The Pain of Being Wrong

Yes, there is nothing wrong with being wrong; but I have not forgotten that it is actually quite painful if not uncomfortable to acknowledge to oneself of being wrong.   It sure took me a long time to “get used” to the pain of being wrong.  Because I’m now used to the pain, I don’t have any problem executing my fail-safe plan (stop losses or lock in profit after giving back a chunk or so) even though I feel the pain.

Unfortunately, our need to be right is somehow ingrained into our mind; it is as much as our ego is an integrated fabric of our consciousness.  Without our ego, will The Fly even care about setting up this site for us mortal to pontificate our thought?  Do we even care to share?  Will we even trade?

With ego, pain WILL be a part of being wrong.  Yes, mental pain.  The kind of pain there can bring tear to your eyes even in the absence of physical pain.  Yes, this is the wonder of our powerful mind; so deal with it.  So, what can we do with this pain of being wrong without the use of narcotic to dull it.   No, you are not permitted to use alcohol either.

What I found out in my journey of trading is that the best way to snip this mental pain right off with only a small “ouch!” exclaimed from your mouth is to acknowledge your being wrong as earliest as possible.  The big pain comes when you simmer on the being wrong for too long.   As each our mind can only tolerate so much pain; the longer you take to acknowledge your being wrong, the more painful it becomes.  Usually, at the end, it is our “fight or flight” survival instinct that kicked in to relieve our severe mental pain by capitulating at the end.  And as most may fear, our capitulating at maximum pain somehow have a 50/50 percentage chance of happening right at the bottom (or top if you are short) of the market.  Nevertheless, capitulation always provides a much needed relief from the pain that has been bottling up for too long.

Bottom line, learn to recognize and acknowledge your being wrong as soon as possible and then take the immediate step to remedy this wrong as soon as you can.  With practice, you may not feel much of a pain at all.  There will be occasion that you may exclaim an “ouch!” a little louder than normal; but it sure beats screaming in agony because you are dangerously reaching capitulating point.

You see, with our mental design that comes with our ego; mental pain is a fact of life when we are wrong, why not make a habit of snipping this pain right off your back by admitting to being wrong sooner before it becomes a painful boil in your mind?

In the world of trading, the most convenient and easier way to acknowledge and admit to being wrong is by the use of stop loss.   The additional benefit of using a stop loss is that the act of using a stop loss means you are entering into a trade with a plan.

Good Hunting!

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Let me start with some examples:

Example 1:

You followed your trading system, you took a long trade and was stopped out.  As it turned out, you were stopped out right at the bottom of the intra-day low (or daily chart if you preferred).  Price began to climb back up per your trading system original thesis which was to go long.

Bargaining:

“Sh*t! Stopped out at the low again!  I knew it!  Why did it have to happen to me!  Now the price is going back up; if I’m jumping back in, I’ve to pay higher price than I stopped out for.  Sh*t,  it just took out the yesterday high!  Damn, I can’t jump back in with this price!  It’s more expensive than when I first got in.”

Trading:

“Hooray!  My thesis (aka as trading system signal) is still on after all.  Price took out yesterday high!  There may be a chance I can make this trade work.  3x profit here we go!  [Click, click and click]  Just bought back some close to yesterday high.  I’m going to put a stop below today intra-day low (or day low if you preferred).  Now, let’s kick some ASS!”

 

Example 2

Price reached your profit target but reacted suddenly so you gave up a point.  Per your system, you should take your profit now.  Even though you gave back a point, you still made 5 points profit.

Bargaining:

“I want that point back!  I’m going to wait for price to go back up there before I take profit.”

Trading:

“Holy Smoke!  That was a sudden 1 point drop.  I’m getting the fuck out of here with my 5 points profit.  Adios!”

Example 3

Price reached to a point where you should be taking your loss.  You only have a mental stop because you didn’t put on a physical stop for whatever reason.

