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Trading Tip #5 – Never Add to a Losing Position. Except…

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Trading Tip #5 – Never Add to a Losing Position.  Except…

Those of you who just read Trading Tip #4 – Being Able to Admit When You’re Wrong, there is a section that speaks about never adding to a losing position.  While this is true almost all the time, there is one instance when I find adding to a losing position can be part of the trading strategy.

This  is when there is either a blowoff top from a massive spike  or a blowoff bottom from a massive sell off such as what happened tonight with the up move in Netflix and the down move in Apple.

In after-hours trading, Apple dropped $50  -9.83% due to revenues.  On a move such as this, I would test the market by buying one quarter of whatever my position in Apple was going into the close.  I would look at this as a new position – not a dollar cost average of the original position.  By initiating a new position at this level, it will be easier to take the emotion out of the trade that your original longs are creating in your mind at this moment.  The new long position can easily be followed, and if it starts going against you – the entire position, both the original long and the new ones, can be sold into the market so you can get flat and think clearly. Personally, (and this is NOT a recommendation) I believe Apple’s fundamentals are still sound and there is tremendous market growth. The company has an  enormous  amount of cash and I would personally be a small buyer of Apple and put it away for a long term trade.

Many traders feel the pressure that they must recapture the loss of the original trade. It is times like this that define the trader on who they are.  It gives people the ability to see who is good trader simply by watching which traders  loses their cool and starts trading like a maniac, trying to make up losses that seem out of reach.  There are times  if a traders head is just to screwed up to think clearly, getting flat and taking a few days off can be the best medicine. As someone who only trades his own money, when I have these kind of butt kicking days, I would take the advice that I would give to the traders I used to manage. Walk away, clear your head, and do not trade out of emotion.  While trading is about pain and pleasure, if the pain is just too much, there are times the risk of getting back into the ring wasn’t an option.  Discipline is the key to being a great trader.  Without discipline, downsize risk is exponential and infinite.

If I was long Netflix or short Apple, I would use the trading technique given in Trading Tip #2 – Test and Test Often. There are very few times, after an overnight move such as this, that the market or stock continues to go in just one direction.  However, one thing to keep in mind for tomorrow (writing this at 8:45pm) and I can tell you from  experience, is that this is one of those nights where risk managers are being dragged into the CEO offices to find out what the  clients and firms  exposure on the positions for Apple and Netflix are.  There may be a few more large swings while liquidation and, yes, profit-taking occur.

Moves like this have the ability to blow up professionals and average traders. The risk management profiles, even if treated within the normal parameters, cannot hold up.

Trading throughout tomorrow morning will be interesting across the board.  There will be margin issues, as well as bottom pickers in Apple, and people trying to find a top in NFLX.  Add that to if the market gaps open lower (at this moment it looks like it will).  The weak longs who have established their positions in the past few days will bailout, and the market should slide and have a correction that many have been waiting for. While the shorts, who have been feeling excruciating pain the past few weeks, will do their best to slam this market as far as they possibly can.

The only thing I know for sure is that tomorrow could be a very interesting day.

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Trading Tip #4 – Being Able to Admit When You’re Wrong

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Trading Tip #4 – Being Able to Admit When You’re  Wrong

I remember the last conversation with my ex-wife just before we started the divorce. I sat her down, looked into her eyes and I said, “I’ve spoken to all the mathematicians, and it is theoretically impossible for me to be wrong every time.”

As a trader, one thing I know I am good at and have no issues with is admitting when I’m wrong and then changing direction quickly. It is a must to be successful .

Being right is over-rate.  I would rather be wrong and be profitable than try  to prove I am always right and be a bad trader. After managing hundreds of traders and trading for over 22 years myself, I have seen the one trait that is most important to be a good (or great) trader – and that is the ability to know you’re wrong and to take action quickly.  Being wrong is, in itself, not a major issue.  The swift action that is taken after is the most important thing.  I will be address this in a future blog post that I’ll aptly call ‘Screwing up and how to make the most of it.’

I’ve always taught my traders, as well as my executive coaching clients, that pain and pleasure can be the key towards a successful career. The biggest issue that some traders have, and in time destroys their ability to trade profitably, is the inability to simply admit they are wrong. The fact of the matter is that, on the trading floor, 60% to 70% of our trades each day were bad trades.  The key to money management while trading is simple – cut your losses and ride your winners.

There are too many people, both in business and in trading, that I’ve seen destroy what could have been a very positive and lucrative career – simply because they were either too arrogant or too insecure.  They were too proud to admit when they were wrong.  These were people who did whatever it took to prove to others and themselves how right they are instead of quickly changing their course of action and re-directing their thoughts and energy to a more profitable outcome.

