Before we begin the discussion of ego and how we can make it work with us instead of against us, let me present a philosophical discussion by one of our deep thinker below regarding our mind:

What is mind?

Mind is not a thing, but an event. A thing has substance in it, an event is just a process. A thing is like a rock, and event is like a wave- it exists, but is not substantial. It is just the event between the wind and the ocean, a process, a phenomenon.

This is the first thing to be understood, that mind is a process like a wave or like a river, but it has no substance in it. If it has substance, then it cannot be dissolved. If it has no substance, it can disappear without leaving a single trace behind.

When a wave disappears into the ocean, what is left behind? Nothing, not even a trace. So those who have known, they say mind is like a bird flying into the sky- no footprints are left behind, not even a trace. The bird flies but leaves no path, no footprints.

The mind is just a process. In fact, mind doesn’t exist- only thoughts, thoughts moving so fast that you think and feel that something exists there in continuity. One thought comes, another thought comes, another, and they gone… the gap is so small you cannot see the interval between one thought and another. So two thoughts become joined, they become a continuity, and because of that continuity you think there is a mind.

There are thoughts- no “mind.” Just as there are electrons- no “matter.” Thought is the electron of the mind. Just like a crowd… a crowd exists in a sense, doesn’t exist in another. Only individuals exist, but many individuals together give the feeling as if they are one. A nation exists and exists not- only individuals are there. Individuals are the electrons of a nation, of a community, of a crowd.

Thought exist- mind doesn’t exist; mind is just the appearance. And when you look into the mind deeper, it disappears. Then there are thoughts, but when the “mind” has disappeared and only individual thoughts exist, many things are immediately solved. The first thing is that immediately you come to know that thoughts are like clouds- they come and go, and you are the sky. When there is no mind, immediately the perception comes that you are no longer involved in the thoughts- thoughts are there, passing through you like clouds passing through the sky, or the wind passing through the trees. Thoughts are passing through you , and they can pass because you are a vast emptiness. There is no hindrance, no obstacle. No wall exists to prevent them; you are not a walled phenomenon. Your sky is the infinitely open; thoughts come and go. And once you start feeling that thoughts come and go, and you are the watcher, the witness, the mastery of the mind is achieved.

Mind cannot be controlled in the ordinary sense. In the first place, because it is not, how can you control it? In the second place, who will control the mind? Because nobody exists beyond the mind- and when I say nobody exists, I mean that nobody exists beyond the mind, a nothingness. Who will control the mind? If somebody is controlling the mind, then it will only be only a part, a fragment of the mind controlling another fragment of the mind. That is what the ego is.

Mind cannot be controlled in that way. It is not, and there is nobody to control it. The inner emptiness can see but cannot control. It can look but cannot control- but the very look is the control, the very phenomenon of observation, of witnessing, becomes the mastery because the mind disappears.

Mind is nothing but the absence of your presence. When you sit silently, when you look deep into the mind, the mind simply disappears. Thoughts will remain, they are existential, but mind will not be found.

But when the mind is gone, then a second perception becomes possible: you can see that thoughts are not yours. Of course they come, and sometimes they rest a little while in you , and then they go. You may be a resting place, but they don’t originate in you. Have you ever noticed that not even a single thought has arisen out of you? Not a single thought has come through your being; they always come from the outside. They don’t belong to you- rootless, homeless, they hover. Sometimes they rest in you, that’s all, like a cloud resting on top of a hill. Then they will move on their own; you need not do anything. If you simply watch, control is attained.

The word control is not very good, because words cannot be very good. Words belong to the mind, to the world of thoughts. words cannot be very, very penetrating; they are shallow. The word “control” is not good because there is nobody to control and there is nobody to be controlled. But tentatively, it helps to understand a certain thing that happens: when you look deeply, mind is controlled- suddenly you have become the master. Thoughts are there, but they are no longer masters of you. They cannot do anything to you, they simply come and go; you remain untouched just like a lotus flower amidst rainfall. Drops of water fall on the petals but they go on slipping, they don’t even touch. The lotus remains untouched.

That’s why in the East the lotus became so significant, became so symbolic. The greatest symbol that has come out of the East is the lotus. It carries the whole meaning of the Eastern consciousness. It says, “Be like a lotus, that’s all. Remain untouched and you are in control. Remain untouched and you are the master.”

So from one standpoint, the mind is like waves- a disturbance. when the ocean is calm and quiet, undisturbed, the waves are not there. When the ocean is disturbed in a tide or strong wind, when tremendous waves arise and the whole surface is just a chaos, the mind from one standpoint exists. These are all metaphors just to help you to understand a certain quality inside, which cannot be said through words. These metaphors are poetic. If you try to understand them with sympathy, you will attain an understanding, but if you try to understand them logically, you will miss the point. They are metaphors.

Mind is a disturbance of consciousness, just as waves are a disturbance of the ocean. Something foreign has entered- the wind. Something from the outside has happened to the ocean, or to the consciousness- the wind, or the thoughts, and there is chaos. But the chaos is always on the surface. The waves are always on the surface. There are no waves in the depths- cannot be, because in the depths the wind cannot enter. So everything is just on the surface. If you move inward, control is attained. If you move inward from the surface you go to the center- suddenly, the surface may still be disturbed but you are not disturbed.

The whole of the science of meditation is nothing but centering, moving toward the center, getting rooted there, abiding there. And from there the whole perspective changes. Now the waves may still be there, but they don’t reach you. And now you can see they don’t belong to you, it is just a conflict on the surface with something foreign.

