Guest Post: The Phantom of the Pits Tried to Tell Me…

Posted on March 20th, 2007
Written by Prospectus
Posted in: N/A (old archives)

This post was contributed by a guest author, and does not necessarily reflect the views of Richard or MovetheMarkets.com

I took a trade in Palm, Inc. (NASDAQ: PALM) today. It was a gap up this morning, and I liked the action in the first four bars: Lots of white space, the second bar was a doji, followed by two green bars. It reminded me of the setup in my TTWO trade. I took an entry above the high of bar 4, knowing that it was a higher risk trade since it was below the OR high. I was ready to get out if it didn’t work. Or was I?

palm-candle-last-2-days_15m-2007-03-20-110620.GIF

Background:

I traded through my TD Ameritrade account this time, which has a good deal of long-term investment money (about 10X my Zecco account; my Zecco money will soon be joining it). Because of that, I’ve taken the dollar amounts away from my results, since the newbie small-dollar trader journey is not really what I’m trying to portray anymore. Instead of trading a very tiny account that is 100% risk capital, I’m going to trade a much larger account that is about 15% risk capital. I see this as my next step in trading.

For example: Say I have $1000 to burn, and $10,000 that I “need” eventually. Instead of trading only the burn money, and grinding away a tiny bit at a time, I would trade the combined balance, but impose a drawdown limit on the account–absolute rock bottom would be if the $1000 goes away. Now a 1% of equity risk would be $100 per trade, instead of $10 as before. This would mean that 10 immediate losses in a row would hit my drawdown limit. A problem–now I have commissions, and if my trade risk size were only $100 then the commissions would be 20% of that. Yikes!

Analysis:

I entered as stated above. As I’ve been re-reading Phantom of the Pits, I read some things last night that I should have obeyed today (paraphrased below):

Don’t wait for your stop to prove the trade wrong! Assume it’s wrong until proven otherwise. Trading is a losing game, and if your position is not proven correct, then reduce or remove it! Don’t let the market tell you that you were wrong. It’s your job to know when you are wrong. You have to learn to be wrong, fast!

I kept watching PALM go sideways, waiting for the breakout above $19.00 that never came. I had opportunities to get out at -0.4R, but stayed with it. In retrospect, it was not proven correct within 3-4 bars, and I should have bailed on it instead of stay with it, especially since it was in the red rather than the other way around. I didn’t want to take the $50 loss, so I stayed with it until the stop was hit for the full 1R loss. Not good. I should have been wrong, fast! That’s the only way to survive in trading.

Takeaway:

Listen to the Phantom! Get out if your wrong trade (that’s all of them) is not proven correct (within 2-3 candles)!

Trade Summary:

PALM Long
Entry: $19.03, Stop: $18.86, Target: $19.63
R: $0.17/share, Exit: $18.86
P/L: -1.00R

Comments

  • bbc
    Well, yes, we all 'know better' and would not be 'careless' if we took the time to think things over...that is the problem, that we do not. OK, Enough on that.

    OK....congrats on the wise choice to fund the smaller acct...my smaller acct is keeping me an 'honest' trader.
  • @bbc: That's good advice. I track my PnL for every trade in a spreadsheet. I keep track of my expectancy, do position sizing and trade planning, and record my actual values in there. If I continue the big account route, I'll have to watch myself very carefully, as you said.

    @QUIKTDR: I tend to be a bit self-deprecating in my writing and humor, so some of it is my shtick, though I also can get down on myself. Actually, being able to take losses in trading has helped with my ability to cope with these feelings immensely. Think of it as cheap psychotherapy.

    About Zecco, yes they are good, though it depends on how you want to use them. The obvious pro is free stock and ETF trades, up to 40/month with up to 10 in a single day, $3.50 after that. There's really no reason to use them except for this one. Other brokerages have better resources. The cons you have to decide if you can live with are:

    *Web-based interface that logs you out every 10 minutes. No streaming quotes or fancy order interface. Think 1998, hitting refresh constantly. (This is my biggest con. If they had a way to integrate their trading to Quotetracker, I'd be completely ecstatic.)
    *Account status only updated nightly, not in real time. Can cause problems with your buying power available.
    *Nearly non-existent customer service.
    *Paper trade confirmations for each transaction mailed to you with no way to stop them currently.

    The fills are pretty good, and they are making improvements to their system all the time. They clear through Penson, so their back end is great. The trading interface needs to be brought into this millenium though. If you want to trade a portfolio of stocks in small chunks, then this is a great way to do it.
  • bbc
    I was trading out of our larger investment acct with large margin...but with all that money (lots of money for a small-fry trader) and four times that in margin, I easily got very careless. Also I did not keep close track of PnL because it could all get absorbed so easily. Aside from the daily covering of my mistakes, by year's end, it really added up. I would be hesitant to repeat. Now I have a small IB acct and play it tight until I am more experienced, if I lose, I have to make it up in the IB acct.
  • Glenn
    PALM is a pos.
  • When you put it that way, I sound like an idiot (which I might be!)

    That Zecco minimum balance really messed with me. I can't trade with them anymore until I get more capital. I've had this other TD account for a while, but just haven't done anything with it. I want to trade bigger size, and had been thinking about doing this anyway for a while. The timing is odd as it came after my big loss.

    I was trying to leverage that one trade the other day to get over my $2000 minimum balance, and it went awry. I realized that the situation wasn't working for me, and I needed to make a change.

    I'm increasing size primarily to get adequately capitalized to trade in the first place. I guess I'm forcing this all a bit, aren't I? Thanks for the comments.

    I'll make a vow not to trade for the rest of the week as I digest what I'm doing and why.
  • I'm with Richard, I hope you're increasing size because you have a proven track record and are ready for greater profits as well as greater risks.

    But on the other hand, losing $1,000 or even $10,000 might make you depressed or upset for a while, but it won't change the course of your life. I think it could be a good learning experience. Even if the experience is "damn, I shouldn't have done that!" :P

    Good luck, Prospectus.
  • I'm surprised, I guess, that you lost 15% in one day, and decided to close out your account. You said: "I trade a small account on purpose, until I can be consistently profitable and weed out mistakes like this one."

    Then, two trading days later, your next move is to trade a 10x larger account with a total of 15% risk capital in it. I guess you are pretty sure you are not going to make your recent mistake again. Sounds risky! Be careful...
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