always curious about the world around me
to write down ideas on stock markets or other financial news
There are quite a few lessons from my short trading experience. Any single one costs me a lot of money and deserves memorizing such that no single mistake will be made again ever.
Don't play fire using leveraged etfs. Playing with leveraged etfs are more likely cost you tons of money than win you money. Risks/Rewards ratios are simply ridiculous. Just think of people who lost 99% a day in using SVXY. I simply cannot believe even fund managers made mistakes in using this financial derivatives. Similarly holding TVIX is also equally terrible. It is like gambling. But trading/investing should never equate to gambling. If the chance of carrying out winning trades is 50/50, then one should never trade, because you will lose money in expectation sense due to the fee and tax charged to your account. Therefore, to gain in the long run, one need to maintain a winning strategy which is more likely to win than lose.
Resist temptation for betting in earnings. For those risky stocks that one does not intend to hold over long time, one should hedge the position by buying puts options. Even simply bet on day-to-day change is very risky: one never knows how much the pre-market or post-market price will differ from the real price movements in regular trading. I know how tempting betting on earnings (ER) report can be. But most of the time, it is a gambling game. It is much better to be reactive in this case rather than being proactive. Instead, I think having a trailing stop order in after hours in case the stock price drops dramastically seems a good idea.
Investment strategy should be towards the conversative style. If even CEO of the company sells some stocks before ER, how can one retail investor be so sure about the stock price movement in one direction or the other? It never hurts to buy some puts when the price goes very high already to hedge against some downward risks even if one has the long term mindsets. JWN is one example. Despite I am bullish on it in the long run, it has long tradition of underperforming following the earnings call, and therefore buying a cheap put when the price is high (like $52) seems worth it. It indeed verifies my intuition. One should follow CEO to cut some positions or hedge using protective puts.
Buy low and sell high. I know this is easy to say but indeed it is probably the hardest thing to do. Everyone can hold the stock when it goes up but very hard to hold when going down, not even to mention to buy more at the dips. That is why the next principle is also extremely important. I heard that the best way to invest is to buy indexed funds in a fashion that one buys more shares when it is low and buy less shares when it is high. Only this way, one does not need to worry about the bear markets in an economy like America. I have not lived long enough not have consistent incomes to verify this so I will come back and update in 10-30 years. Of course, it does not necessarily hold true in all countries' stock markets. That is why there is a need for multi-nation investments and stocks shouldn't be the only choice. I can understand why ultra-wealth individuals would want to invest in not only in stocks, but also bonds, gold/oil and even crypo as well. Because the most important goal for them is to preserve wealth in the long run in all environments, either high inflation or high interest or negative interest or low inflation or massive currency depreciation.
Diversify by opening small positions in various stocks (or even assets). I think that this is probably most important lesson in investors' history. How to control and manage risks? The power of compounding is simply amazing. If one can make 10% a year, that is pretty good already. 10% a month is like amazing. If one can have the same return 10% for 7 months, you can double your money. Or if you can do it for a year, you can get three times your original investments. Of course, it is hard, especially hard if you take very small risks by diversification. But although it is tempting to all in your money and double within a short period of time, it is much better off playing safe and make decent returns over time. Otherwise it is easy to blow up your account and lose your principal. This is called: money that comes easy also goes away fast. On the other hand, if you diversify, even if you can lose money in the short run, you won't be that worried and you are more likely to hold on to it than giving up before the dawn. My experience with DEPO and NFX verfies this. The best investment is to spot diamonds in the sands before everyone finds out and wait patiently until even the slowest person realizes this before selling and diverfication helps one with the patience. I guess diversification is the most important lesson I learnt ever not only in investments but also in life. Diversifying is free lunch anyway. So why not take it?
Hedging your positions is another way of diversifying. A certain ratio of longs and shorts indicate your bullish positions on the market. The higher the ratio, the more bullish you are towards the market. Without any shorts (either shorting the stocks or buying the puts), the downside risk is huge especially if you are in a leverage positions. That is why the next point is extremely important. One can never be sure in one direction. Betting both sides with different weights is the best strategy. It is kinda like donating money to presidential candidates, one can never bet all the money on one candidate. More likely, one should bet on both. Instead of support Hilary, one should also put money to support Trump in case he would win in rare case. And he actually did in 2018!! Now you understand me. I guess many people may regret being Trump's enemies before. And this principle does not only hold for stocks but also for options or forex trading.