And from the center, when you look, by and by the conflict ceases. By and by you relax. By and by you accept that of course there is a strong wind and waves will arise, but you are not worried, and when you are not worried, even waves can be enjoyed. Nothing is wrong in them.

The problem arises when you are also on the surface. You are in a small boat on the surface, and a strong wind comes and it is high tide and the whole ocean goes mad- of course, you are worried, you are scared to death! You are in danger; any moment the waves can overturn your small boat; any moment death can occur. What can you do with your small boat? How can you control anything? If you start fighting with the waves, you will be defeated. Fight wont’ help; you will have to accept the waves. In fact, if you can accept the waves and let your boat, however small, move with them and not against them, then there is no danger. Waves are there; you simply allow. You simply allow yourself to move with them, not against them. You become part of them. Then tremendous happiness arises.

That is the whole art of surfing- moving with the waves, not against them. With them- so much so, that you are not different from them. Surfing can become a great meditation. It can give you glimpses of the inner because it is not a fight, it is a let-go. Once you know that, even waves can be enjoyed… and that can be known when you look at the whole phenomenon from the center.

Just as if you are a traveler in the forest and clouds have gathered, and there is much lightning, and you have lost the path and you are trying to hurry toward home. This is what is happening on the surface- a traveler lost, many clouds, much lightning; soon there will be a tremendous rain. You are seeking home, the safety of home- then suddenly you reach there. Now you sit inside, now you wait for the rains- now you can enjoy. Now the lightning has a beauty of its own. It was not so when you were outside, lost in the forest, but now, sitting inside the house, the whole phenomenon is tremendously beautiful. Now the rain comes and you enjoy. Now the lightning is there and you enjoy, and great thunder in the clouds, and you enjoy because now you are safe inside.

Once you reach the center, you start enjoying whatsoever happens on the surface. So the whole thing is not to fight on the surface, but rather slip into the center. Then there is mastery, and not a control that has been forced, a mastery that happens spontaneously when you are centered.

Centering in consciousness is the mastery of the mind.

So don’t try to “control the mind”- the language can mislead you. Nobody can control, and those who try to control will go mad; they will simply go neurotic, because trying to control the mind is nothing but a part of the mind trying to control another part of the mind.

Who are you, who is trying to control? You are also a wave- a religious wave of course, trying to control the mind. And there are irreligious waves- there is sex and there is anger and there is jealousy and possessiveness and hatred, and millions of irreligious waves. And then there are religious waves- meditation, love, compassion.But these are all on the surface, of the surface, and on the surface. Religious or irreligious makes no difference.

Real religion is at the center, and in the perspective that happens through the center. Sitting inside your home, you look at your own surface- everything changes because your perspective is new. Suddenly you are the master. In fact, you are so much in control that you can leave the surface uncontrolled. This is subtle- you are so in control, so rooted, not worried about the surface, that in fact you can enjoy the waves and the tides and the storm. It is beautiful, it gives energy, it gives a strength- there is nothing to be worried about it. Only weaklings worry about thoughts. Only weaklings worry about the mind. Stronger people simply absorb the whole, and they are richer for it. Stronger people simply never reject anything.

If you have read all the way here, I congratulate you.  You have the motivation and interest to learn.

If you’ve skipped the reading, either half-way or from the beginning, then you are impatient and is only looking for quick fix that interest you.  From my experience, you may not have the commitment to improve yourself in a way that you can master the skill you need to trade successfully.

If you’ve skipped the material above because you already know the material (either from a book you own or borrow), a big congratulation is in order.

Ok, so how is the above discussion of the mind help me with trading well?

Good question!

Remember the part about centering?  That where we all want to go as a trader.  When you are centered, you look out the window and you see all the volatile price action; so, instead of being in the middle of a storm where you will be subjected to all sort of emotional responses which can prevent you to make the right decision, you are in the perfect calm stage to make the right decision by getting out when you see price action is going against your entry point.  In other words, you will be in a state of mind that allows you to cut your losses quickly.

I will discuss more of how we can approach our center in the future “Where Ego Dares” series.  Yes, I borrow the title from the movie called “Where Eagles Dare” starring Richard Burton, Clint Eastwood.

And for those who are interested, the philosophical discussion of the mind is an excerpt from a book by Osho.

My 2 cents

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Before I tell you the secret to the Holy Grail trading system, let me tell you a story about my experience in learning kung fu when I was in high school.  There were quite a few bullies in my school and I wasn’t going to make it easy for anyone of them.

“There are only four basic movements I’m going to teach you,” said my teacher.  I was already depressed because four movements did not make an exciting repertoire here.  How am I going to impress my friends with only four movements here?  I was thinking to myself.

The four movements were deceptively simple.  You alternate the two attacking and two defending movements between your partner and yourself on a non-stop back and forth movements until the instructor tell you to stop.  To tell you the truth, it did get boring after awhile.  

“When am I going to learn the other variations besides these four movements?”  I kept asking the instructor.

“Don’t worry about the other stuffs, master these four movements first.”  was his reply every time.

“90% of the time, these four movements will get you out of the jam in any physical combat situation,” my instructor kept drumming it into my head.

But as I pushed through these weekly training, I began to realize the wisdom of the exercises.  My speed for the movements became faster and smoother.  One day, one of the bullies was trying to intimidate me by throwing me an air punch very close to my face; without thinking, one of my practiced movement came out to block the punch at the same time my body was already moving on to the next movement of attacking which caught him by surprise that he almost fell over backward.  It spooked the hell of the bully that he never ever wanted to get near me again.