Odd as it may sound, I made more money in trading being wrong than I did by being right. The simple reason is that when I realized I was wrong I could reverse my position or get out and cut my losses.

trading4Let me give you an example.  There were times I would be long five lots of crude oil.  (5000 thousand barrels of oil, which seems impressive but is not). If I was long 5 lots of crude oil at $95.10 and sold it at $95.11, I have simply made $50 on the transaction.  In this example, we will assume I am long five lots of crude oil at $95.10. The market starts drifting lower $95.09 $95.08 $95.05 $95.02, and I start feeling the pain of losing trade.  I start getting the sense that I am wrong, at which point I hit a 50 lot bid at $95.  I go from being long 5 lots of crude oil to being short 45 lots. (45000 barrels )The market trades at $94.99, $94.95. At $94.90 I  buyback 10 lots, then at $94.88 another 10 lots.   – the market bounces and I cover the remaining 25 contracts at $95.00. The 5 lots I was originally long was enough to show me that I was long and wrong, and it was time to get out and reverse and follow the trade through the other side. I lost $500 on the first 5 contracts I was long, but I ended up making $2,200 on the 45 lots I was short for a total on the trade of +$1,700

There are many times that, instead of just admitting that it’s a bad trade, the trader does what I feel is one of the worst things that can be done. The trader adds to losing position. There can be (false) justifications in the traders mind for doing this. He might say to himself “there is support” while looking at his charts. He might say “the market has to go back up“, or worse – he can say the famous last words of many traders, “I hope the market goes back up”. “  As I spoke about in Trading tips #3 – there is no hope in trading.

The real issue adding to losing positions is that, many times, it works.  People use dollar cost average, and if this works 6 out of 10 times, the trader feels that it is worth it in the long run.  Well, it’s not.  Take, for example, Trader 2 initializing a long position in Apple at $690, just after 9/19/12 when Apple settled at $702.10 The odds are on his side. However, the 4 out of 10 times it doesn’t work can be enough to blow the trader out of his position and, at times, even out of a job.

Trader 2 buys Apple at $690.  There are analysts on the financial news networks and blogs speaking how Apple is expected to go to $1000 in the near future. The market rallies over $700 and slowly starts drifting lower. Then it gaps lower to $678.  The trader continues to add to his initial buys at $690 – convinced that the he is right and that this is just a minor correction in the market.  He says to himself  “the market always comes back.”  As we all know, Apple continue to drop to $500 at which point this trader could of had the trade that ended his career –

So, the key to this trading tip is straightforward. Stay light on your toes so you are always able to get in and out of positions with out mental stress. Never stay married to a bad position and, as I spoke about it in Trading Tip #1 – Leave your ego at the door.  Trade within your own size, and be able to admit when you’re wrong quickly, get flat or reverse.  I have said, and will continue to say, in my trading and business blogs – being flat is often the best position. It is the one and only position that you can look at the market from both sides realistically, honestly, and without prejudice to see where the market is headed.

Remember you can always get back into a trade.  No traders are prefect, so don’t try to be.

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Trading Tip #3 – If You Hear the Word “Hope”

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Trading Tip #3 – If You Hear the Word “Hope”

THERE IS NO HOPE IN TRADING.  It is like I tell my executive coaching clients who trade – If your thoughts keep returning to “I hope it goes up” or “I hope it goes down”, GET OUT!!!  Get flat and take another look at your view of the market.  Hope is on a date with an old friend of mine and, trust me, it is not going well.  Too many traders are concerned about being flat and missing part of the trades.  Don’t be.  You can always get back in.  No one catches every part of a trade.  Being flat is the best and only way to think clearly, even if its just for a moment.  How many of you have been crushed in a down move by hoping the market would go back up or saying “ this market has to bounce“?  The most important thing about understanding market movements is that the market doesn’t have to do anything.  No one is bigger or smarter than the market, and if you think you are, in time you will be carried out like so many traders before you that you never heard about.
stockYes, there will be times that you get out of a trade and – the moment you do – the market will go your way.  DO NOT WASTE YOUR TIME GETTING UPSET.  I have a lecture named “Fu@k*ng Up and How to Deal with It”, and this is for not only for traders, but for everyone – because the simple and true fact is that everyone Fu@ks up.
Traders need to understand that when I traded on the floor,  almost 60% of my trades were bad trades. I could have sat on my butt and kicked the crap out of myself, but if I did, I would have missed so many good trades.  So, if you get out and the market goes you’re way, don’t spend more then a second getting pissed.  Just step back in.
I will explain more  in  Trading tip #4 – Being Able to Admit When Your Wrong …. coming soon.

