This is my trading journal that I wrote last year, that reflect my psychology after a devastating loss because of my “overconfidence” and inability to be flexible. Since we are approaching November, which is the worst month of the year for Indonesian Equity, I hope this post can help me (or if anybody read this.. us) reflect and do better in our judgement and execution, so we can avoid the trap and the losses
11th August 2015
Since the beginning of June, my portfolio have been sliding significantly downward, and it concerns me because the strategy that I employ so successfully prior year, which net me a hundrend percent plus returns are not working these months, and it backfired on me, and worst of all, I lost all my senses of emotional discipline that I use to value, and that is the cardinal sin of all trading: to let emotion controls the decision making, which kept me from cutting the losses and give way to hoping that it might bounce back, of which it goes straight down day after day
I made some research and observations on the current condition, and this is my personal take on the situation:
- ONLY USE THE OBB STRATEGY WHEN THE MARKET IS SIDEWAYS OR UPTREND
The reason of this rule is that when the market is going downward, that usually means funds are outflowing the market, and there’s simply no much demand for the particular stocks, and it is really risky because the bounce might be so little that we cant even make a decent profit out of it while the risk is enormous! One very big flaw of the OBB Strategy is that it doesnt include when to stop the bleeding, because it kept on averaging down until one minor rally then we gradually reduce the position, and one thing that I must remember is BIG POSITION IS TO HOLD SHORT TERM! IF IT GOES UP OR GOES DOWN, GET OUT AND DONT BE FUCKING GREEDY! Even if it just broke even, if we are holding large position, JUST GET OUT! We can still live and trade for another day, but if we are sucked in the downward spiral, we are losing big time. And good trader cant afford to lose big bucks. Stop the bleeding and continue to look for opportunity another day.
- ALWAYS PLAY A GOOD DEFENSE
Trader can’t get killed if they got a very solid defense, and only after they manage to survive, they can prosper. My fault at current market is a failure of conducting emotional control which resulting I bought heavily on stocks that are not performing well, might be because of overconfidence that the OBB Strategy has served me very well during sideways period, but the impact is severe because I am heavily exposed on down market and I dont know my stop loss point by using this strategy. So one of the wisdom of being a good trader is to KNOW WHAT STRATEGY TO APLLY ON WHAT TYPE OF MARKET. And if the strategy is out of sync with the market, the best thing to do is to play a good defense! Trade smaller, trade smaller, And avoid using margin.. if possible, dont use all the cash because the should be preserved for another battle.KEEP IT SIMPLE
Successful trading, in essence, is the same as successful diet. It is simple but people often complicate things. For successful diet, it is: eat less, exercise more. For successful trading it is: preserve the capital, play a good defense, look for consistency, and look for homerun when the time comes. But as simple as it may seem, this is not easy. In fact, this is hard as hell because we have to keep our emotional balance in check all the time.
- KEEP EMOTIONAL BALANCE IN CHECK
If the trade goes against us, and if we sense something is wrong about the movement of the stocks, and if we feel bad about the position, it is time to REDUCE the position to the level where we are more comfortable with. If we can not control our emotional balance, it might ruin our objectivity of analysis and decision making. Anyhow, the impact will be much worse than if we just reduce the position at the point where we feel uncomfortable with the position.PRESERVE CASH! TRADE ONLY WHEN THE ODDS ARE IN OUR FAVOUR
The early days when I start to use my OBB Strategy, that I always preserve cash and only use it when I see big opportunity, and if the stocks are not OBB, then I wont touch the margin and the stop loss would be tight. And by using this strategy, my portfolio grew significantly. One thing that makes me lose the momentum is when I fail to cut loss at the point where I shouldve cut, and I kept on waiting for the price to bounce back, of which it didnt and it really cost me a lot. So actually the message is the same, if uncomfortable, get out! Reduce the position on the way down, dont be stubborn, and dont be hopeful.
