Crowd Psychology

Crowd psychology almost always works. In our office, we use the actions and the sentiment of the majority as critical indicators to the next move of the market. Here are some examples:

1. Market Top - After a furious rally to the top of a channel, the house account usually runs out of money. And, almost always, the market either retraces in the afternoon, losing all morning gains, or it crashes within the next few days. It's also the time when everyone is so bullish and complacent.

2. Market Bottom - When everyone is so bearish, then it's a sign that the market is about to turn to the upside. I usually ask my colleagues whether they're buying to the close or not. When no one is brave enough to buy, it's usually a good time to probe the leaders.

3. The Happy Meter - Whenever more than a handful are rejoicing and making unrealized profits in a single stock, it may be a good time to sell. Looking at it from a larger perspective, it may mean that there are no more buyers to push up the stock - which means that the upside has already been capped.

Just today, I experienced the happy meter. Everyone who had shipping stocks today was ecstatic in the afternoon due to the sudden acceleration of buying. One was already thinking of going to a club and celebrating, others were already computing profit targets, etc. At the back of my head, I was already wary of a sudden reversal and, thus, I planned a tight mental stop. Lo and behold, about 20 minutes into the close, the shipping stocks did reverse. But of course, I didn't sell right away. I froze for about 5 minutes and hoped that my stock would still go up, and I paid a few dear fluctuations for it. (ALWAYS FOLLOW YOUR PLAN!)

Here's a snap shot of the intraday chart of the stock almost everyone had today (click to enlarge):

In conclusion, one should always be wary of how his/her fellow traders (as a group) are acting. A trading firm is a good microcosm of all the market participants in the world. However, one should also put into mind that, though very important, crowd psychology is only supplementary to proper technical and fundamental analysis, and must not be used alone.

Lessons

My boss is right, change is constant in the market. Even if you excel in technicals or fundamentals, you still have to know when to use either one or both. Exceptional knowledge of the markets is useless if you're always one step behind. There are raging bull and bear markets, and there are also periods of consolidation. If you want to earn a living from trading, then you'd have to notice these constant shifts in environment, and adapt quickly. And so, in order to prepare myself for the future, from now on, whenever I pick up some valuable lessons from my own experiences, my boss' tidbits of wisdom, and even my colleagues' stories, I'd write them down here.

So here goes:

Period: From the March 2009 bear market trough.

1. Keep out of the laggards. Your chances of making a quick profit are slim when you hold on to these crappy issues. Use the index as your guide to identify laggards and leaders.
2. Never do the revenge trade intraday unless there is a valid set-up. And even so, only buy a portion of your original size.
3. If your stock is not trending, do not anticipate the moving average bounce. Wait for the first uptick.
4. Look at the big picture first, and then enter using an intraday set-up.
5. Candle sticks are very important. When you think something is wrong, get out and just enter the next day if possible.
6. In overbought markets, do not load up in one issue overnight. The chances of experiencing a "Black Swan" - or something extremely unexpected - are very high. (i.e. placements, profit warnings)
7. Avoid buying stocks in the first 30 mins.
8. Large and fast intraday moves accompanied by strong volume are signals to sell a bit of your position. On the other hand, small, gradual moves are hold signals. The latter are more sustainable.

Poco a poco se va lejos

I'm sitting on my biggest drawdown ever (47%), and it has left me wondering... how the hell am I going to hurdle this?

August 2009 - the month I will always remember as a trader.

The losses started as a trickle - little by little the market churned me. It was just 1%-2% losses per day. Until the big drop came. I decided to hold a stock overnight that was strong fundamentally, even though it wasn't doing very well technically. The next day, it gapped down 12%. The company placed shares at a deep discount. I was devastated. From that point on, the losses have been piling up exponentially. I can't control my risk. My emotions have been running high. I've been cutting too late and taking profits too early. I simply am not in tune with the markets.

My psychological well-being has also been compromised. And it shows with the way I've been dealing with my co-workers. It seems like, lately, I am more concerned about HOPING that their stocks would decline, and their account balances would deteriorate to a level below mine. This stupid competitive or crab-mentality episode of mine has been distracting me from what should be my ultimate goal - improving and refining my trading in order to make up my losses and eventually, WIN.

GOD. The market is running high and I'm losing money. For days and weeks, I've been jumping around from trading right to trading reckless. Why? Because I've been hoping for that big break in order to bring back my confidence, which has been causing me to pick a stock, bet big and then, consequently, HOPE that it would go up without looking at the picture objectively.

I need to change. I know I can turn this around. I just need to be more patient and be content with singles and doubles. My losses started out with a trickle and then a big drop came... maybe if I traded better, my gains would start small, and then with a little luck, a big win would come around as well.

This will be my toughest test ever.

Little by little, one goes far.

Mini Crash

I just had the worst 2 weeks of my career as a trader.

From euphoria down to near depression just in a matter of a month.

How could have that happened? How could have I let that happen?

I was up and then I am down. Roller coaster it is.

I can only imagine how other traders felt when the market was at its worst. From the peak of the bull market down to the March 6 bottom - unbelievable.

I lost 16% in 2 weeks. What if I had started at the peak of the market? I might have wiped out my whole account.

I need to be more disciplined. I've been saying that since I first started but I still haven't changed significantly. Maybe that's the reason why people say the learning curve of a trader approaches its ceiling in about 5 years. It takes that long to master ones emotions, and to gain discipline. Or, it takes that long to become a machine.

Lessons:
1. You can't control the market. You can only control your risk.
2. When you feel like you "know" what you are doing. Stop and evaluate. Bring down your size and do so until you feel like it's "hard" again.
3. LEARN WHEN TO STOP TRADING. It's not just about churning; it's also about preserving one's capital.