Let me premise this post by saying that losses are just a part of trading. Just like any business owner or entrepreneur, traders have expenses, and most frequently these come in the form of losses. Generally, we try to cut losses early and keep our expenses minimal, however no one is perfect and often times human nature gets the better of us. In these situations, the best thing we can do is take away a valuable lesson. While you can never take back the money you lost, you can take away a valuable lesson. People pay for education all of the time, and big losses can be one of the best ways to ingrain a trading rule in your mind.
My main takeaway from my recent loss on PBMD is this:
“When trading the front side of the move -- use NO size, have a plan to stop and always remember it';s better to be .10-.20 late than $1-2 too early.”
— Nathan Michaud (@InvestorsLive) May 20, 2015
The good news is that full time day traders can handle most of the hefty losses – they are small dent but nothing that can't be shaken off. These losses, while larger than normal, were a small percentage of their accumulated profits. For anyone who had a loss that was larger than a small percentage of their account, I hope this blog post sheds some light and ideas of the warnings signs, and other tidbits to help prevent it in the future. We’ve been fortunate enough to have a great trading year already. 2015 has been amazing! That being said, recent plays gave the false sense of confidence and hope that everyone would be saved. Each stock we've played recently (GEVO, PTBI, etc) ended up trading out okay, even if we were early on the short. PBMD caught everyone by surprise and went $2 bucks higher than anyone expected. Yesterday was a tough day for many. Forget me, losses are part of game that I’ve grown to accept. What sucks more is seeing guys you love to watch profit get cut up. It's been a good year so far and this was the first year I pulled away from my “slow and steady” approach and really started to make my trades work for me. It was a process, and there was definitely was some great wins. Of course, there were some sour losses but it's part of the game. I've learned a lot over the past year while changing my trading style and focusing on bigger picture.
Here’s my loss on PBMD from yesterday:
Yesterday, I feel like was the second coming of Christ - no one had seen a loss of this magnitude before from anyone. I regularly share my biggest losses because there's a lot to learn from them. They can always trace back to a broken rule - I'm human and it happens.
Risk management is the most important part of trading, as I mention EVERY day, in EVERY webinar and in EVERY educational product. I start in with a PLAN, set risk and SCALE into that winner. When I disregard this and scale into a trade BEFORE confirmation with SET RISK, I let my BIAS get the best of me.
There's NOTHING wrong with CONVICTION and a strong BIAS if proper risk management is taken. When risk management is neglected, that is a PROBLEM.
As I wrote in my post a few weeks ago trading is going to test you, make you re-think if you're cut out for it, likely make you fail at some stage and really question if it's even worth it.
“Why this stock? What the hell happened?”
Another Takeaway: Overconfidence
People got too biased too quickly. It's been a crazy year for a lot of traders, and many, young and old, are off to the best starts of the year. There really have not been many tests of "rules," which as allowed traders to get comfortable, too comfortable.
I saw many traders commit size too soon and, if you've never been in the situation yet, there will be a time when you are. Here's what happens - you start in, you think about 20 times to yourself "shit this looks like it might keep going," you get into a bit of denial and think, “eh, one more push then it'll settle back.” That’s when more stuff comes, sits back, you feel great, and then out of the blue BAM! .30-.50+ move puts you upside down, then another .30 to follow up and you're immediately in a situation where your challenged with the thought, “do I cover or do I try to make it work? Can I get out of it?” Realistically, you should have just covered when you second guessed yourself (yes, hindsight is easy -- but I'm just going over the warning signs to hopefully prevent it from happening to others).
I see many traders on Twitter say, "it was obvious." Yes, in hindsight it was! I get countless PMs all day saying, “Think it's a long here?” There are times I am just not comfortable buying a stock that could crack at any moment that has ran from .70 to $3 .. to $4 .. to $5 ... and buying a dip. In retrospect that would have worked, however this is not a strategy I like. I'd rather avoid the trade.
Stock Market is ALWAYS Right:
Some traders lost some serious amounts of money from I saw on Twitter. Many that lost a lot formed a bias in the high $1.8x-2.3x's and tried to make their traders work for them.