The problem nowadays is that when the market broke down, there are a lot of stocks that OBB, but the mind should be able to resist such temptation and know when NOT to use the strategy. If we use it, and it kept on moving against us, and there are lots of other stocks that OBB and the macro conditions are terrible, then its time to stay aside and hold cash.
- NOTICE THE CHANGE IN ECONOMIC CONDITION
On May, I’ve noticed the warning signs that the market would not be in a good shape, because crisis in several countries and domestically, our new government is a dissappointment, from new policies that lead to uncertainty economic climate, to their incapabiliy to spend the promised budget on time, and most importantly, the earning of companies is showing signs of slowing down, of which makes the market to slump down. But I also have to took the blame for my action because at the time, what I see is “opportunity” because a lot of stocks are OBB, which turns out to be a TRAP! I indiscriminately treat all OBB as the same, which is an ERROR IN A VERY EPIC SCALE! And now I learned my lesson that not all OBB are the same, and if we are wrong, just reduce and reduce and get out! Dont be stubborn to wait, because waiting is really expensive at this kind of market.
- DROP ON IDR, COMPANY EARNINGS DETERIORATION, AND UNSTABLE MACRO ECONOMY IS A BIG WARNING SIGNS
Actually this point is more or less alike with the point above, but since this is really important so I want to emphasize it again. If future earnings suddenly become uncertain and a lot of miss projection, added by unstable currency and macro economic, then that is the time to reduce reduce reduce and stop! If there are any tempting opportunity, be sure not to use MARGIN. Because from my experience, to time the market bottom during a down market is severely costly! So if I am tempted, then what I have to do is use a fraction of equity to buy, and if the price action isnt good, CUT LOSS AND DONT TRY TO AVERAGE DOWN! Remember: during a down market, average down is costly!
- THE DURATION OF DROP MATTERS
The larger the decline in a shorter term, the better opportunity it is, for instance if the stock decline 30% in 3 days while the previous earning trend is still upward, then it is the time to start buying. But if the decline has been steady for several weeks and it keep goes down steadily, then it is not a good opportunity to buy, and this could be a very dangerous trap!
- BE DISCIPLINE TO REDUCE IF EQUITY DRAWDOWN REACH 20%
Theoritically, people are not encouraged to do average down, and that averaging down is a very risky thing to do, especially in a downtrend market, which is true and is happening to me, but my personal strategy involves heavily on the act of average down, as I will pyramid it, to sell the margin position in the first rally. So what I need to do is to manage my loss if it goes really strongly against me and if my equity drawdown touch 20%, then I have to be super discipline to start reducing my position, remember: THIS IS A MUST! Because it happens over and over again to my portfolio, so I have to change my mindset about this. REDUCING MEANS TO FIGHT FOR ANOTHER DAY, DONT FORCE A TRADE, BECAUSE TRADING WITH IMBALANCE EMOTION IS REALLY REALLY COSTLY!
- AFTER A DRAWDOWN, DONT RUSH TO START AGAIN, GIVE TIME TO RELAX AND SEE THINGS OBJECTIVELY BEFORE ENTERING ANOTHER TRADE, AND KEEP THE TRADING SIZE SMALLER
My fault is also to rush again after I cut my losses, and want to “revenge” the market and take back the losses, but this is simply counter-productive, because if the drawdown reach 20% of the portfolio, it means my stock selection has been faulty, or the market condition is really bad. Of which I shouldn’t enter any more trade. This is the time to sit back and relax, and if I do have the urge to trade, TRADE SMALLER! This period is not the time to make money, it is time to build confidence.REMEMBER THE T+5 RULES
One of the advantage of this rules is that it gives us the objectivity to think clearly. If the position is against us, then it is the best time to execute this rules, because we might not be able to sell, then sometimes we must “force” the sale
I think this is my observations about things that is happening these couple of months. It is a very very expensive lesson indeed but I made a vow not to make any of these classic mistakes ever again, remember: BEING WRONG IS ACCEPTABLE, BUT STAYING WRONG IS NOT, Goodluck.
Thanks a million, this journal is written by traderology.wordpress.com