Use margin loans smartly. Margin is never supposed to be used to make more profits on any single deal. Using margin that way will kill you. Also, a high interest rated margin provided by most brokers will likely kill you. The one reason that Buffet succeeded in early times is that he has access to cheap float money surronding his issurance companies for investments.
Importance of reading 10-K and 10-Q SEC Filings. As an outsider, the only way to understand the true risks of businesses is to read those filings. U.S. companies are obliged to provide those numbers and those numbers are what we can trust. Not words from CEO or CFO, nor the price targets provided by analysts. Technical analysis is good in hindersight but most of time it is not useful enough for predicting the future. Those, like pivot study or RSI can definitely help you make deciions but in the end it is the fundamentals that matters most. Is the stock considered as value stock or growth stocks or momentum stock for speculations? How they compare with other peers in the same sectors in terms of different criteria: are they fairly valued, overvalued or undervalued? Those are very important for investors, even short-term investors.
Have a correct mindset. Just think of every day as a new day. Do not avoid buying something simply because it has gone up so much in the past, like NVDA back in 2017. Similarly, do not buy sell simply because it looks so cheap! Price is relative to the value buried in the company. Don't regret the money that has not been made as there arise new opportunities every day. Tempory loss is fine as long as the fundalmentals have not changed. Patience is key here. I feel people have more patience when they don't put all eggs in one basket. A very bad habit is to panic and trade very often (a lot of commissions generated for brokers).
Event-driven speculation. A sharp drop in stock price presents a buy opportunity many times. Or a continual drop of stock price for extended period for not very good reasons. For example, today Trump seems to exchange ZTE deal for interests for farmer goods and NXPI deal for QCOM. The stock price jumped from 90s to 110s, which means it is 20% return for very short period of time. I have been paying attention to getting in for some time but was feeling hesitated due to the risks associated it. Another example will be BIDU, whose CEO Qi Lu left the job. If one is following the news, it is not a surprise that the stock price tumbled 10% before tumbling another 5%. Same for NTES and QD for the earning disappointments. Using Options expiring soon fast in and fast out is very essential. I feel a rule of thumb is that if you make over 50% on options, it is better to step out and take the profits for now. It is better to take smaller profits than to lose money. It is simply too hard for perfect timing. Same reason for holding options through the weekend is very dangerous. Who knows what will happen in the long weekend, right?!
Connect the dots. Many things are connected. For example, oil price is related to air stocks, as well as solar stocks in addition to oil companies stocks. Another example is retail stocks are highly connected within the sector, as well as cinema stocks and chip stocks. So sometimes it is too late to do first-order thinking trading, then maybe we can still do second-order trading. For example, American steel company X benefit from tarrifs so the stock price has gone up (too late to long, and stupid to long). So now we can short it, because tarrifs are not even good for X really. Everyone loses in a trade war. So this is called second-order trading. Same for oil price. For example, oil price has gone up due to the tighting US supply. First order thinking is let us buy some oil. If you are faster than computers, good luck for you. Second order thinking here is the old concern OPEC will lift supply in June, so it is a fantastic opportunity to short the spike. Here, the optiomal opportunity to set up a sell stop order in case a sudden drop.
Never trade emotionally. Emotions are bad, very bad for traders. Trading is never personal. One can be on long or short side depending on the context. Never let old history between you and stocks twist your judgements. Personally, I feel I tend to over-trade when I am emotional. That is the symtom of my being emotional. I start to trade too often by reacting instead of being proactive. I start to gain little but lose a lot of money. When this happen, it is better to close all positions and get off the table. Have a strategy before entering a trade. That is the key and it is the strategy that differs trading from gambling. If I find I have the symptom of trading emotionally, I will force myself to stay outside to calm down for hours if not days. You can see that it happens to a lot of people that one can win profits in a straight number of days and lose straight as well. That is not because of the bad luck. That is because your mindset has changed and it is time to stop and recover from your emotional setback. Trading is a brutual task. It makes one easily feel to be a loser. But that is not the case. And trading often and blindly is bad. It makes me to lose not only money but also a lot of fees. Sometimes I pay over $100 for broker commissions, which is very bad. This leads to next point.
