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Background and Resume

December 24, 2011 Leave a comment

Just about every other week, I get inquiries about how I learned the skills I have used in my coding and trading life. The fact of the matter is that the best way to learn how to do something is to surround yourself with those that have already become successful and to learn as much as you can by DOING rather than just reading about doing something. Just as there are a countless number of trading materials as there are books on the shelves of your local Barnes and Noble, there is nothing that can match the amount of information you will keep in your mind than the act of repetition.

As in any career that requires mental stamina, you can only grow by learning from a base of material, and then executing your plan with creativity, persistence and hard work. I’m often asked what languages I know, where I got my background in computer science, and how it led me to finance. I figured the best way to answer was to lay out exactly what I’ve done and how I’ve progressed in my career. As a result, you can see my credentials and resume below.

If the right person sees this, they can judge for themselves if someone like me is right for an opportunity that lies ahead. Thank you for your time.

Categories: autobiography

$NFLX Convertible Bonds – Act of genius or desperation?

November 27, 2011 3 comments

In my previous post I noted my experience working at a hedge fund called Stark Investments.  One of the core strategies of the firm was finding opportunities in convertible bond arbitrage, and Netflix news on Monday gave me a reason to talk about them in a post.  There are several strategies that can be employed with the use of convertible bonds, but I won’t get into those details this time around without a background in what they are constructed and what it all means.

Last week Monday, $NFLX shares continued their downward spiral another 8% when news came out that the company offered $200Million of Zero Coupon Convertible Subordinated Notes due on December 1st, 2018 to Technology Crossover Ventures, a  late-stage venture-capital firm.  If converted, the offering will add approximately 2.3M shares to the float This is equivalent to an initial conversion price of about $85.80 / share.  There are currently 52.5M shares outstanding, and the additional shares would dilute the stock by about 4.4%.

Convertible bonds have been given the label complex derivative, but they really aren’t that complicated when you take a few minutes to see how they are constructed.

A Convertible is basically a bond issued by a corporation that gives the holder the right to exchange the bond for a fixed number of ordinary stock shares.  If the bond is not redeemed by expiration, the value of the bond can be redeemed at the cash redemption value or market value of convertible shares.  In the case of a zero coupon bond, the value of the bond at maturity is par.

Let’s take a look at a basic hypothetical example:

Company Widgetron wants to raise cash by offering bonds that pay a 4% annual coupon that matures in May 19, 2015.  The first settlement date was May 19, 2010.  The bond holder reserves the right to convert the bond into

We can break that apart by looking at the terms:

* Coupon: 4%
This is basically the annual interest payment paid on the bond, which can be paid annually, semi-annually or quarterly.  This amount is generally a fixed rate for the life of the bond, but there are exceptions.  A 4% coupon on a 1,000 nominal value bond equates to .04 * 1000 = $40/year in payments.  Interest accrues according to the market convention used.  The UK, Asia Pacific, US and Latin America typically use 30/360 day convention, while Japan uses Actual / 365 days and continental Europe is actual/actual.

* Maturity
The date upon which the bond matures and the issuer must offer convertible shares. Again, if the value of the shares underlying at maturity exceeds the redemption amount, the holder will opt to convert into the common shares.

* Conversion Ratio
This is the number of shares the bond can convert into. For example, a conversion ratio of 31.0463 means that each bond can be converted into 31.0463 ordinary shares. The conversion ratio remains fixed for the life of the instrument, but may be adjusted to account for stock splits or special dividends.

* Conversion Price
This is a computed value, derived by taking the nominal value and dividing by the conversion ratio.  1000 / 31.0463 = 32.21.  This is the implied price that the shares would “cost” to the holder if conversion takes place.

Most convertible bonds are issued with a period of call protection during which the issuer may call the bonds early. Hard call protection is a period of time in which the bonds may not be called at all, while provisional protection is subject to the share price being above a certain level. For example, an issuer may want to reserve the right to call the bond if the underlying stock gets above 140% of the conversion price in order to protect themselves from a massive implied yield hit. Greater the call protection, the greater benefit to bond investors.  Shorter the call protection, the greater benefit to the issuer.

Therein lies the rub:
At maturity, the holder of the bond simply figures out if the value of (share price * conversion ratio ) > (conversion price * conversion ratio).  If it is, the holder would convert shares and score an instant profit.  This is effectively the ‘strike price’ of the bond.