We get trained by other stocks, such as GEVO, PTBI, and other recent runners. What do I mean? We get familiar with how these names trade - gap up parabolic, sit back ... wash out. Then we forget about it for a few days and look back in a week and it's even lower. This trains our brain to think, “hey, it may be up but it's likely to pull back within $X days.” Well, point A to point B doesn't always come without passing through a point that can take traders out of the game. Take DGLY LAKE and VLTC for example – these moves come in different shapes and sizes. We look at them and say "phew! Thank God I wasn't short" "Good thing I covered" and "I never want to be in that position!" Some times it's not always that easy to see and a crazy mover sneaks up on you.
Some traders had a very tough lesson yesterday. A few traders blew up their accounts, most just gave back some of their profits from prior days or months.
It sucks. There's nothing fun about it and, most importantly, I hate seeing traders I trade with daily hit a rough patch.
Most of the guys I know personally were off to a crazy start this year and really lost touch with reality and forgot about the value of a dollar. It just became numbers in accounts (which is the way trading SHOULD be) ,but the second you lose touch with the most important thing, RISK, that's when bad things happen.
It's not all rainbows and sunshine and most never think it can happen to them. It can.
To those on Twitter who poke fun of traders who have an awful day, shame on you. To those who say, "told you so" or "well you know, this was avoidable" blah blah, my response is when you can screen shot an account value that is at least 1/2 the value some traders lost and use your real name, sure then poke fun. Shit happens, everyone has been there and for people to make fun of losses is ridiculous.
To those who are on Twitter, if you are ever approached with negativity, I suggest to just block. I have zero tolerance policy - block and forget.
I've had a theory for quite some time that I’ll have to adjust my trading on as traders get better and better at shorting and better and better borrows, it's not just a layup like years past. You can't just short an over extended chart and be patient for the fade - markets change. Now, it seems like we have a big move, a nice fade, and trap for a few days followed by a gap up (trapping new shorts) and then major squeezes.
Does this have to do with the better availability of borrows now? Maybe. Newer traders getting into the market shorting because its "easy to borrow" and not really realizing the risk or how far these stocks can really go?
This isn't the first time it's happened, remember LAKE? APT? DGLY? And yes many more in the past! There is a cycle every few years and a handful of stocks catch traders by surprise. We had some warning shots starting with VLTC and then PTBI. Personally I had a close call on PTBI and was fortunate to minimize that loss on a pull back.
This happens and it's part of trading. It doesn't HAVE to be part of it, but no matter how careful you are there will be a time you get stuck in a halt, trade too aggressively or just make a dumb mistake. We are human. It happens. Don't try to say it doesn't.
Yesterday in chat, I warned against shorting this thing early - all first trades were scalps. I had a nice over night gain which gave me a false sense of confidence and made me think “ok, I nailed that, I can nail the next one” (false sense of confidence).
A few things stuck out to me, which I'm mad I didn't realize earlier:
1. After talking to Gregg last night he mentioned that PBMD traded all of Tuesday’s volume in the first 10 minutes. I knew this, I saw it, but it didn't click in my head THIS time as it usually does because I was set at finding the top.
2. Everyone was short biased and didn't think it could go higher just because it was a high float (Remember IBIO? That had a huge float too). I got too biased too early because I've been so good at riding these PTBI, VLTC and GENE breakouts LONG (I know, not a normal thing for me).
3. Stock was holding each level and NEVER broke trend. I've been getting much better at letting the stock exhaust and then slowly scaling in from there vs. trading front side of the move. Going back the past 2-3 years my biggest losses came from front side entries and one goal for 2015 was to get better at that - and I did, until today.
None of this is to say "I told you so." I lost as well.
I'm posting this to show:
1. The warnings signs were there 100% because I wrote about where they were soaking/holding, trapping, etc.
2. What happens when I break my rules, and how easily avoidable this loss was.
3. When I get the pull back, NOT capturing a loss that comes back into my "oh shit handle" number is a rule break in itself.
4. A stop should be a plan somewhere to be right or wrong, if you're wrong you stop out; if you're forced to stop that's where you run into issues. You shouldn't be forced to stop out - you should stop out because it is part of your plan.
I’ve gone through the chat logs for Tuesday and made notes of everything that led up to yesterday’s loss.