Trading Tip #2 – Test and test often

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Trading tip’s Rule #2 – Test and test often –

This goes for  the all types of traders, from the smallest to the largest. Once a position is established long or short, it’s best to test and test often. Let’s go with the long position for this example. Looking at the recent move in Facebook, let’s say that Trader one is a short-term day trader who likes to be flat by the end of the day, so he/she buys 500 Facebook shares at $27.75.  The stock moves to $28.  I would suggest testing the market by selling just 100 shares at $28.

http://www.dreamstime.com/-image22468311

This does two things.  First, it locks in a $25 profit to help the cost average of the original trade.  Second, and this can be hard to understand, the trader now has two positions – the long 400 of the original 500 shares, as well as the 100 that was sold can be looked at as a new short position.

This is what I did often and it allowed me to see both sides of the market.  For example, if Facebook is suddenly is offered at $27.95 then $27.90 then $27.85, then the 100 shares that the trader sold at $28 starts looking good as a short position, and that trader will start to feel good about the sales and can keep an eye on the buy side of the trade.

On the flip side of that example, however, what if the 100 shares the trader sold starts looking bad.  Perhaps the market goes to $28.10, then $28.15 and $28.25.  This technique will allow the trader to feel more comfortable with his long position. The trader always has the availability to add to the trade.  The trader also has the ability to test  the market with another 100 shares of the remaining 400 that are left and look at the trade to the same scenario.

Yes, it’s the same as scaling out of a position, but I have found too many traders sell out of part of their position and never look at the shares they got out of and see it the trade from only one side.

The same kind of testing can also be done with long-term trading.  For example, let’s say the trader buys Facebook a $27, tests at $28, tests more at $28.50, and then rides the rest position.  If this had been done over the past week, the trader would have made money on their original longs as well as on the sales that were looked at from the short side. Testing is a crucial technique in trading.  (Different techniques will also be discussed in future blog posts).

Traders must always be able to look at the market from both sides.  As I teach in my lectures, very few traders ever feel the market is going down when they are long or up when they are short – if they did, they wouldn’t be in that position.  Looking at a trade from both sides allows the trader to feel both sides of the market.

Trading comes down to very simple emotions – pain and pleasure. However, over my career I might’ve had a really good day on Monday and a small loss on Tuesday.  However, the small loss on Tuesday always feels worse than the excitement I felt on Monday.  It is just an occupational hazard.

One of the biggest mistakes a trader makes is getting upset that more money wasn’t made.  In the example above, the trader would be focusing on the money ‘lost’ because of the 100 shares that were sold. So many times I have heard “Ughh, if I didn’t get out of part of that trade, I would have made more money !!!!”

Great traders never buy the exact bottom and never sell the exact top. Those traders who love to boast “I bought the bottom or I sold the top” are either not telling you the truth, or are leaving out all the other bad trades in the middle that they just happen to forget about.

Good  traders very often feel some pain within establishing the position.  They rarely establish on the dead low or the extreme high on the move. I have been around some of the biggest and best crude oil traders in the world, and most were quiet and never boasted about anything .

Throughout my career, I’ve use this method of testing on both sides of the market. It is imperative for all traders- small and large – to not allow themselves to get upset about money that is often left on the table because of testing.  Finding that you have a winning trade is worth whatever money that is given up and testing to see that you have a losing trade to get out quickly, in the long run, will ensure cutting your losses quickly and efficiently.

We all feel that we should make more and lose less on trades but, in reality if a trader consistently adds profits into the portfolio – no matter how small – and cuts their losses quickly over time, they will be successful.

In the end, all the stories of all the trades that are told at the bars after work are irrelevant.  The bottom line and the only thing that counts is the balance in your statement the next morning.

More trading tips and rules are offered through my business coaching as well as lectures and speaking engagements.

Trading Rule #1 – Leave your ego at the door.

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IMG_0272As President of Sterling Commodities, part of our risk management for the Clearinghouse was to go over all of the traders accounts every night.  We needed to watch and analyze their trading patterns so that we could tell when it was time to talk to a trader and tell them to pull back or even take a few days off to regroup.  We were able to tell when traders were about to move to the next level of trading – both in size of positions and risk tolerance – and then give them guidance.  We helped them move to the next level.