In the concrete example for $NFLX, the bond is actually a zero coupon bond, and in theory the private buyers of the bonds today may be getting a deal in the long run, with faith that the value of the common stock will rise significantly over the next 7 years in exchange for taking the risk of getting a 0% coupon.  At this point, the stock would have to rise 35% from the current stock price of 63.86 in order to be made-whole on the deal.  The notes will convert at a rate of 11.6553 per $1,000, an implied price of 85.80.

For $NFLX, it could be viewed as both a smart move to lock in interest-free financing of international expansion, but it comes at a short-term cost.  The market has acted negatively as current holders continue to take a beating on the once pumped up momo stock that is momo-no-mo.  Netflix has shown poor management of available capital by over-spending on content, losing content providers like Starz through failed negotiation, and even repurchased its own stock with an average price of $222 per share.  The recent issuance of this convertible bond deal will either prove to be an act of genius or an act of desperation to continue its global dominance in streaming content.

This is a painful lesson for those that continue to catch this falling knife or planned on holding on short term but got locked in to a now long term position.
Obviously for the holders of the bonds, the long term view must be very bullish, but it could still be a very costly bet.

Let me know your thoughts by leaving a comment.

Categories: Uncategorized

Who is CoderTrader – Part I

November 21, 2011 7 comments

Twitter and tools like @StockTwits have proven to be great tools for building groups of like minded individuals into small communities upon which to form valuable relationships and build a reputation within the community.  As you may have found for yourself, the more you create content and generate ideas for others, the more followers you get.  Word of mouth spreads like wildfire these days, and you get to meet a diverse group of people that you would otherwise have no chance of meeting in random chance.  For whatever reason, people in the physical world tend to just walk on by each other with barely a moment to gain eye contact when walking in the street. In contrast, people feel very comfortable sending a quick tweet to say hi or even ask personal questions about your background, current status or even future goals.

As my own set of followers grows to over 2,400 at the time of this writing, I’m finding a lot of new followers know very little about my background or credentials when it comes to trading in the markets. Some people prefer to stay anonymous, and that’s fine for various reasons.  I tend to lean towards the transparent side of the spectrum; I believe there is a great opportunity for an individual to build their own brand while building the community around them.

I am just a regular 29 year old guy based in Milwaukee, WI.  I am married to a beautiful wife of 7 solid years, and I wouldn’t trade that for anything. We are parents to 2 year old daughter named Ruby who provides most of the fuel to my inner fire.  She was born with a multitude of severe health issues, including life threatening ones: Tetralogy of Fallot (4 part severe heart defect), Pulmonary Atresia (missing pulmonary artery) and MAPCAs (multiple aorta pulmonary collateral arteries to get de-oxygenated blood around her body).  She was born with 22q11.2 chromosome deletion, a chromosome defect that affects every part of her DNA and growth process.  She eats only with the use of a feeding tube.  Every day is a challenge for her, but I wouldn’t trade anything for the life experiences that little girl has given me.  Hell hath no fury like a father protecting his little girl from the troubles of the world.

I graduated Summa Cum Laude from the University of Wisconsin – Milwaukee with a Bachelors of Science degree in Computer Engineering and Applied Science.  My Mathematics courses at the university left me one credit away from a minor in Mathematics, but I assure you 5 years of calculus and applied physics makes you feel close enough.  While attending college, I was hospitalized with meningitis and made it through.

When I started college, I wasn’t satisfied with pure theory. I wanted to put my knowledge to the test by getting a job while going to school full time.  I began work with a Hedge Fund called Stark Investments.  The experience I gained while working with experienced software engineers, research analysts, portfolio managers and all kinds of traders was invaluable.  You cannot buy that kind of experience in any book or classroom.  I have experience with equities, convertible bonds, options, futures, CDOs, CMBS, RMBS, Risk Arb and loads of other strategies.  I wrote algorithms to detect price patterns and make decisions based on certain financial models.  I learned that the further you choose to go down the financial rabbit hole, the less you actually knew about the domain.  Only through rigorous work, sleepless nights and a persistent drive did I get to where I am today, and I am thankful for the people that helped me get there.  I worked with some of the smartest people in Risk management, wrote *extremely* complicated Value At Risk models that plot portfolios of thousands of positions against hundreds of possible scenarios.  Those scenarios and their results were presented to portfolio managers that made trading decisions that affected portfolios worth billions.  This was not taken lightly.  I worked there for TEN years before deciding it was time to branch out and apply what I have learned through personal trading.

