Thursday, January 24, 2008

Yesterday's $9k tuition lesson

A trader must avoid overconfidence in one's ability to prevent the unexpected from impacting one's portfolio. Unfortunately, when one violates that, the market is assured of presenting its lesson.

Yesterday afternoon, at 3pm we were looking at a $10k gain. Then the unexpected occurred, the Dow rallied 250 points and 4 days of gains evaporated in less than an hour.

Looking back, about the only thing we could have done better was auto sell the entire position around 97.50. But the important thing is to not get frozen, which is what happened. Not planning for this contingency didn't help either.

The tape action does not need a reason why its moving in a specific direction. All you have to do is trade what its saying and not concern yourself with the reason for the move. One can always sell and rebuy part of the position at a better price, which is what's happening now.

Although Livermore didn't mind retracing substantial gains if he felt the entire move had not played out, we are not Livermore. It's one thing to have $100 million such as Livermore, but when you have less than .2% of his capital, you don't have the luxury to make that many mistakes before you're out of cash. And when you are out of cash, it's game over.

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