My confidence shot up and I walked like I could take on any bully that came my way even though they were much bigger in size than I was.

In summary, by mastering these four simple movements, I became my own body guard.

Ok, great story, but what is the secret to the Holy Grail trading system?

Patience, grasshopper.

When you are your own body guard, your job is to observe and protect.  Thus, if you really know your stuff (like Bruce Lee), your experience and skill set, coupled with the powerful processing power inside your head, will turn you into an ultimate body guard that can defend yourself in any physical combat situation (that doesn’t involve gun, of course).  Your mind will size up the environment, the strengths and weaknesses of your attacker(s), and apply the proper fighting movements to counter the attack.  You become your own Holy Grail fighting machine.  Do you know Bruce Lee actually created his own fighting style?

Basically, my point is that the Holy Grail trading system is you.

To become the Holy Grail trading system, you need to master the basic movements of technical analysis in a manner of speaking.  Below are my personal take of the four technical tools/movements that we need to master:

1st movement: understanding price action.

2nd movement: understanding support and resistance

3rd movement: understanding moving averages

4th movement: understanding momentum indicators

1) Price action:

I prefer to use candlestick chart and all the candlestick patterns that have been identified by the Japanese for hundred of years.  Candlestick is just one of the price action tools, there are many other types available such as Heikin-Ashi, Three Line Break, point & figure, market profile, etc.

2) Support and resistance.

There are many way to look at resistance and support.  I like to use previous year, month, & daily high and low, pivot point calculation, high and low of historical valley and peak, high and low of consolidation areas, trend lines, and Fibonacci calculation.  I’m sure there are other ways to observe support and resistance that I’ve not mentioned here.

3) Moving averages

There are many variation of moving averages (ma) including those with offset.  I have tried ma offset (popular among Joe DiNapoli with his 3×3, Bill William’s alligator, etc) .  Offset or not, they all say the same thing, the less the number of days (or time units) you used to calculate moving average, the faster the line.  And the faster the line, the more cross you will see (either with another ma or price action)  But then the faster the line, the more whipsaw you will get if you take every signals.  And if you don’t take every signals, you will have to know which signals to choose from the multiple signals which is something you want to avoid.  Therefore, there is an optimal number for each one of you based on your personal preference and tolerance.  Personally, my choice of ma changes from time to time.

4) Momentum indicators

Momentum indicators tell you the strength of the current bull or bear.  By themselves, they do not tell you if the overall current trend is over or not.  It simply tells you that the bull may be getting tired or getting hyper.  The momentum indicator may also help you identify the development of peak and valley of an on going trend.  I like to use MACD and stochastics and I change the parameter on the indicators from time to time as well.

These four movements are my personal interpretation of what are important to me as a trader, it is not necessary the required movements to be successful.  Some greater trader may focus only on price action and nothing else.  Some may only use a few of the above.

I remember reading that the Grand Masters of Tai Chi Chuan was so powerful in their art that they were able to condense their skill to a few simple movements.  No matter how you attack them, all they did was to simply flip their hand, a simple shake of their body and you would end up flying across the room.  In the same token, a master trader can take one look at the chart (or the tape for those tape reading connoisseur) and know if the stock is a buy, a sell, or neutral and is correct 7/10 of the times.  They don’t even need to look at ma, indicators, etc. for these information are already absorbed in their observation of the chart.  In other words, just by looking at the chart, they know exactly where the ma line will be and where the level of momentum indicators are without having to see them visually.  Like a grand master chess player, he doesn’t need a chessboard to play chess, he can see all the possible moves and counter-moves all in their head.

If you’ve read “Reminiscences of a Stock Operator”, you know that Jesse Livermore could read the tape like a chess grandmaster read a chessboard.

Putting it all together

While there are many different styles of martial art; there are also many different variations and styles to each of the four type of trading tools discussed above.  We each have to find the style that match our personality.  How do you know which style best fits you?  The only way you will know is by trying out different technical tools you come upon until you find the ones you are comfortable with.  You will know which ones don’t fit you when you find yourself annoy by the indicators every times you open the chart.

Once you master the the technical tools mentioned above, that is when you come into the picture.  You are the quantum computer that will bring these four movements together and calculate the next action/decision to execute.  Your eyes, brain, mind, psyche, and your heart will process the data and alert you to a stock with a good risk/reward ratio.

I know some of you are keenly aware of this processing power because you’ve experienced it.  You saw the signal based on everything you learned.  You said to yourself, “price will take off from here“.  And Voila, price actually took off like you predicted.  Now, you might or might not have taken action based on this observation; but you know I’ve made my point here.

Here is a key reminder to this Holy Grail trading system- there is NO SHORTCUT.  Meaning you need to work very hard to achieve this.  If you think you can read a few books, watch a few video, spend little to zero time in reviewing the charts, and still become a Holy Grail trading system, forget it.  Working hard means you spend hours and hours going over the charts to see how price action interacts with the ma/indicator you are interested to become a master of.  You spend hours and hours of reading charts to see the relationship b/w price action, ma, indicators.  You raid the bookstores and libraries to find related subjects on the technical tools you are interested in; you also want to read up on the thought of other professional traders to see how they think.  You research for a software charting program/package that fit your needs so that you can practice, practice, and practice trading using the simulation module in your charting program during off-market hours. You document your progress by daily journal so you can become aware of your own strengths and weaknesses. You never stop learning from others because you are always interested in seeing things from a different perspective.  In fact, it becomes a continued education that you are never tired of.  In other words, trading successfully is your life goal.  It doesn’t matter how early or how late you start your trading endeavor, you need to make this your life goal.