I have a deep passion for self-education, idea sharing and growing as a person through continuing to learn and apply what one learns from others while adapting to whatever environment presents itself to you.  I’m the kind of person who feels his word is his honor, and my reputation is always on the line with whatever I say.  When I make a statement, I try not to take it lightly.  There are times when we all joke around in social media, but for the most part, I feel that we should all be building our own brand.  I currently don’t make a dime from what I do on Twitter or StockTwits.  Maybe some day that will change, but for now I am content with using these tools as a way to journal my path along the way.  After all, it’s not the destination, it’s the journey.  It definitely is what you make of it.

I welcome your questions, and I’ve already received a few last night. I hope to be able to address them as time goes on.

Categories: autobiography

More Dangerous Than 2008

September 25, 2011 7 comments

I would like to start this article with a warning to readers: the views and opinions I express in my blog are my own. I am not paid by anyone to do this, and is in no way meant to be viewed as financial advice for your own trading positions.  You and you alone are responsible for taking on extremely high market risk, especially in this environment.  Throughout the week, I post not all, but many of my trades in real-time. They don’t always work.  Before following any of my trades, please realize that the only one that can protect you from loss is yourself. Be sure to stick to your own rules, and be full aware of the downside and stop loss point BEFORE entering or exiting a trade.  I felt the need to write up the aforementioned warning especially after watching @bclund’s video on following people on Twitter.

At the risk of looking like a complete fool last Sunday, I decided to go ahead and post my “Psychopathic Market Still Sucks” article before the Packer game.  I am satisfied with the fact that my market synopsis was ultimately correct and ended up coming to fruition by week’s end.  But it is also important to note that Monday through Wednesday, the market almost appeared to be ready to break out.  It could have been very easy to buy near the top last week and become quickly trapped as things turned ugly in a matter of hours.  This brings up the point that you should not focus on being right, you should focus on doing the right things to put you in a position to make you a CPT, a Consistently Profitable Trader.

Earlier this week I promised an update to the market’s reaction Post-FOMC. Immediately after the meeting, the market experienced severely volatile knee jerk reactions to the news. Many people, including myself, looked for a severely powerful push forward to finish Wednesday green.  If you did not stick to your own stops or mental stops, you likely got poleaxed holding longs into the close on Thursday.

$SPY – A Market of Gaps and Landmines

I cannot stress this enough: this is not a market for swinging large positions. I am not merely saying this about swing longs; this goes for swinging short positions as well. Take a look at a daily $SPY chart since August, and you’ll see gap after gap after gap.  Waking up to a gap, having held a medium to large position of any kind, can put your trader’s brain into a poor state of mind to make good trading decisions.  If you suffer a large loss overnight and are not able to cut losses quickly, your mind may prevent you from sticking to stops that are now so far away.  Traders often fall into the trap of doubling down, waiting for gaps to fill based on what happened 7 out of 9 times in the past, or turning 2-3 day trades into long term positions.  There is no guarantee that the price you got into a trade will ever return again.  This is why I tell followers to know the downside price of the trade before placing the trade.

The only way to make money in this psychotic market, as in any market, is to take on risk in order to earn a profitable reward.  When the $VIX (or $VXX if that’s your poison) is persistently high, you should be taking much smaller size on a position. If you normally buy 500 shares of a stock, buy 250 instead.  If you normally trade 10 $ES_F contracts, trade with 5.  Do not use stops that are so tight that you’ll be instantly booted out of your position, but don’t become so lax that you let a trade run away from you. It is far too easy to “zoom out” of a short term 5 minute chart to justify your “stuck long/short” position with a 30 minute or daily chart in order to be “right” on a trade “eventually”.
Next Week Trade Preparation: Let’s take a look at the carnage in the markets last week.

The technical damage done to the charts over the past week is tremendous. Most sectors have lost long term support with the bear “whoosh” sound that came on Wednesday afternoon and didn’t end till Friday morning.  I watched as markets around the globe sold off assets hard, and nothing was spared, including precious metals.