The ability to see how everyone trades and their styles had its drawbacks mentally.  Being a medium size trader myself, I had to deal with the issue.  While I might have made 25k on a good day, there were traders that made 50k, 75k, and a few that would make 100′s of thousands of dollars on a big event day.  Events such as a major OPEC statement, a hurricane, or other world events.  I remember how, at first, I would question my own trading while comparing myself to some of the biggest crude oil traders in the world who cleared through Sterling.  I quickly learned that all traders need to trade within the parameters of their comfortable levels.  I remember the first time I made the cardinal mistake in the pit.  It was one of those crazy days when the action was high and my pulse rate was higher.  News had just come out and the market was flying! We loved trading in days like that.  I saw a paper broker get an order from his clerk and he quickly tuned in to the pit and ask for a quote in November/December spread.  I pushed my way through a few people to be first and I screamed ’68 bid’  He looked right at me and he screamed as loud as he could ‘SOLD!!!!!!!!!!!’  As I was wiping his spit off my face I realize I screwed up.  (As a floor traders, we are taught to always say the amount your willing to take.  For example, 68 bids for 50.) However, stupidly I screamed ‘BUY EM!!!!‘  I saw there were bids that came in to other brokers around the pit and felt like a big shot. He screamed ’400!!!!!’  Well, I could have said ‘No, I’ll take 75-100 contracts’, which was my normal self-imposed limit and looked like an ass and have him shove up my butt screaming ‘Don’t ever fu@-king say buy em to me.’  or I could just take them.  So, I took them.  There was also the ten-lot rule in the pit.  If you didn’t put a number on your bid or offer, you were held to 10 contracts.  However, most traders didn’t take just ten. Do that enough times and no one will ever trade with you or trust your bid or offer again.

What many traders need to realize is that, at times, you end up in positions you didn’t always plan on.  Sometimes, someone bigger, smarter and with more money wanted you in and fooled you into taking more than you wanted.  This could be done in many ways. However, the way it happened that day was there was a flood of bids in the spread that hit the pit. Orders were put in different areas of the pits to the largest paper brokers. Large companies often used multiple brokers around the ring to help disguise what they were doing – with the flood of orders hitting the pit, I felt I was safe to take em all.  Well, once the broker got off the rest of the 1000 lot order to a few locals (traders who trade their own accounts), all the bids in the spread got pulled and the spread collapsed.

YES, THERE WAS ORDER STUFFING BACK IN THE OLD DAYS OF PIT TRADING.

The lesson learned is to stay within your own comfort levels. Only stepping up your size when you feel you’re ready and not because someone you went out of dinner with the night before told you how much he or she made.  What I was able to learn by knowing everyone’s positioning in the clearing house was that many traders (ok, almost all traders) exaggerate what they make.  So this is the rule of listening to others when it comes to money – whatever they tell you they make, cut it in 1/2 and take some more off.  Remember the fish was THAT big!!!!  There are two things that most men lie about.  The size of their position, and, well, you know the rest.

Case in point, one day the CEO of Sterling was in the elevator with one of the largest metals traders, who will remain unnamed.  Gold was up $25 on the morning call, due to world events. In the mid 80′s a $20-$30 gold move didn’t happen often.  This trader was telling everyone how he was long 300 contracts.  When everyone left the elevator the CEO said hey “——”, you can say what you want, but I saw your position in your account and I know your long only 30 contracts.  He Laughed and then walked out.  But, at Sterling, we made sure no one knew anyone else’s positions and, more importantly, about what others made.

So, stay in the size level you feel that you will not lose sleep over and realize that many medium and small traders ended up making more money than the traders who had the need to trade huge every trade.  Medium to small traders can stay light on their feet. They tend to be able to change positions faster with less emotional attachment.

In the end it all adds up.

Another case in point. Trader 2 was what I called an ego trader.  He had to trade big.  Every day he would be up and down.  Up 20,000 on Monday and down 30,000 on Tuesday.  Down 20,000 on Wednesday and up 35,000 on Thursday.  Friday he’d be up 10,000.  He paid huge commission and had emotional swings all week to end up making 15k for the week.  I, on the other hand, chipped out about 2,500 a day, and after commission I made more than him.  I once went over to him saying ‘If you traded 20 – 30 contracts at a time and chipped it out could you 4000 a day.’ He answered with ‘Of course I could’.  I said ‘That’s over 800k a year with less stress, less commission and less mood swings.’ I saw many traders do like I did.  Trading smaller.  Chipping it out and making a very good living, with much less risk then most traders.

So, my main point of Trading Rule Number 1 is this: Don’t try being a hero – they often wind up getting blown up and blown out.  Stay within yourself and, at times, test trading larger position – when and if the time and the markets are right.

For more trading tips, watch the video below or contact me.

ICE vs. NYSE – Is It time to turn the lights off on the trading floor?