For those of you who are/were doctors, lawyers, CPAs, and professional in all manner of occupation, you know what I’m talking about.  You need to put the kind of commitment to trading you’ve put into your career.  Do you know there are doctors out there who are successful traders?  They are successful because they’ve invested the kind of commitment to trading as they’ve done to being a doctor.

Having said all the above, there lies the ultimate obstacle to implementing your Holy Grail trading system successfully- your EGO.

Ego = greed = fear = I’m right and the market is wrong!

Eventually, Jesse Livermore, despite being a Grandmaster who possessed the ultimate quantum computer in tape reading in his head, were doomed by his ego.

So how do we deal with the ego?  It won’t be easy; why do you think the giant hedge fund invested so much into quantitative trading?  The way I see it, if we can put our own ego aside, there is no computer out there that can do a better job than the quantum computer inside our head.

The ego issue will have to be dealt with more posts in the future.

My 2 cents.

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How many of you bought $AAPL at $4xx.00 in Jan 2012, watched it climbed all the way to to $644 in three months. endured the correction to $522 in one month, cheered the resumption of the meteoric rise to $705 in four months, and then suffered the persistent and painful downdraft all the way back to $4xx?

I did not buy $AAPL so I missed the whole meteoric rise but I had witnessed a friend who did all the above.

“It is going to a $1,000!”

“But the market cap is north of half-a-trillion already!”

“Don’t matter, they are not making enough iPhone to supply the demand!”

“But the chart is heading south, why don’t you put a sell stop at $680 to lock in profit?”

“Hmm, I will think about it.  But I will sell some at $800 to lock in some profit.”

But the price never climbed back above $705 since then.  $AAPL began its descent week after week.

“Did you sell at $680?”

“No, I know $AAPL will go back up.  I’m afraid if I sell at $680, I will miss the bounce back to my $800 profit target.”

“But the price has been going down week after week and it doesn’t look like it is stabilizing yet.”

“Do you know that they cannot make enough iPhone to sell?  I hear of iPhone shortage everywhere.  Besides, if they nail the big China phone company, price will go back up to $1,000 in no time.  However, I won’t be greedy, I will sell at $800.”

“You do realize that for each week $AAPL drops in price, it will make it that much harder for you to sell for profit because you’ll be telling yourself you may be selling at the bottom, right?  Basically, you may freeze yourself up from selling if price continues to decline.”

“No worry, $AAPL is not going to go back to $400.  It is an opportunity to BUY!  If you do not have $AAPL share, this is YOUR opportunity to buy some now on the cheap!” He gave me that sly look as if he was letting me in on his special secret.

Needless to say, I’ve to witness my friend gives all his gain back to the market.  Since his average cost is around $4xx; he allows a phenomenal 75% gain evaporates in front of his eyes.

There was another case I witnessed that happened at the time when Linux was the talk of the town.  There was an IPO on a company that sell and support the use of Linux launching in a week.  My friend and I bought some shares of another company that also sell Linux OS in a disc.  I forgot the name of the company.  Anyway, when the IPO was launched, the company we bought did not move much even though the IPO was opened at $100+ on a $28.00 IPO price.  Seeing that there was no following the coattail with our stock, I took my profit and ran.  I also told my friend he should take profit as well.

“Did you take your profit?”

“Well, my hand was on the phone and I was about to dial my broker number; but I could not move.  I was sweating and it was as though another force was preventing me to call.  I could not go through with the phone call.  No, I did not sell yet.”

“Why don’t you try again tomorrow?  Watch the market open and sell if price begins to fall off.”

The next day came and I asked my friend if he had gotten out.

“I couldn’t get up in the morning to watch the market open.  Obviously, I missed the gap-up but the prices fell off afterward and is now down 7% for the day, so I don’t see the point of getting out now.  I think I will wait for it to go back up.  After all, Linux is the new wave.”

Price did not climb back up and eventually my friend had to give back 50% of the gain before he finally sold.

There was another case which I mentioned before in one of my Biotech posts.  After I sold my lot and locked in my 360% gain, I told my friend of the possible unreliable data being promoted on the web, he brushed me off and thought I was being too “weak”.  And to prove his point, he later told me he bought more at the high of the day (which happened to be the historical high of the stock).

Now, this friend was quite intelligent in his own right but he was ignoring all the red flags because he was too consumed by his greed on this particular biotech stock. He was like a different person when I talked to him.  He defended his stock like a star-crossed lover defending his/her loved one when others were trying to warn him/her of the “integrity” of the person he/she was loving.

Needless to day, he lost money on the stock instead of multiple gain he should be taking home with. He later confessed to me that he was already dreaming of an early retirement, planning for his world traveling, etc at the time I was alerting him of my sold-out position.

Such is the destructive power of Greed.

I was not immune to this emotional force as well.  I had my share of being possessed by greed and lost money as a result instead of a gain.  However, I also believe that if we don’t learn from our past mistakes, we are doomed to repeat them again and again.  Hence, instead of putting my past “possession by greed” experience in a far-away corner in the remote part of my brain, I put it on a pedestal in front of me to “remind” myself of the debilitating effect of greed.

