Beginner Turmoil

I joined this forum to get some feedback from more experienced traders. I have experience with stocks and options (simply buying puts and calls) and have either been lucky or I’m somehow gifted (I tend to think the former). Over the years I have made money--but I just started day trading, so I am a bit inexperienced at that and in need of far more discipline (I'm actively working on that).

In general, I have made many successful day trades simply riding momentum—I’m actually quite good at seeing meaningful breaks of support and resistance levels and eploiting them. However, recently (probably due to the desire to make up my stock-market losses) I am having trouble closing positions in time. For example, on two recent trades, I was ahead to the tune of about 85%--yet I did not close the position. Instead, I took delight in my on-screen gains. While taking delight, a reversal began and I got paralyzed—not knowing whether I should wait for another reversal or simply pull the “market order” trigger.

In every recent case my trades have been positive up to 85% or so—but also in every recent case I sold after losing the position to a reversal. This inability to lock-in gains is costing me very dearly—and if I don't fix the problem soon I will surely get wiped out, I will reduce my positions as I learn and stop being so greedy. I’m also losing big because I am so enamored with my gains that I “believe” they’ll come back.

I’m sure these are typical beginner’s errors, but I often:
A) Fail to honor the chart pattern when I see a reversal.
B) Fail to sell a *portion* of my holdings to at least lock-in some profit.
C) Fail to know when a good time to exit would be.
D) Resort to "magic numbers"--for example, being up $925 and wanting to close the position once I hit $1000.

Does anyone have any suggestions for these problems?

Also, being very discouraged at this point, I tried to read some articles online about day-traders--and got only more discouraged. Every article I saw suggested that most day-traders are doomed—that they are all, essentially, being fooled by randomness (to quote Nassim Taleb). I tend to think that patterns are real and are indeed evident and that breakthroughs to the upside and downside are meaningful events--especially after an extended trading range. Any thoughts?

Many thanks for a reply or even links to writings that may help address or discuss the issues I have presented.

Thanks,
Jon

 

I'm not in any way, shape, or form even remotely pro, but from what I've read, for the moment at least, all bets are basically off. For experienced traders, everything they know isn't just temporarily wrong... it's misleading and dangerous. There's been a HUGE influx of new traders since last month, and their very inexperience and concentrated chaotic and random behavior is completely screwing up every long-established observable pattern... patterns that were based on the culture of traders who understood each other, shared common strategies and habits, and basically tended to act in predictable ways.

Add a million newbies doing things that make absolutely no sense (to someone who knows what he or she is doing), and old observable patterns based on expectations of rational, experienced behavior go flying out the window.

The closest thing I've found to a pattern is the tendency of people eager to buy to cluster around $x.x2 (trying to squeeze ahead of the less-eager $x.x1 bidders, and the whole number-loving $x.x0 bidders, and the tendency of people eager to sell to cluster around $x0x8 (cutting in front of the $x.x9 and $x.x0 sellers). And a shockingly common love for $x.69. I kid you not. Watch Google for a while, and look at how many bids show up for any given dollar value plus 69 cents.

 

Thanks for the reply. The .69 bit is interesting... Wow.

If most newbies are trading options--and not the stock--does option activity that is day-traded actually affect the stock price? I can see if a call, for example, is exercised and then sold--or a put sold and covered--but I don't see plain buy calls/buy puts affecting the underlying stock if closed and never exercised. Can individuals really affect Google at its price level? Are they actually trading shares of the stock vs. options? That's kind of big money for individuals to be buying and selling, no? It's not exactly a cheap stock.

My primary problem is not getting out in time. I think my problem is more psychological than for lack of trading skill. I pick good positions that move in the right direction but I get gun-shy when it's time to exit. I just need to learn some discipline. I saw somewhere that getting out after a 20% pullback is a good idea. Also, I tend to revise my limit orders to close when I'm trending well--and then I miss the exit and end up "chasing" the option price on the way down--ultimately issuing a market order when I've lost money. Now, I don't do this so often that I'm not learning from my mistakes--but I did do it twice this week and lost both times. I'm sort of answering my own question because I realize that the solution is simply to set a reasonable limit and be DELIGHTED if it sells and locks-in a profit. I will learn the lesson sooner or later--I will be out of the game if I don't.

By the way, I don't trade every day. I really need to see a "traditional" pattern in order to get in--I avoid the wild, patternless plays--they're too random for my taste. The textbook patterns still exist in options for perhaps less hugely-popular and touted stocks.