Fees and taxes are as important as P&L. Never under-estimate the fees and taxes you paid to the brokers and government. I can guarantee you that it is a lot of money if you are active trading. We have to learn to control that to minimum to maximize profits.
Learn to take profits early. I find it is simply impossible to buy lowest and sell highest. If you have made a lot, maybe it is time to take some money off the table. Sell some when prices go up and buy more when price is down a lot. Rather than selling too late and lose most of the profits, one should take profit early. One mistake I always made is that I don't want to sell when it goes up so I set up a stop price well below the current one. Suprisingly, 90% of time, the price never goes much higher but hit my lower stop price. So instead of making a lot, I only make a small amount. It is the stupiest thing. Learn to take profit based on your own decision not being thrown out by stop price triggered. After all, it is what the stragefy matters.
Sleep well. I think to be a trader in West Coast California, it is very challenging without sacrificing maintaining a healthy life. I feel I am good at options trading and can make profits in a consistent way. But I don't like many sleepless nights and many sleepy mornings. I cannot do this like others: sleep at 9pm or 10pm and get up before 6am. But to be a successful trader, one has to treat this as work or life/hobby. For example, today there is jobs report for May to be realsed at 5:30am in Calfironia time. Because this is an very important factor for forex/gold future trading. I tend to get worried and wake up in the middle of night around 5am and cannot get up before the market open at 6:30am, which results into I missed the opportunity for LULU and it is at least 500 dollars loss. Not to mention that watch gold investment dropped like 1000 dollars before recovering is mentally challgening and requires self-displicine to stick to the trading plan. The pre-market and market different price trends present many trading opportunities but because the fact that I live in West Coast, it is simply too hard to take advantage of those unless I sleep little, which is very bad for health. I guess that leads to my decision that I still want to work in tech industry despite that I think I have talents and passion for finance. The more money I make, the more I realise that the money is not the most important thing in life: I would rather live without much worry with my girlfriend rather than make a lot of money.
It is stupid to enter a trade early without even seeing a trend and even more stupid not to get out after recognizing in the wrong trend. I have made the mistake a few times. Not willing to wait is the worst. Not to catch a falling knife on the first day. It saves life most of the time. Not entering a trade without having a break out of current trading pattern. Not buying when it is over valued and should wait till it has no room to fall any more. Also, most importantly, not shorting a stock when one has so much upside momentum. When against a longer term trend, one should exit fast after a proper gain. You know you have less chances when you are shorting a stock in a bullish market. Same for bear market. Follow the trends of influential traders and join the strong side to win the battle. It is like playing basketball game in NBA. Durant joined warriors so that he can win easier. Same for trading, we should follow people who has most money to win in a easier way. Never let the fact that you have lose money in the other side or miss making money in this side prevent you from joining the forces promptly. It is business we are talking about. We should let the previous personal bias get in the way of investing. AMD, SQ in 2017-2018 speaks for itself.
Never buy too much of one option. Same reason for diversifying stocks.
Don't leave money overnight unless with utter confidence. If you have confidence with very far away stop loss order OR even without stop order, then you can hold positions overnight. In all other situations, it is not wise to leave your porforlia unattended. But again, who has utter confience unless one has insider information? lol.
Setting a proper trailing order is tricky.One does not want a trailing order to be triggered to easily most of time but at the same time one wants a trailing order to be triggered in a sudden spike. Without writing codes to achieve this, it is kinda tricky. This principle seems to be conflicting with the one knowing when to sell. There is an advantage of setting a trailing order in advance in case one does not make a terrible mistake. On the other hand, it is easy to be triggered in siutations that one does not want it to be triggered. It is a conflict that one must solve. I guess one idea may be always setting one (making this one to be maximum loss you want to carry in the short-term) and then when triggered, re-evaulate the situation from starting over. And don't let history of losing money to be your burden. I think AMD or even GC/ZN can be a lesson. But I am not saying that one should not set a stop order, because it is actually very necessary in terms of preventing you from getting killed brutally.