This, from my experience, is the only way to control this monster.  As long as we are human, we are always one-step away from falling into the abyss of Greed and be possessed by it.  And once you have fallen, there is no exorcist around to help you escape.  And the only cure available is that the stock you are possessed by get bought out by another company and thus force the gigantic gain on you or that the stock actually reaches your lofty price target and you come to your sense to take it.   Sure, it can happen to you but you need to look at all the corpses around you who have tried the same thing but are not as lucky as you are.

Here is a litmus test to see if you are possessed by Greed:

Stock shoots up and begins to climb

“Ha! Ha! Ha!  It is going to the moon!” (you may be possessed)

“Wow! Go! Go!  Let me move my trailing stop just in case.”  (it’s ok to be excited since you are not a robot; however, you have a plan so you are not possessed)

Stock retraces by 50%

“I’m buying more!  What’s an opportunity! It is gong back up higher!” (you may be possessed)

“Sh*t! I’m going to watch the support, if it get taken out, I will sell some to lock in profit.” (you certainly have a right to be pissed off to see your gain drops by half; but you are not possessed since you have a plan to lock in some profit )

In summary, we have all been possessed by Greed at least once; therefore don’t put that experience away since we have paid dearly for it.  Instead, put it in front of you to remind you of this lesson.  Tell yourself you won’t repeat it again.

It is working for me and I believe it may work for you too if you can acknowledge the destructive power of Greed.

My 2 cents.

ps. Here is a classic example of controlling greed by The Fly himself:

The Fly loaded up on VHC because he had reason to believe it would go much higher; however, after seeing price action languished for too long when it should be going up, he decided to sell his positions in pieces until he sold his whole lot to lock in his gain.  Enough said.

 

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Some of you may wonder why I’m so stubborn on my $AMRN trade and have chosen to sit through an ugly downtrend instead of abiding by my own discipline of cutting my loss and buying them back cheap.

Well, there is a reason why I call this a “position trade” from the get go.  Remember, I made that decision at the time I decided to load up (averaging up) when I was still in-the-money on the trade.

From the past, I had made similar calls to some of the stocks I believed to be “game-changer” or “visionary” but without the kind of conviction I’ve right now with $AMRN; thus, I loaded up BIG but sold too soon and missed the whole “game-changer” and “visionary” uptrend because I was either too busy or waiting for a retracement that I forgot to follow-through.  So, this time, I said to myself, “I’m not going to make the same mistake with $AMRN.”

Below were the trades I left quite some money on the table:

1) Loaded up on $SNFT (before they changed their name to $NUAN) because I believed their voice recognition software was a key component of technology trend at the time.  My average price was around $3.xx and price gyrating between $2.xx and $7.xx for a long long time and it began to wear me out.  Finally price went back up to high $7 and I threw in the towel by selling all my shares at mid-$7 because I didn’t want to go through the pain of watching it falling back below $7 which I had witnessed so many times.  Price then proceeded to head higher after I sold.  I was too “yellow belly” to buy back at $8 because I didn’t want to give back my gain after a long-period of frustration.  $NUAN is now trading at $20.00.

2) Loaded up on $LNG when it was trading at $3.xx.  At the time, I believed in this stock and its fundamental so much that I literally had a large stake on this one.  I had about 13% of my portfolio betting on this stock and I told myself I would hold this one long-term.  Price shot up to $6 and promptly fell back to $4.  The volatility was insane!  Instead of sticking to my conviction, I sold out when price went back to $5.00 for a decent profit.  While price continued to spike up and down in great speed either way, I lost my appetite after swing-trading $LNG for some quick profit here and there.   $LNG is now trading at $26.00.

3) Loaded up on $BIDU when it was trading at $110.00 before the split.  It was during one of those anti-BIDU sentiment and $BIDU dropped in price from high $300.00 to low $100.00.  Because my conviction wasn’t there, I sold at $130.00 and forgot about the stock.  $BIDU is now trading at $86.12 after split (pre-split would be $861.20).

4) Loaded up on $AMRN when it was trading at $3.xx.  After it went to $7.00, I got nervous and sold it for profit.  Since then, I began to swing trading it for profit.  Then one day, it so happened I did not have any position at the time, $AMRN gapped up to $16.xx and headed to $19.xx before heading back down.  I knew I would have sold it b/w $16.xx and $19.xx if I had held my full-size position.

Now, if I don’t learn from the lessons above, it will be all for naught.  So I told myself that, this time, I’m not going to let this volatility on $AMRN get the best of me.  Therefore, I’m holding this one through the end.  The one thing that allows me to hold this one through thick and thin is that I did not average down along the way.  I set my worst case loss scenario at my original investment (I doubt I will lose the whole thing since they do have a patent on pure EPA (icosapent ethyl); thus, I’m not faded by current $AMRN downdraft.

One more thing, because I made money back then with $AMRN when I loaded up with more shares than I’m holding now, this drawdown is simply my paper loss against my previous realized gain.  This fact does ease my mind in a way giving the current price of $AMRN is in a deep malaise.

Remember folk, this is strictly for position trade, I hold no such tolerance and conviction when it comes to my swing trades.  Swing trade is strictly for profit-taking when you see it.  Since the position size is much smaller, missing the runners here and there is part of the game.

My current position trades are: $LRAD, $AMRN, $SZYM, & $TINY and I intend to hold these as long as their technological fundamentals remain intact.

My 2 cents.

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I’m sure most of you know what it is like to be a boss or an employee.

If you are not the boss, then all your effort goes to please  the boss.  And if you are the boss, all your effort goes to manage the employees.  And if you are the middle manager, then you have to please your high up and manage those below you.

