentum have been met.


When SKPRES hit RM1.25 we were presented with two options:


1) Sell the entire position and lock in a 3% gain.

2) Keep the existing position and risk some downside volatility with a RM1.29 profit target price.


We also had another option that is far more aggressive: keep the entire position and double the amount of stocks held by buying as much as we can at RM1.25. If we commit to this, we have to be willing to lose that entire RM5,750 in profits if the trade went south. But the upside potential made it an appealing proposition; we stood to gain as much as RM11,000 if the stock hits RM1.29.


You may ask: how or why would we decide to buy so much at RM1.25? This is because we had set an expectation even before entering this trade. Think of it as part of a decision tree, or one of those [either/or] commands in computer programming:


RULE X : If SKPRES hits RM1.25 within the contra period, there is a high likelihood of the stock advancing all the way to RM1.30 and above in the subsequent few days. If this happens, sell at RM1.29 just to be safe.


We decided against doing this due to the negative broader market. A high risk, high reward momentum trade is more palatable when the broader market is also positive; the broader positive sentiment tends to ignite more enthusiastic trading activity. This particular period wasn't one of those days.


There were elements of technical analysis that we depended upon, and in this instance everything went well. The technicals supported our view of the stock, and we missed out on more profits.


It turned out that RULE X was worth its weight in gold; SKPRES hit RM1.25 within the contra period, and the stock advanced to RM1.30 in the subsequent days. In fact, it went all the way to RM1.34, proving that we underestimated the momentum.




We are pleased either way. It's not the eventual profits that matter the most to us; it's the execution as well as the information derived from the whole process. We identified a stock and indicators that are useful for making money. The next time we encounter a similar situation we hope to be better in our execution, and we will not discount the value of TA.














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