Bargaining:

“Holy shit! I’m not sure if I want to take my loss here.  I’m afraid I’ll be selling at the bottom.  Yesterday down day was already over-sold.  Fuck it, I’m not going to sell now and have to buy back at a much higher price later.”

Trading:

“The train stop here!  I’m putting a market order!  Come on… come on… get me fucking fill already!”

 

Example 4

This is actually a week later after example 3 above.  Prices were down all last week.  Per your trading system, you should have taken your loss last week based on example 3 above.

Bargaining:

“I’m fucking dead already!  What is the point in selling here now?  If I sell here,  I’m definitely selling at the bottom.  I’m going to wait for that Hail Mary piss on your face rally that is gonna get me back to the price I wanted.  Come on, give me your shit! I’m not afraid anymore.  I’ve resigned my fate to the stock god now. ”

Trading:

“What are you looking at me for?  What?  What did I do with the stock?  I don’t remember, didn’t I sell it last week already?”

 

The way I see it, we always carry our past with us in our head.  Because of all the history, we tend to compare our current action against the past.  Perhaps, in some perspective, it can be beneficial because it helps us to avoid repeating past mistakes.  On the same token, this “comparison” of the past can also hamper our trading success.  Perhaps due to our genetic programming or cultural upbringing, when $$ is involved, we start to compare prices.  And when we compare prices, we somehow automatically enter into a “bargaining” mode in our head.

For crying out loud!  Do you really want to bargain while trading?

Below is my take of unproductive thinking when trading:

– if I cut my loss now, I may end up paying more to get back in.  Definitely not as good a deal if I  hang on with my original entry price.

– I loathe to pay the the whip-saw prices for jumping in and out.

– I probably have to pay higher price to get on board.  Price hasn’t taken off yet but may soon be; but I think I can count on saving a few penny here to enter. (Meanwhile, you are completely obliviously to the dollar the trade can give you.)

Listen, in trading, getting a bargain is SECONDARY to survival!  When you bargain in the business world, you have the luxury of holding off your purchase until you negotiated a price which you think is a good bargain; but in the trading world where the health of your portfolio is hanging in balance based on the decision you make, sometimes your getting “pissed” at losing a bargain and trying to hold out for a better price can cause even more harm than good.   Not to mention that you are not cutting your losses quickly but also giving up great opportunity to lock in gain because you are trying to bargain for a good price.

“I refuse to get out until the bargain price I wanted come back!”

or

“I refuse to get in until the bargain price I wanted is filled!”

Good luck!  ’cause we don’t know if the bargain price you want will ever come back!

Now, tell me.  Are you trading or are you bargaining?

Good Hunting!

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With market sentimental change overnight, again, we are re-entering the dark zone.  What else can one do but to join the dark force to make a few penny.  Without fanfare, I am moving back into my other home where my SKF lives; together, we will go hunting for slim picking.  Along the way, we met our old friend SDS!  What’s a nice surprise!  The more the merrier!

Bought starter position in SKF and SDS this morning.  Reason for the trade: breakout of yesterday high.  I’m looking for higher high and a higher low for today bar.

As usual, while I don’t mind hanging out with my mistresses, I don’t trust them; for they are famous for stealing when I’m not looking.  Therefore, my stops are below the midpoint of yesterday bar.

Good Hunting!

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And this is the market truism I live by.  At least, it is my market truism.

With great eager, market walked down DDD and slapped me on the face this morning.  And what did you do when a 500 lbs gorilla slapped you?  You run away as fast as you can!  And so the market took back what I thought was a nice profit from yesterday run-up on my beloved DDD.  Did I just say “beloved”!  Holy Shit!  So that was what happened.  I was momentary in love with my DDD and forgot to lock in at least half of my profit by putting a stop at mid-point of yesterday bar.

Well, once the low of yesterday bar was taken out, the pain on my face became very real so I bailed.  If there is any candlestick bar I dislike the most when it is against me, it is the BAD ASS ENGULFMENT BAR.  When I see bar like this against my position, I run.  I will run like there is no tomorrow.