Well, guess what, investing is pretty much about the same thing; but there is one big distinction.  It is YOUR money you are investing: therefore, YOU “should be” the BOSS.

Aha!

I added the “should be” not for effect but to reflect how we let the employees (aka stocks) get away with not doing what they are hired to do- to make you money.

For those who are or were bosses, you know what I’m talking about.

On one extreme, if you are a tough boss, you pretty much have a strict guideline for the employees to follow.  And if your employees don’t follow those guideline, you write them up and inform them of their deviation from the guidelines.  And if they ignore your written warning, they are setting themselves up by providing you with reasonable ground for termination.  Simple at that.

Now…

On the other extreme, if you are an amiable boss who care more about the employees than your company’s mission, you may become too lenient to your employees who are not productive, not fit for the job, not being a team player, and worst of all, do not have integrity.  You become more susceptible to manipulation by the employees who are good at kissing your behind…

Before I go on, to be fair, there are excellent bosses out there who are both amiable and tough at the same time.  And these are the bosses all companies are lucky to have.

Well, I think you have a pretty good idea of where I’m going here.

It is interesting that while most of you are/were tough bosses in the business world, you become quite an amiable boss with your stocks.  Hmm…

Why do we, as an investors, tend to become the amiable boss who let our stocks get away with non-performance?  Why don’t we just fire the stocks the way Donald Trump does it in the video below?

Come on now, if your mission as a trader (aka your organization) is to make profit from swing trade/short-term trade, your job is to fire those stocks that don’t perform.  In other words, you need to be an extreme tough boss if you are a swing trader or short-term trader.  Otherwise, you are letting your employees (aka stocks) do what they please as your company’s expense (aka your portfolio’s expense).

Hence, firing nonperforming stocks = cutting losses.

Here are some thought that may help:

Scalper: stocks are like temp; if they don’t perform, replace them immediately.

Swing trader: stocks are like new employees on probation; if they don’t perform, let them go before the probation period expires.

Position trader: stocks are like project managers; if your have sufficient evidence that the project manager is not working out after a period of time, replace the project manager.

Whatever you do as a boss (investor/trader), do NOT become the boss as shown in the video below…

In other words, do not fall in love with your employees (aka stocks).

My 2 cents.

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Let’s be real.  Taking losses when you are trading and/or investing is as normal as taking a dump.  Yes, that is right.  It is an essential part of investing and speculating.

So what is stopping most of us from taking loss when it is clear as day that our investment/trading thesis is not working?

Hope.

Oh dear!

Hope, my dear friends, is a loaded word in the stock market.  So loaded that it can blow up on your face.

We should have faith!

I have heard that one before…

ok ok…  you can’t discount faith entirely since, after all, I do have faith in my AMRN, LRAD, & SZYM investments.

However, there is one thing I also hold closer to my chest more than faith, an open mind when it comes to reviewing evidence or circumstantial facts that can debunk the faith I’ve in my investments.  Even price action, when the direction is opposite to my thesis, is a kind of fact that I’ve to take into consideration.  When you think about it, if price action collapses severely in absence of news, usually that means some big holders are unloading pronto based on  information we don’t have; otherwise, any bear program will be countered by big players waiting for an opportunity to  buy cheap at support level.

Keeping an open mind when you are deep in your hope and faith is not an easy task since you are in danger of being infatuated with the stock.  In other words, you are in danger of being possessed.  Yes, you heard me.  Possessed by a strong feeling that your stock can do no wrong.  I’ll revisit this topic in another post.

So how do we get ourselves out of this stranglehold of not being able to take loss when you know you should?

By changing your thought pattern regarding taking loss.

Instead of worrying about missing the boat by getting out to take your loss, you can focus on one (or several) of the followings:

1) get out now so you can buy back cheaper (I use this thought most of the times)

2) get out now before you spill more blood (I use this thought on my $USU position)

3) get out now so you can use the cash to buy another stock that is going up (I use this from time to time)

4) get out now to take a break from the stress (I use this one recently when I had a minor panic attack)

5) get out now because you have a planned vacation to take (don’t let this losing trade ruin your holiday)

If you can shift your thought to one or several of the above instead of focusing on your fear of missing the bounce after you are out, you are already ahead of the crowd.

Since taking loss is very much part of the trading/investing process, learn to be the one to take control of the process instead of being forced on you at your maximum pain level.  In other words, take that loss when it is still small.

If you don’t mind my using this analogy, you control when you take a dump (otherwise, it will be an ugly accident!); then why not control when you take a loss when it hurts the least?  Remember, how you hurt is personal, my small hurt may be your giant hurt or vice versa; therefore, you get to set YOUR small hurt loss-taking level.

Btw, your definition of small loss can also vary depend on whether it is a scalper, a swing trade, or a position trade.

Believe me, from my experience, once you are used to taking small losses, you will love it and will not think twice taking them as time passes.  Yes, even in the face of seeing some bounce without you on board, you won’t be faded.  You know why?  That is because you will also have witnessed multiple times how taking small losses have saved you from much bigger losses, probably more times than you see price takes off without you after you’ve sold.

My witness of the $DCTH and $USU continuing downtrend last week after I’ve taken my losses proves my point.

My 2 cents.

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Watch the video first and you will know what I mean.

Imagine the race-car driver is the trader you follow.  Can you handle his driving style (trading style) in the Camaro (type of stock)?