Jon

 

If you're already well versed in the intricacies of S/R, I suggest you look into this thread: Unholy Grail to Success

Good luck!

 

Oh god, no. The newbies aren't trading options. Just equities. But what I'm saying is that there are a lot of them, collectively injecting lots of new capital, but behaving as a group in ways that completely go against everything that's traditionally been known to be sane and rational. There have always been people like that in the market, but never so many, with so much cash, at a time like THIS.

I'm sure you saw my essay in another thread (forgot the title) where I give my theory that the influx of new casual active traders, and their money, made possible by rapidly falling barriers to entry thanks to online trading, is in the process of rewriting the rules of how the market works *forever*. Going forward, we won't really have "bull" or "bear" markets in the traditional sense... we'll have markets that are temporarily volatile when there are only a relative handful of active participants, and quickly become stable and converge around a new level as the casual traders jump in and spray lots of small orders around a bell curve centered at some point.

If Nasdaq 2 becomes a nearly-universal feature, it'll be just like a football game... where everyone places their initial orders, then sees where the pileup is taking place, and shifts the rest of their orders to join the pileup. If you wanted to buy shares, and saw that there were 20k bids for $12.78, 120k bids for $12.79, 470k bids for $12.80, 690k asks for $12.80, 1.2 million asks for $12.81, and 3.8 million asks for $12.82... plus a trivial number strewn above and below, you'd probably dive into the $12.80 pile too.

In the past, there were thousands of traders, but their individual impacts were large, and they behaved in relatively predictable ways. The market has never really HAD a situation where there were literally MILLIONS of chaotic individuals playing metaphorical football.

Remember, the current chaos is due to a few hundred thousands newbies jumping in. Trading costs are only going to get lower, and over time more and more people are going to join the party. 95% of the activity will still be due to 1% of the participants... but the others will throw JUST enough randomness and chaos into the equation to make predicting ANYTHING using the old rules difficult or impossible.

Case in point: my suspicions that Thursday afternoon's crash was largely fueled by fund liquidations that kept steadily driving the price lower and lower long enough to convince the cash-wielding hordes to just step back and wait for prices to fall by another buck. Going forward, funds liquidating might learn that if they're trying to liquidate, to just STOP SELLING if the price falls by more than a dollar. Crowds are individually chaotic, but as a group their behavior tends to be more predictable.

If my theory that Thursday afternoon's sell-off was largely due to the liquidating actions of a few sellers is correct, they themselves could have stopped it by just pulling back before the masses decided to step back and wait for it to fall more. Imagine, for a moment, if there were 3 funds liquidating, at some point they all realized what was happening, and simply pulled back and ADDED a buck to their ASK prices. If the other liquidating funds saw it happen and did the same thing, the crowd would have panicked that the crash was over, and started chasing the shares back up.

Remember the most important point: institutional investors freak out and panic over "bad economic news". Individual investors with fistfuls of dollars could largely care less about it. Taking that tidbit of crowd psychology into account, the most rational behavior for funds liquidating due to fears over bad economic news would be to assume that the buyers WON"T care, and are being driven more by bargain hunting than any real formula. Instead of blindly assuming that if they stop selling, the market will just keep falling, they'll figure out that if they stop selling, the masses will think the falling has stopped and resume the feeding frenzy.

 

Indeed, all valid points.

The Big Question remains: Are trends predictable in such chaos? Fractal appear random until you zoom out--charts, too, appear random until a zoom level often reveals a trend. Not all charts will trend, but intraday trends often lead to extraday trends--even (and perhaps especially) in chaotic markets. For example, nearly every stock has trended emphatically downward in the past month. That's hardly "random". Arguably, these are the kinds of market conditions that give day-traders an obvious edge.

If we can conclude that there is no randomness, then this suggests a certain (albeit quite difficult to detect) order. And it suggests that day-trading is not entirely futile.

Jon

 

Sorry, but I have a hard time buying this has anything to do with reality. Not to mention that retail traders make up less than 10% of NYSE volume...even beyond that though, I would be shocked if there are not less retail traders now than when the crisis started.
The reality is we have simply not seen this much volatility before for such a sustained amount of time. You can't really expect the same patterns when you have ultra high volatility vs ultra low.
The best advice is to trade with smaller size and less risk until these crazy markets pass.