A lion share of yesterday profit of DDD was taken back by the market; just like that.

Market gives and market takes!

Sure, with hindsight, some of you might say that I bailed out too quickly.  You didn’t let the day to finish before calling it the Bearish Engulfment bar.  Well, excuse me.  It is exactly because I believe in the market truism (see subject heading) that I’m not going to “wait” for the market to take more than I was given.  In other words, market can take the paper profit that was given me; but I’m not going to let it takes my hard-earned cash that was converted from paper profit before.  Once I converted paper profit into cash; this cash belong to me.  And I will play defensive in anyway to protect my cash.

If I lost money due to stop losses; then that is my business expenses I’ve to pay out of my cash; but if you let a paper profit turn into loss (especially when it was a nice decent size profit), then you are killing your business.  It is akin to buying your customer a gold watch for stringing you along with the promise of a deal and then left you high and dry ’cause you were just being used to get a better deal from another seller.   Who does business like that?

Folks, hindsight sucks!  There is no need to wallow in our self-pity for not being able to call the top or bottom.   First, we are not blessed with the power of precognition; so why are we beating ourselves up after we close our position or miss an opportunity?  Is there an almighty being scolding you for not using the power of precognition that you possessed to make perfect market timing decision?

DDD is now up a point from where I sold and WPRT is up 2 points after I sold.  Big F**king Deal!  Yes, I was away from my desk so I didn’t have a chance to reconsider going back in like I normally will do.   But giving the way the market is behaving right now, I’m not going to buy back DDD or WPRT yet.

Btw, I missed the whole AAPL rise to the moon; so did I cry about it?  No.  Why?  ’cause I was never looking at AAPL at a trade.   So, why should I cry about the missing gain for DDD and WPRT when I was no longer in the trade?  Ok, maybe “cry” is too strong a word; how ’bout- why should I feel bad about missing the gain that I “could” have?

Did you see how ridiculous it is when you stop for a moment and think about this.  Say, you just open a broker account for the first time and is very eager to invest.  You look at all the charts of your favorite stocks you have been keeping an eyes on.  Obviously, there is a lot of charts with uptrend or downtrend and you are looking for an entry point to get in.

Wait!  Stop right there.  While you are looking for entry point, do you feel bad (if not crying) that you missed all the uptrend you saw on the chart?  No?  Why should you?  You just open your account!

Then why should you feel sad (if not crying) that you missed the trade based on hindsight after you got out?

The point I’m trying to say is that whatever decision you made at the time of the trade is based on information, the risk tolerance, and your mental condition at the time.  Once the decision is made, the whole trade is OVER.  The only thing left is a lesson to learn.  And the ONLY thing to do is to look what is in front of you; not behind you.  BE that guy who just open his broker account for the first time and look at the whole market with a fresh mind.

Am I off the tangent in my post here?  Nope!

Market gives and market takes.

Just remember this, the gains that you thought you missed by getting out too soon; the market could easily take back.  Just like my DDD paper profit.   Once you accept this truism, you will then be able to look at the market with a fresh mind every single time you close a position (with loss or gain).

Market gives and market takes, it is the cycle of life in the trading market.  Our job is to prevent the market from taking back too much.  And to do that, you have to play defensive even when you are on the offensive.

Despite my getting out too soon today, I’m still up 15% for the year.

Current cash position: back to 75%.

Good Hunting!

 

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Hey, I got stopped out of my SKF today and I’m feeling really good about it!  Why?  Take a look at the Bad Ass bearish engulfment bar below (at least the full body red bar contained the full body green bar from yesterday).

That look like a great force coming to stop this SKF from going further up.  It could mean the SKF run is over.  Meaning that there may not be a financial meltdown some of us are afraid of.  Meaning that the Euro-zone is going to find a solution instead of letting thing fall apart like some of us are postulating.  Enough of my wishful thinking and meaningless conjecture, let’s move on.