Trading is time consuming. If you have other important things to do, close all positions before doing so. I learnt this lesson brutally on Jun 26. 10 days after I move to Bay area for my internship at Facebook, I lost $7,000, almost one month's internship salary. Moving to a new place and doing an intership is too time consuming for me to spend any time reading WSJ or following Bloomberg. I hardly have time to study the patterns I used to see. So I have no idea of what is going on most of time. I had no time buying VIX options to hedge against my positions. Overall, I felt lucky/over-confident and felt I did not need much time to trade. (maybe okay for some stocks but definitely not true for options or futures). It hurts to see to lose 2 months' earnings in 10 days. What a lesson to remember forever.
There is an analogy between trading and gaming. Forex, futures, stock and options are like games. Whichever one trades, is what game one chooses to play. There are both sides: long side and short side. The price moves in the direction in which one side has more money, either buying or selling. The key to win is konw which field you are the best at. For me, I am better at options than the rest. I am still quite new to futures trading. I am getting better and better at forex and stock trading. The daily P&L (Profits and losses) are like your gaming score. It is kinda strange of me. I never thought of actually using the money I gained from the trading. To me, it is more like a game than making a living. I like it and enjoy what I do. I am good at connecting the dots that others did not see immediately and have a good sense of future and potential outcomes. I am also getting better at managing my risks and stick to the principles I listed in the beginning of the blog. I like the fact many of the smartest people/computers are competing in the games, which makes the game very interesting and challenging, and I want to be the top among all. I am looking forward to starting all over each single day no matter the market is good or bad. There is always opportunties one can take advantage of each day. There is a saying that bulls and bears kill pigs. Just like life, in this game, one can easily get emotional, greedy, and soft but to be suceesful one needs to overcome all those shortcomings of humanilities. Tough, fearless, cautious, generous, and optimistic are what helps one to get through the forests without being killed.
What I have predicted correct: momo at 20 USD levels are very cheap (as of Dec, 2017), as well as BZUN and SOGO (as of May, 2017). Also, AMD, BB at single digits (as of April, 2017). TWTR from low 20's. (I purchased my first option on virtual account on TWTR 24 CALL) I said short YY and long MOMO. What a day!! (as of June 6th, 2018).
Hotel real estate sector seems to pose great returns, both great growth and dividend. Want to build a position here.
I like entertainment sector, such as AMC, WWE, LGF A. AMC may run after ex-dividend date.
I like high end department store, like M and JWN.
I am bullish on Gold. A 10% run is imminent. Not sure when though. Maybe tomorrow's job report will be a trigger point. (wrong June 1st jobs data turns out to be very strong which costs me 1000 USD in gold price drop but I still believe in the gold run, next key event is CPI data on June 12th)
The right is gaining popularity in almost all governments around the world. But I also don't think it is that bad for Spain or Italy or euros. Dollar may lose grounds to euros soon.
Trading futures in crude oil or gold is highly risky and leveraged. If options are danagerous already, then trading futures carelessly will kill you. For example, the price of curde oil is highly violatile. One contract is about 67,000 USD and a 1% drop means 670 USD nominal loss in your account. That is a lot of money for just 1% of change. Not to mention that sometimes crude oil can jump or drop like 4, 5% within a short period of time. Gold price is about 1300 USD per ounce, so a contract is 130,000 USD, that is a lot of money for a contract! Imagine that!! What is more, they are like forex trading 24/7 all day long. So the price can change a lot at night while you are asleep. Imagine traders in Asia or Eruope did something crazy and all of sudden, you lose thousands of dollars. So first of all, trading futures is very risky, just like options if not more risky.
One important thing about futures trading or forex trading is to set up a maximum loss before entering the trade. And more importantly, never change it. In my early stage, I always lower and lower my stop loss trigger, hoping the trend to turn around shortly. But most likely, they don't. You should get out and think about which side you want to join from above. You can never made a sensible decision when you are in the battle but much easier when you have a choice before entering the trade.
After last week 10% plus plunge, the price for JWN seems to stablize at 45 level, strong support line from. below. At 45 USD, JWN is a strong buy. When compared with 45 USD in 2017, the prospects for Nordstrom is much better. Not to mention that it remains a potential target for taking private or being acquired. Not long ago, a $50 bid is rejected by the board, I will say it has great potential to reach 50 USD, which means 10% potential profit.