You see how the race-car driver spins the car so skillfully (aka cut his loss or lock in profit quickly) when he comes to an obstacle (aka consolidating price action or sudden spike up in volatility) that appear in the front?  Meanwhile, all you can do is scream, “We are going to crash!  It’s too late!  Help!” (aka “I can’t take my loss now, I want my money back! or “If I take profit now, I’ll miss the boat when the stock keeps going up!”)

That is why when you see someone throws out a few picks, you need to find one that “fits” your personal style.  Not all stocks are treated equal.  Believe it or not, stock does exhibit personality.  You just need to know its mood to decide when is the right time to buy or sell.

I will delve deeper on this topic next time.

My 2 cents.

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My trading style is all about high beta.  While some of you may leverage yourself to the hilt with $AAPL stock, I load up on high beta stocks using cash.

Both styles are obviously high risk with a high reward scenario; however, I’m more likely to walk home with a few more buck than those who leverage to the hilt when the market crash or the stocks in question crash.  These few bucks that I still have after the calamity will give me another chance to make a come back by buying, you guess it, high beta stocks.

Since I trade biotech, which by nature is high beta, a lot, I’m always subjected to high risk at all times.  Thus, in order for me to survive, I’ve to be quick in my execution.  I try not to think too much when I trade.  You can say I trade by reaction.

Below is an example of my thought process:

This morning, $BBRY opened higher but then started heading lower.

“Hey, $BBRY looks good at the open”

“Wait a minute, $BBRY is tanking”

“It dipped to negative territory in 6 min after open!”

“I’m still in the money.  I’ve not given back too much yet.”

I looked at the daily bar chart and compared today bar to the previous day bar.

“Not looking good.  I’m taking my money now.”

I clicked the mouse button to sell all my $BBRY shares to close.

Done.

All three 3D printer companies headed higher after open; but then after 10:00am EST, both $DDD & $SSYS began to tank.  Meanwhile, $XONE was fighting the downdraft and even bounced back up after falling off a bit.

“XONE is holding well despite $DDD & SSYS tanking.”

“XONE is dipping… not yet, it is holding…and bouncing back up”

“Give it a few more moment”

“Holy Smoke! DDD is crashing and look like SSYS is following through.  XONE is still holding… impressive!  But I’m not going to wait for it.  I still have profit so I’m taking it.”

Click, click, & click.

I’m out to lock in profit.

$DCTH opened up at the open and then after 20 minutes began to tank.  It went into negative territory and dropped quickly to the gap-filled area of $2.04 which I postulated was a good support.

“No way! Already? Let’s see if it will stabilize.”

“There is a lot of bid in there.  Maybe it will hold.  Wait…”

Meanwhile the bids size increased and price looked like it might hold.

“Looking good.”

10 minutes later, the sizable bids had all been hit and price started to tank.

“Holy smoke!  I’m getting near the breakeven mark!  I’m getting out now while the bids are there to take my load.”

“Maybe I can buy them back below $2.”

Click, click, & click.

Out of $DCTH at breakeven level.

And this is pretty much how I think during trading. Really, there wasn’t much to think but to express short burst of emotion in reaction to the price action at the time.   I know what I’ve to do and I strive to do it quickly.  There were times I hesitated just a bit and the stock god took that opportunity to punish me.  A few seconds of hesitation and someone took away the bids I needed to get out without tanking the price further down.  Darn!  Then you had to scrambled out before others jumped ahead of you.  Sometimes, it was the right thing to do ’cause price just kept on tanking after I had gotten out; but sometimes I just happened to sell at the bottom for the day.  Yeap, it happened!

$DCTH was a good example today.  Now, in hindsight, it would be nice that I took profit at the open; but you should not think like that.  You just have to deal with the hand (like a poker hand if you will) you have at the moment.  I was given the choice to get out at breakeven and I took it.  Right after I took it, price continued to tank further down and broke under $2.  I bought back some shares to see if the bounce had leg but it didn’t.  I dumped it when price went back down to the low $1.9x area.

Did I think about what if price went back up after I got out at breakeven?

Sure but that was the least of my worry at the moment.  I was more worry about turning my gain into loss!  As far as I’m concerned, I do not have the same “trust” in $DCTH as I’ve for $USU, $AMRN, $LRAD, and even $SZYM.  Therefore, I’m not willing to hold this one against me after I was sitting on a gain.  This thought process simply pushed away any thought that I could be getting out at the bottom of the correction.

Thinking about it, perhaps my username should be called “High Beta Trader”.  Feedback anyone?

My 2 cents.

 

 

 

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Now that I’ve my day behind me. I like to go over some more thought on how I trade the biotech.

I’m sure you’ve many questions popping out of your head while you’re reading my previous post:

1) How do you know which biotech stock to buy?

2) Are you kidding me, you can lose real money fast by trading biotech!  This is real suffering!

3) Ain’t you exposing yourself all over again by jumping back in after you’ve taken profit?  How do you know it won’t gap down the next day?

I’m sure you have more questions but let’s just deal with this three questions for now.

1a) It’s all about the story and potential catalyst.

The story usually begin with a new discovery and that Phase 1 or 2 studies are positive; and that the next phase result will be coming out in a few months.  If there is a prospect of a takeover due to an “expected” positive result, there will be a pump to drive the price up.   The catalyst can be a single news item that show some minor progress which by itself means nothing much until the result comes out in a few months.

However, be aware that some news will simply trigger sell the news scenario; therefore, instead of seeing price increases, you see a price drops from early buyers taking profits.  And to minimize our exposure to sell on news, we need to pay attention to the chart.