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  1. Basic Materials Still Suck $X $AKS http://twitpic.com/6qnh6z http://twitpic.com/6qnh8f
  2. Transports Still Suck $DJT $CSX $UNP http://twitpic.com/6qnjet http://twitpic.com/6qnjfy
  3. IPOs Still Suck $P $LNKD $DNKN http://twitpic.com/6qnkam http://twitpic.com/6qnkcv http://twitpic.com/6qnkdp
  4. Non-Cyclical Still Sucks $OC http://twitpic.com/6qnklx
  5. Oil Servicing Still Sucks $OIH $HAL http://twitpic.com/6qnkuy
  6. Autos Still Suck $F $GM http://twitpic.com/6qnldq
  7. Chemicals Still Suck $DD $DOW http://twitpic.com/6qnllz
  8. Financials Still Suck $XLF $C $JPM $GS $MS $BAC http://twitpic.com/6qnlyr
  9. Aluminum Still Sucks $AA http://twitpic.com/6qnm64
  10. $INTC is approaching decision time. Squeezing under price compression, lifted by $QQQ
  11. COPPER STILL SUCKS $HG_F $JJC $FCX This got OBLITERATED last week. Support not here.

My view is that the $QQQ is still holding up the market.  Sentiment continues to be extremely bearish, and counter-trading is guilty until proven innocent. There are so many trapped longs in this market, that every time we appear to be breaking out of this consolidation, the reality of the sharply declining 50MA in the $SPY and daily VWAP proves to be too much of a force to get through.

The $MACRO picture is not bullish either, obviously.  This weekend has been full of rumors, panic reactions for what to do on Monday, and people “preparing” for events that have already occurred. Greece will default. Whether it is going to be “planned” or not does not matter. The reaction in the market will be important, not what you think happens going forward.

How do you trade this market?  Wake up an hour earlier than normal. Prepare for your day with a written plan in hand.   Know what happened in Asia and Europe overnight.  Watch for what the market is telling you. Know your price exit and entry points before you get in the trade.  Without a plan, your own position becomes an influence on your mind, taking your eyes off the action around you and causing tunnel vision. As @smbcapital often writes, it is important to know how to be prepared, know your pivot & pre-market price levels, trade your plan, and stay consistent.

Over the course of the next few weeks, I truly believe the market goes lower.  The economic conditions around us are more uncertain than in 2008.  In ’08, we were surrounded by a government that was willing to step in and backstop the market at any cost, and the actions were supported by the majority of people holding a brokerage account, roth ira or 401k.

Today, SOVEREIGN banks of Greece, Italy, Spain, Portugal, Ireland, France and even Germany are in SEVERE CRISIS MODE. Do not trust anyone in politics to give you the truth or make your heart feel warm and fuzzy.  THE ONLY ONE who can protect your capital is you. The only plan you can trade is your own. There is almost NO PRECEDENT on which to base your medium and long term investment decisions on.

As economies around the globe remain in crisis mode for an extended period of time, we will continue to see decreased liquidity, seizing credit markets and increased risks of severe loss.  These types of environments cause countries around the globe to err on the side of caution by leaning towards protectionist government policies, circa 1930s. Nobody, and I mean nobody including myself, knows exactly what is going to happen based on Technical Analysis or Fundamental Analysis.  In markets this nervous, fear and greed take over as rational thought gets tossed to the wayside.

That said, I can honestly see chances of @ReformedBroker -style “Rip your face off” rallies and @StockSage1 -style disaster sell signals.

PLEASE BE CAREFUL OUT THERE. If you are not able to day trade and be nimble enough to get in and out of positions immediately, please do not trade these markets.

 $SPY Weekly

Categories: psychology, stocks

Psychopathic Market Still Sucks

September 18, 2011 3 comments

It’s been a while since my last post, but I thought the market action of the past 6-8 weeks has warranted some analysis to make some sense out of what has been going on with the market lately.

After nearly an 18% fall in the $SPY since mid-summer, a week from hell with +/- 5% rallies and selloffs in the $ES_F and subsequent basing action, the action depicted in the charts can be interpreted dozens of ways.

As the $SPY has been rising since the capitulation night of August 8th, traders have been debating whether the chart is showing a bear flag, bearish wedge, rising channel, and I’ve even someone tweet out a pattern that looked like a rising rooster posted by @FractalTrades.

Regardless of the interpretation, one thing is clear. $QQQ is leading the market up, $XLF is leading the market down, and somewhere in-between, $ES_F (or $SPY if that’s your poison) is somewhere in the middle, near the top of the channel/flag that’s been building.