Investors Underground Chat Logs for Tuesday May, 20
[May 20, 2015 9:42:45 AM EDT] InvestorsLive PBMD any new traders (small accts etc — yes many SureTrader folks) please please please have a plan here just because its ETB doesn’t mean its a hold short
This is always my biggest fear - when new traders who are unfamiliar with shorts are presented with an "easy to borrow" name and they don't really "get it." So, I'm always first to warn these guys and say LEAVE IT ALONE (I do this regularly and repeat myself often).
[May 20, 2015 9:49:26 AM EDT] InvestorsLive PBMD I have zero interest in size until $3-3.20 or $2.50s over/under and fade
This was the two trade set ups I wanted to see - either a reactive trade through $3 + and sit back (scalp trade) or LEAVE it alone until the BACK SIDE of the move $2.50s over/under peak and fade. Keep in mind $3-3.20 + would be a parabolic type move I am looking for. If there is NO PARABOLIC and it just grinds, I have ZERO interest in the trade (typically).
[May 20, 2015 10:07:31 AM EDT] InvestorsLive can see on PBMD that $2.70 mentioned snap and reclaim — have plan if trading
The area of interest now became $2.70s as this was the "soak spot" and PBMD was holding this level very well and basically absorbing (supporting) everything that came into the bids. Again, a clear sign that this sucker meant business.
[May 20, 2015 10:25:25 AM EDT] InvestorsLive re: PBMD I have ZERO interest in ANY size unless $3 para or $2.70s over/under and peak
I did really well at staying out of size - I truly did. I was happy about this warning along the way, having no real bias at this point just knowing it was a nutty trade and I should not fight the name.
[May 20, 2015 10:29:14 AM EDT] InvestorsLive PBMD great guys – lock in along way until confirm 2.70s peak
[May 20, 2015 10:29:19 AM EDT] InvestorsLive can always add more as well once confirmed
[May 20, 2015 10:54:18 AM EDT] InvestorsLive PBMD gonna let it chill for a bit without adds (from the covers)
[May 20, 2015 10:54:34 AM EDT] InvestorsLive feels like it needs to just grind out a few times and prob just be an attention whore for a bit
[May 20, 2015 11:05:31 AM EDT] InvestorsLive done w/ all PBMD from $2.8x’s gonna re visit later after it settles
I got out. I did the right thing - done with trade before $3 break. No sense fighting it - proper risk proper plan STAYED SAFE.
[May 20, 2015 11:38:48 AM EDT] InvestorsLive hope everyone stayed safe especially those at smaller firms (just b/c ETB doesn't mean hold)
Warning to those with smaller accounts, STAY AWAY.
[May 20, 2015 11:40:17 AM EDT] InvestorsLive bidders coming to play on PBMD 100k etc
Fund money is still there, starting to flash major bids again to spark shorts/longs interest. Again, the fund is still there (I call it a fund b/c this was not a natural move).
[May 20, 2015 11:48:43 AM EDT] InvestorsLive PBMD has that feel where it needs one more punch imo — so if any size be very careful
Yep so why not get long? Why keep trying to find top?
[May 20, 2015 11:48:53 AM EDT] InvestorsLive looking to get a $4.20-4.205 punch for add
[May 20, 2015 11:48:58 AM EDT] InvestorsLive 4.20-4.50
[May 20, 2015 11:50:08 AM EDT] InvestorsLive .88-90 absorbing a lot which is why I am saying this
Tons of size being soaked up here.
[May 20, 2015 11:53:56 AM EDT] InvestorsLive I haven’t added to PBMD yet rather see it snap and then add pops later on vs. add and then get squeezed out into 4 the more it holds .80s more it can snap back
[May 20, 2015 11:57:04 AM EDT] InvestorsLive any NEW traders I’d stay far away PBMD until you see $3.70s peak a few times
Pull up the chart and look at $3.70s and see why this mattered -- this was a clue and re-tested twice and carried on to more highs.
[May 20, 2015 11:57:09 AM EDT] InvestorsLive same thing I’ve said just repeating
[May 20, 2015 12:04:20 PM EDT] InvestorsLive s/s 4.30
[May 20, 2015 12:04:30 PM EDT] InvestorsLive now in 2/5 size 4.18 avg
[May 20, 2015 12:04:33 PM EDT] InvestorsLive 4.08 *
[May 20, 2015 12:05:10 PM EDT] InvestorsLive using the SAME plan I wrote before I wanted $4.20-4.50s para — will remain small on way up then add if over/under $4
I wanted to stay SMALL until over/under and back side of the move -- this was plan only had 4k on the way up.