1b) I like to look at the daily chart to see if the price action is acting like it is going to bust out.  If you go back to my older posts here and my twitter historical tweets, you will see that I’ve bought in the biotech stocks due to price action looking like it is going to bust out, or breaking out of a downtrend line, or  taking out previous pivot high.   These are all simple basic breakout chart patterns I go by.

Of course, there is no guarantee that price action will actually broke out or continue higher after taking out the previous highs; but together with a good story and a catalyst, those breakout may just have a better odds in following through.

It’s all about playing the odds.

2)  Yes, you can lose money really fast trading biotech.

One of the key factor in causing most people to lose money in biotech stock is greed.  I’ve witnessed first hand a friend who just could not take the profit despite my pounding my fist on his table (figure of speech).  The drive was phenomenon.  Price had gone from 75 cents to over $3.00 after almost six months in waiting (did I mention ‘patience’ in my last post?).  The catalyst was that the Phase III result would be fantastic due to a similar “test” done in Russia.  However, when there were doubters who started questioning the so-called “Russian result” and asked for links to access the said result, no one was able to provide a link.

Right there and then, I took profit as soon as the market opened the next day.  I believe I sold my shares around $3.50 even though the price continued to rally to $3.80 the same day.  I told my friend I had my doubt and suggested he should take his profit as well.  Unfortunately, his greed had such hold on him that he told me he bought more at $3.80.

I guess you could predict the rest of the story; $3.80 was the high of the stock and it eventually crashed to penny because the phase 3 result failed.

From my experience, most of the money in Biotech are made during the drive to higher price in anticipation of a positive result.  The fuel to supply these dizzying rise is the greed of the buyers.  Sometimes, you will be amazed at the POWER behind the greed that can drive the price so high that if you don’t take that precious moment to take profit, it will crash down so fast that you can see your paper gain evaporates into thin air.

How do you know when is the precious moment to take profit?  Ha! You will never know.  You just have to bite the bullet and take that profit in front of you.  Sometimes, you just happen to pick the top and sometimes you will just see the price continues to gap up from where you’ve sold.

I left quite a bit of money on the table when $MJNA went from 11 cents (where I bought) to 35 cents and then it started crashing back down to 25 cents on the day it touched 35 cents.  I sold all my shares around 28 cents on its way down and thought I had a good day.  Then the price turned back up to 32 cents by end-of-day.

Ok, I told myself it was not a big deal.

Then the next day, price gapped up and reached 50 cents before settling down around 40 some cents.  That is the “suffering” I refer to on my first post.  Price continued to bounce off 50 cents in the next day which drove me even crazier.  Boy, did I suffer! (grin).  It was like the stock god was taunting me…  “neh neh neh neh neh… I’m hitting  50 cents, where did you say you sold?  Ha! Ha! Ha!”  So cruel!

Now, you know what I mean by “suffering”.  However, I prefer this type of suffering over actual loss.

If you read my twitter and past post here, you will find out that I’ve lost dearly on my $ETRM trade.  Foolishly, I traded thru the release of the result.  I knew the result might come any day but I thought I had a few more days to decide.  Noooo!  The result came out and I instantly lost close to 60% of my $ETRM investment.  Ouch!

Luckily my win on $MJNA helped offset this loss.

Trust me, biotech is not for the faint of heart.

3) Yes, I’m exposing myself again by going back in before the day is over.  Usually, I try to buy less than half of my original position after I’ve taken profit.  Therefore, if price drops the next day, I won’t lose too much since I’ll dump it first thing.  However, if price takes off like I think it will, I’ll then add more like I’ve added to $PACB today.

It’s all about taking a calculated risk by not buying size on the second time around until you see proof that the momentum is still there.

I think I’ve written this post longer than warrant so I hope you don’t fall asleep half-way here.  Thanks for reading if you’ve come this far.

My 2 cents.

 

 

 

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I remember watching “The Andromeda Strain” when I was a teenager and this movie really stimulated my curious mind.  Little did I know that biotech is an essential part of my trading vehicle.  I love biotech because it’s a science which sole purpose is to better our human life- either in sickness or better quality of life.

There is a lot of money to be made if you play it right despite its high volatility.  Somehow, while you can make a lot of money in the market, it is going to make you suffer before you can see the reward.  Suffering doesn’t have to be painful as in taking a huge loss;  the correct “suffering” in trading biotech is the need to be “patience” and your ability to let go of “unclaimed” profit.

“Sh*t! the damn stock takes off without me after I’ve taken profit!”  is one of the suffering a biotech trader has to live with; otherwise, you will suffer real losses, losses that you may not recover from.

However, one of the trick I’ve learned in playing biotech is that you can always jump back in even after you’ve taken profit.  The trick  is to monitor the momentum during the day.  What you don’t want to do is to be out of the position before day end; otherwise, the gap up will make it that much harder for you to get back in.  If momentum is strong near the end of the day, you can elect to jump back in even though you may be paying a higher price from your earlier exit- just like I did with both $DCTH, $PACB, & $RPTR last Friday.  While this technique will not work 100% of the time (that is what taking ‘calculated’ risk is all about), it can make your day when it works.

Now, all three are tracking higher which prove my thesis.

See daily charts below:

I got back in $PACB due to its ability to stay near support even though momentum was down all day.  Since it was near the top level support, I was willing to take the calculated risk by buying back in for less than half of my original position.

Btw, due to the strong reaction from The Fly regarding my username, tradingmytwocents,  I’m changing it back to zenhunter which I’ve spent a year here at ibankcoin to establish.  I’ll be a fool to ignore a sound advice when I see one.

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