As you may have read in my “Me, Me, Me” page, I got started as an active trader by reading this book. And while it’s an amusing and interesting story, the ATA (Actual Trading Advice) is pretty slim. So it was something of a fluffy, puffy book for me.
Not satisfied, I went looking further. I was heading to Hawaii for a vacation – no, NOT earned with all my stock market winnings. I wanted some ebooks for the plane etc, and found a positive gem.
It’s called The Honest Guide to Stock Trading, by Llewelyn James. I got lucky with a really great book at the beginning of my journey, because there are some real dogs out there. Llewelyn does a really great job of explaining not just how to trade, but loss management, portfolio management, position-sizing etc. It’s like a shot of tequila…distilled down to its raw, unfiltered state.
I also like that he insists on testing everything. I’m a huge skeptic when I come across technical traders who read charts like tea leaves and horoscopes. “This one looks like a cup-and-saucer. This one looks like a double-bottom. This one looks like a girlfriend I had back in February of last year…” But not Llewelyn. He gets his robot-ninja chart-crunching software out and smacks the heck out of those charts, until money drips out.
But he’s very clear: the money drips and sometimes runs dry. It doesn’t pour out like some charlatans claim. In short, he speaks to my “prove it to me” nature.
Without hesitation I recommend his book. His other one is good too, but start here. Oh and he has a blog too (here).
As I was doing some deep research last night, I was reminded that everyone is out to make a buck/euro/yen. Nothing wrong with that. But there are a lot of trading scams aimed at the unwary. There are some honest-but-high-priced “systems” out there too, with claims ranging from unlikely to outlandish.
As a professional photographer by day, I’m all too familiar with people trying to sell me a system guaranteed to make me more money. One thing I learned early on though is to ask yourself a simple question: if these people are making tons of money with their systems, why are they wasting their time selling them to other people?
I think the exception might be the few – very few – people who are genuinely trying to help others learn trade more successfully. The same is true for authors who write about trading the markets. Ask yourself, why’d they write this book? Authors don’t usually make a lot of money, at least compared to successful traders.
If I had a brilliant system to make millions in the stock market, I’d either be too busy to sell it to others, or sunning myself on an island somewhere (thus still too busy to sell it to someone else). And if I did decide I wanted to share it, I wouldn’t want my get-rich-quick system to become general knowledge. The effectiveness would eventually disappear and I’d be forced to write books or something for a living. No, I would share it with a few friends or perhaps become a private mentor to a select few. But I wouldn’t sell it to the masses.
So next time you’re frustrated with your trading and want a quick way to start having success, look very hard at websites or people offering you an easy ride for a fee. The fact that they have to sell it makes you wonder how they really make their money. Which speaks directly to the effectiveness of their “system”.
In yesterday’s post, my INSY position had exceeded my profit target by a goodly amount, and I was trying to decide if I should sell according to the rules of the system I have in place. The stock is heavily shorted and looked to go higher on a “short squeeze”, so I thought I might be leaving money on the table if I sold.
So this morning I got up, and the bid/ask prices were well above my target price. So I put in a sell with a hard stop slightly over my target, at $45.98. The price briefly dipped below that and my shares were sold at market, or $45.78. Deducting commission I made over 15% on my trade, in 16 trading days. And it outperformed the S&P 500 by 17% during that time. A nice little swing trade.
I’ll revisit this trade in a month or so to see if the short squeeze played out, and if I should have taken a different approach to my stops.
Today was a particularly bubbly day for the S&P 500. My entire portfolio gained, except for one of the two stocks I bought this morning that slipped a tiny bit. And with all this activity comes a conundrum. Mind you, it’s a good one to have.
I bought Insys Therapeutics (INSY) November 28th, 2014. I got a signal from a technical system I was using for a swing trade. I did some further research and liked what I read about the company. I wasn’t looking for a long-term commitment, just a one-night stand (or a few days/weeks tops). My research confirmed it wasn’t a dog.
Except…after I bought it, I found out that there had been some pending FDA investigation against the company. And as a result, it was heavily shorted. In fact it was number 2 on the highest short percentage list at highshortinterest.com when I first looked. This was good and bad: bad because there was risk of doom and gloom, and lots of people who were willing to bet on the stock price falling. The good news is that there were SO MANY FRICKIN’ PEOPLE shorting the stock, it was ripe for a “short squeeze”.
What’s a Short Squeeze? It’s when short people…er, people who have shorted the stock…have the price move upward. They need to scramble to cover their losses before it goes higher, and so must buy back the stocks they borrowed. But with so many short people forced to buy long, and relatively few shares available, the buying-to-cover frenzy just drives the stock up more.
In my half-hour research this afternoon (yes, I’m THAT thorough), I found some examples of short squeezes that sent the price up 6 to 20 times ATR. What the hell is ATR? That’s a post for another day, but it’s a handy way to tailor your stop losses and profit targets to a particular stock.
Right now I’m up 18%, which is at right about 3 x ATR. There’s a somewhat conservative additional 15% to be had, maybe lots more. But my swing-trade system, which is freshly minted and brand new, says to sell the darn thing. What to do?
The downside is of course that in the next few days, the price could gap downward as the frenzy ends, and I’d be left with less that if I sold tomorrow morning. Then I’d feel stupid for breaking my own rules. None of the examples I looked at had any major gaps that ended the run up, just more of a decline as things cooled down. While I can see into the future, I can’t see past midnight so that’s no help.
One additional upside to selling: I’ll have some money to play with. Trading is fun, and sitting around watching stocks do nothing is NOT fun.
Break the rules, and pay the price? Or be flexible to increase return? History is written by the victors, and I am running out of cliches.
So I think what I’m going to do is get up at 6am PST (I normally get up then anyway, to get the kids ready for school). I’ll check the bid/ask numbers on this stock. If they’re considerably higher than today’s close, I’ll put in a hard stop at my profit target and ride the day out. If the stock doesn’t look likely to climb, I will sell at market when it opens. Stay tuned for more drama and excitement.