[May 20, 2015 12:14:33 PM EDT] InvestorsLive .38 avg will not add anymore unless $4.50 over/under holds — if .60s defend a few times will scale down — won’t use size on this as I’ve said so far wrong but cautiously shorting
I said I won't use size ...
[May 20, 2015 12:14:38 PM EDT] InvestorsLive if next dip holds they likely want to shove it into $5s
[May 20, 2015 12:17:36 PM EDT] InvestorsLive .60s soaked again on PBMD as you saw that is line in sand
[May 20, 2015 12:18:12 PM EDT] InvestorsLive covered the .65 adds
[May 20, 2015 12:18:30 PM EDT] InvestorsLive I think close but will let .60 snap first then re add- no reason to fight any size
[May 20, 2015 12:27:35 PM EDT] InvestorsLive s/s .28 PBMD again
[May 20, 2015 12:34:14 PM EDT] InvestorsLive did more size on PBMD this round using $5.50s as a guide covering all/any washes
I used size -- BROKE PLAN
[May 20, 2015 12:36:39 PM EDT] InvestorsLive 5.10s defending so far on pBMD
It was OBVIOUS that $5.10s were defending - when I size in, if something starts to grind and soak again, it's my rule to SIZE DOWN - BROKE MY RULE.
Had some other comments in between but not really making any points I wanted to on blog
[May 20, 2015 12:49:24 PM EDT] InvestorsLive likely won’t trade much more — bagging some PBMD hefty loss for me been a while since stubborn I was doing really well staying away until the last add thinking that was it — then didn't cover it all in time only partial
[May 20, 2015 12:49:38 PM EDT] InvestorsLive for the day — just b/c no reason to ‘try to make back’
[May 20, 2015 1:06:08 PM EDT] InvestorsLive when it snaps will be super fast and will aim to take loss into a wash — but the more that short into weakness the longer it's going to hang around
Plan was to cover on dips. I minimized this loss to $11K on the fade (and by minimize I mean I got a lucky pull back) but I didn't take it off! I have a rule that any time I get in a shitty situation, if it comes to my "Oh shit handle" spot of $10k to take it off and move on -- NOPE -- BROKE RULE.
Here is image of getting bailed out and not taking the $11k loss:
[May 20, 2015 2:06:57 PM EDT] InvestorsLive all done PBMD
[May 20, 2015 2:07:09 PM EDT] InvestorsLive gonna watch it rest of day — %%%%% trade avoidable but it happens part of trading
You never know what can happen until it happens, and this is why you need proper risk management. Nikkos had a rough day yesterday. He lost touch of what money really was (self-admitted) and trading became like a video game. I'm very familiar with how Nikko feels. I was 20-21, had nearly a million bucks, made some bad decisions and ended up losing money in trading (losses), business (promotional), legal fees, and other things at a VERY young age. I went from hero to zero, and if I didn't have the humble upbringing I did, I'm not sure how I would have handled it. As ass-backwards as this sounds, I am HAPPY that it happened to Nikkos NOW instead of later when he has a family, kids, and other debts that could be life crippling. This is the BEST time for things like this to happen - no debt, no responsibility but getting life lessons out of the way EARLY.
What's really upsetting is I literally JUST had a conversation about three weeks ago, urging a few of these great young traders to cool it (when starting out 50k size as a 'starter' at some point it'll catch up to them). I spoke to one of those traders last night and he even remembered the conversation telling him it's NOT a competition, don't let others influence you or those trying to get you to play bigger size, the warning signs were there and I just wish they were heard. Excessive risk with no proper plan. Losing touch with reality. This isn't salt in the wound, it's just reality. It was avoidable for most. As I said above - most of the guys could handle it - for me my first 'size' short wasn't until over $5 and tried to make everyone stay away I guess the most important thing is that no matter your conviction the stock market is always right.
As for the rest - those aspiring to be great traders, let this serve as a reminder that you're only one trade away. Take trading seriously, have a plan, and NEVER and I mean NEVER use leverage (margin) that goes beyond cash value on the same stock. Use leverage for OTHER opportunities (meaning different names to trade) but not to go 2-3 or 4x size in ONE name.