Options strategy is not for all investors. Most options are for advanced investors. Options trading can be extremely hard and costy. So one should exercise in caution. But on the other hand, options are a very good to hedge with a small amount of money. Of course, it is a also good to speculate short-term big moves. Also, one can use options to build positions in the future. Therefore, one should at least understand what options are.
Options contain call and put. Call gives one right to buy stocks. Put is for sale of stocks. One contract of options is 100 shares, therefore for shares like Amazon, even one option contract is insanely expensive. One can buy/sell calls/puts.
The simplest strategy is to buy naked call/put. It is simple but also has two distanvantages: one is the time decaying risks and the other is the cost of premium may be high and you may lost all of it. But the awards are high and one will only lose the premium at lose. I feel it is not too bad if one buys call/puts in the distant future and try not to gauge the short-term trends. After all, the long-term trends are the most important one.
Sell naked call is too risky and one can only do it most of time by owning the stocks or the calls. Doing this in the distant future is too risky. I will only do it within a short-period of time with high level of confidance, like 90% confidence. Essentially one is giving up the potential up rewards for a very limited premium income. The timing is extremely important, one can do it when everyone else is super bullish while you are not and willing to sell the stocks even if it can go much higher.
There are more complicated ones listed: here.
I find that the main advantage of using option is using a very small amount money to take advantage of the huge difference between price and value, which is set to be realized in the next couple of months. The main disadvantage of course is timing. It is simply too hard to time up. Therefore it seems much better to not even try to time. Buy calls/puts in the distant future seems like a good and safe strategy. Since it is a small amount money, I tend to have the mindset of angle investor easily: diverifying a lot in 20-30 potential tickers and does not care if some of my decisions are wrong as long as some of them pay off hugely.
A few advice on options trading, selling or buying at open is extremely hard for options (even harder than stocks) as the spread between bid and ask is high. One can easily lose a lot of money by selling at bid price or buying at ask price. Options are not as liquid as stocks, which is a major disadvantage for options. When buying options, liquidlity is also a concern. Too close to expiration date or too far from expiration date poses more illiquidility concerns. And it will be very bad when everyone is trying to sell when prices go down. Therefore, it is very important to take profits early before everyone else did. Same with everything else in life, buy early and exit early.
Selling options give one advantage of the time. Time is the most powerful thing, just think about interest compounding over time. Selling calls and puts are risky and therefore one should exercise extreme caution. Selling short-terms ones with extreme confidence. Long ones carry a lot of risks, for example, today FL jumped 13% and the other day Tiffany jumped astounding 23%. Therefore, bear this in mind when one sells calls or puts. Basically, I do both and I tend to sell the short-term ones while buy the long-term ones as I may have better sense what is going on in the distant future (like a few months later) despite I may completely wrong in the short term. One example will be predicting oil price, one can see how absurdly people are wrong about crude oil price at end of last year and how wrong they are about energy stocks in Feb. Selling protected calls may turn out to be not very flexible. You cannot sell stocks anymore so one should only consider this when abosolutely want to hold the stocks throughout the period.
Buying options too far away or too close may be hard to realize the profits directly in options. Therefore, sometimes one is better off by buying or selling stocks and then exercising the options.
Sell puts / Buy calls when price is low, and buy puts / sell calls when price is high. Options are somewhat like insrance. It is not supposed to be used the other way.
There are a few interesting trends I find turns out to hold for the past half year. Any single trend means sizable profit: 30% profit within a very short period of time.
Oil remains strong and energy stocks rebouned after entering correction territory in Feb. Since both US dollars and Crude oil are gaining for different reasons, I am curious to see which one will lose the uptrend momentum first.
Retail is not dead yet. Department stores like Macy (M) and apparel stocks like ANF, FOSL recovers from lowest points.
2018 will be a good year for movie related industry. It is not a surprise that Regal got acquired at lowest point. AMC seems fairly valued if not under valued. Rising box office in 2018 will likely help AMC with a higher earning. The only concern is the high debt it carries in the rising interest environment.
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