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ICE vs. NYSE-

As a former Board member of the New York Mercantile exchange, and after dealing with the ICE while at NYMEX, I find the news today very interesting.

In 2000 the ICE made an offer to NMYEX. Or should I say more of a demand. The demand was that if NYMEX didn’t invest 10% into ICE, then they  would go after all of NYMEX’s products .

This started a war between NYMEX and ICE that continued for years. ICE was founded by members of Goldman Sachs and other of NYMEX’s largest customers. The NYMEX Board under estimated ICE and it continued to grow and take over more market share.

There was a time I felt  a merger between the two companies would  enhance the company’s bottom line and  stock price.  If the two exchanges could cross margin their energy products, it would open up a tremendous amount of equity which, in turn, would enhance volumes and help both exchanges grow.

After the NYMEX IPO, NYMEX and New York Stock Exchange were in talks to merge, but these talks fell apart over pricing and management issues.

If the New York Stock Exchange is smart and understands that the world of trading has changed drastically in the last 10 years, and they are considered old school as well as  losing market share by the year, they will need to consider this possibility of merging or being taken over by the ICE very seriously.

The staff and board of ICE are on the cutting edge and could rebrand the NYSE, which has been left behind on the exchange front. The way that the New York Stock Exchange handle the closing of the exchange for two days during super storm Sandy, that they could’ve easily open the exchange while not opening up the building,  shows me they are concerned about their brand and didn’t want the public to realize that without anybody in the building trading could have continued without issue.

After September 11, 2001, all the exchanges made contingency plans that if New York City was closed down for an extensive period of time the exchanges could still open the next day without issue.

Once again, looking at this deal between ICE and the NYSE, the real question is – is there a way to cross margin products -stocks, futures, and derivatives to free up even more equity which will enhance volumes on both exchanges?

As someone who traded, was President of a Clearinghouse, and was a Board member of a major exchange for seven years as well as an Executive Committee member, I feel ICE taking over the New York Stock Exchange would be very beneficial.

It will be interesting to see how regulators look into this deal. The CFTC had no issue allowing ICE, which is a foreign exchange based in Atlanta, to create and put on their platform a WTI crude look-alike product  and settle it on NYMEX settlements while having no authority to look at positions because ICE was regulated by the FSA in London.

NYMEX still holds the record of any exchanges value on their IPO and the sale of the exchange to the CME.

The debate of this merger will be enjoyable to watch from my perspective. Please feel free to leave comments I look forward to hearing your views.

MF Global – My email to the CFTC

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This blog was originally set to post on 10/31/12,  due to Hurricane Sandy and the issues that we faced on Long Island, New York, it was delayed.

The following was an email I sent to Bart Chilton on the eve of the MF global Collapse. The actions that were not taken by the CFTC and the CME added undue risk into the markets –  many traders and introducing brokers never recovered from being locked out . While John Corzine is a free man, and the board members of the CME and commissioners of the CFTC point fingers and have conflicting stories, they are still in positions of power.  The real question is ’What lies ahead for investors?’ The markets with cleared swaps are only getting more complicated to regulate and the speed in which events happen will only get faster.  We have seen over and over that the regulators are still behind on understanding the futures markets.

As a former NYMEX Board and Executive Committee member, as well as an investor, I am deeply concerned about what lies ahead. The meltdowns of the past will seem small and slow in comparison to what is about to happen in the near future The time has come to reform the CFTC and the SEC with people who understand the new markets and how they are traded.

My email to Bart Chilton clearly points out what I thought would happen and did –

Bart,

I am sure you are up to your ears dealing with the MF Global issue . However, the Floor Traders both in Chicago and New York are being put in a position that is just unnecessary. They are not part of the issue, the funds should be in a seg account and they should be allowed to be moved quickly and with ease.

There is no more risk in these account then there were days ago and, if anything, the CFTC has caused all the accounts to have unlimited risk since they can not be managed by the traders. Liquidation only for these traders will, and can, do more harm in the markets. It will cause moves that are not with in the normal parameters of trading and many traders and companies could have major issues which could have easily been avoided .

In the end, none of the money in the traders account will provide help for the issues that MF Global now faces and lives will be destroyed.

Refco??? All the traders on NYMEX and CME got all their money back.  Can we all learn from the past to see where this is going and stop the pain to the people who had nothing to do with this?

This is the easiest part of the problem and the CFTC can and should handle this tomorrow.

I realize that many of the people you work with do not understand all clearing and exchange issue. However, after our conversations, I believe that you do and that you can see my point.

If I can help out in any way please let me know  .

Regards,

David D. Greenberg

President, Greenberg Capital