Well, when I see a bad ass bar telling me my run with SKF is over, it is naturally for me to start looking for something to go long.  As usual, I only trade my personal favorite.   I’m now long DDD, SSYS, EMAN, WPRT and some other exotic animals you probably don’t want to touch.

Basically, I’m now 40% cash.

Yes, you are correct, I’m crazy.  But in case you forget, this is just my “catching the falling knife play“; therefore, I have all my fail-safe protection in place in case I’m “wrong” which, again, happen all the times!  Hey, I was wrong on my SKF play from yesterday, remember?

Now I can my watch my monitors with renewed vigorousness.  It sure beats learning to catch a fly with my chopsticks! 🙂

Good Hunting!

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Jesse Livermore was famous ’cause he was the king of the trader back in his time and made millions; but at the same time, he also gave it all back.  Without doubt, his famous book, “Reminiscences of a Stock Operator” by Edwin Lefevre, contains treasure of trading wisdom which are timeless.  Nevertheless, the most important lesson I took to heart is from Chapter XII where he described how he gave back nine-tenths of his stake (in milions).  Here is an excerpt from the book:

“It seems incredible that knowing the game as well as I did and with an experience of twelve or fourteen years of speculating in stocks and commodities I did precisely the wrong thing.  The cotton showed me a loss and I kept it.  The wheat showed me a profit and I sold it out.  It was an utterly foolish play, but all I can say in extenuation is that it wasn’t really my deal, but Thomas’.  Of all speculative blunders there are few greater than trying to average a losing game.  My cotton deal proved it to the hilt a little later.  Always sell what shows you a loss and keep what shows you a profit.  That was so obviously the wise thing to do and was so well known to me that even now I marvel at myself for doing the reverse.”  (from Chapter XII)

In his defense, Jesse said he was the victim of a magnetic personality with a brilliant mind.  Somehow, he allowed his belief in someone else’s fundamental aspect of the cotton trade to supersede his intimate knowledge of the price action which was telling him that his timing was very wrong!  Yet he kept on averaging down!

The lesson I learned from this chapter is that you must always open to the idea of being wrong at any point in time during your trade.  There is no if or but.  The answer is very clearly displayed to you in the price action of the market.  If you don’t have a profit after you are in within a reasonable time, you are wrong!  Simple at that.

So, what is wrong with being wrong?  NOTHING!  If you are wrong, just admit it, close your position and move on.  It is only wrong if you refuse to admit that you are wrong.  Guess what, you can always go back in if market condition change and your stock begins to show sign of movement in the direction of your thesis.  It is just that at the time you took the trade earlier, the timing was wrong.   Like I said before, sometimes you can be lucky to defy your being wrong and get away with it; but in the long run, you will pay the ultimate price- a decimate to your portfolio.

Now you know why I sometimes acted kind of “jumpy” in my trades.  In and out, in and out, and in and out.  But overall, I make money.  Perhaps not a 10 baggers or a big-hit wonder; but enough for me to enjoy my time at the market.

You see, there is nothing wrong with being wrong.

Good Hunting!

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With such lofty valuation even after a heavy haircut from the last 2 weeks, I think FB is still over-price giving current economic environment.   FB already announced reduced revenues forecast right before IPO; now if we are heading toward another recession (or is it deflation?), where do you think the advertising dollars are going to go?

Google advertising business model is far superior than FB ’cause people who searched for items have high probability of buying the items they are searching for.  Meanwhile, ad popping on FB while people just wanted to chat with their buddies are annoying, especially when those ad is designed with attention grasping “LOOK AT ME!” graphic artworks.

With such poor fundamental support (my opinion), I don’t see any counter-force movement to stop this waterfall price-action any time soon.

Therefore, albeit a bit late, I’m shorting FB by buying the July 28 Put options.

In case I’m wrong (which happen often), I will close my put option if price action exceeds yesterday high.

Good Hunting!

 

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