I’ve been nimble, getting in and out on both the long & short side, playing the action in $ES_F either through 2-4 contract sizes per trade or using $TNA / $TNX as a proxy to the overall market action as correlations approach 1.

The problem with being so nimble lately, has been that while it’s true I’ve been avoiding the “sell low / buy high” market @StockSage1 talked about, I’m beginning to feel that I’m still missing the large moves and larger trends that are within the channel. Perhaps I’m even missing the possible breakout of the channel, and perhaps I’m even being left behind and the train for the next leg of the biggest bull market in history has already started taking off. I really don’t want to be like one of the under-performing money managers who is chasing returns by taking out every possible offer. For one, I don’t have the capital or the power to do that. Neither do I want to use leverage to make up for “lost returns”.

Don’t throw out your own personal consistent trading rules because your current trades haven’t provided the most bang for your buck. Don’t chase. Reflect and act.

So what does a small-time trader like me do? The only thing I can do. Look at some charts, analyze the price action that’s going on under the surface, and come up with my own conclusion.

Let the chart-fest begin. ** Conclusion is below the Slideshow **

  1. Basic Materials Still Suck $X $AKS http://t.co/NhtYrV1o http://t.co/NLiRG8JA
  2. Transports still suck. $DJT $CSX $UNP http://t.co/4aaLbe7O http://t.co/Xxzj9XOe http://t.co/I2QBaOKk
  3. IPOs still suck $P $LNKD $DNKN http://t.co/VZPN5OKY http://t.co/PrhGeuvc http://t.co/eQSB95Ws
  4. Consumer Non-Cyclical Still Sucks $OC http://t.co/geOeqmCv
  5. Oil Servicing still sucks. $OIH $HAL http://t.co/nNYRfnSQ http://t.co/nBpaw4jj
  6. Autos still suck $F $GM http://t.co/t2LU6Xvb http://t.co/HIG0T7rr
  7. Chemicals still suck. $DD $DOW http://t.co/yQt2pA1D http://t.co/1nRDhcqD
  8. Financials still suck. $C $XLF http://t.co/263AztDi http://t.co/UOWHpmPJ
  9. Aluminum still sucks. $AA http://t.co/td68RKlR
  10. $INTC might be getting ahead of itself, well outside upper bollinger band. http://t.co/TuIu3lAd
  11. Copper still sucks. $HG_F $JJC $FCX http://t.co/zS6gcX0n http://t.co/KQeQfIcD

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Conclusion: The Market Still Sucks

I’m happy to miss the “exact” bottom in the market if I can continue to stay nimble and avoid overnight heart attacks. I believe the $QQQ is basically holding up the market and trying to lead higher, but many other sectors are either lagging, barely getting off the mat, or in the case of $XLF leading the market lower.

I’m personally waiting for the right time to step on the gas to the short side, and am happy to continue getting in and out of this psychopathic market until the true trend decides to show its true colors. Either break out of this channel up or work on the next leg down.

Take care.

Categories: stocks

A Risk Managed Trade in GS

June 6, 2011 2 comments

Goldman Sachs, the ‘vampire squid’, the ‘planet-eating deathstar’ — whatever everyone calls it — is a company that is not likely to leave the spotlight any time soon. With news of another subpoena regarding its alleged criminal role in the financial crisis, it is clear that $GS is main stream America’s favorite investment bank to hate.

Love them or hate them, there are plenty of opinions and theories floating around on the stream about why $GS is a “great buy” because of rumors that “they are in bed with the government”. Read as many articles as you want. So much has already been said on both sides, including an article by Michael Lewis (July,2009) dispelling some of the rumors. Who knows what the ultimate truth is? Frankly, I don’t care. In my opinion, that is non-actionable noise, and serves no basis for a trade.

Earlier today I had a short conversation with a member of the stream, @MarketShot in which he stated he was willing to go long $GS at these levels because large buyers are willing to step in at these levels, among other less notable reasons. Ok, fair enough. It’s good that someone is willing to stick their neck out with an opinion and draw a clear line in the sand. My response, I realized soon after, was probably related to the fact that I had recently been absolutely burned by a trade I made in Goldman. I went long $GS one day before the most recent subpoena news, and took a massive hit to the shares I held overnight, and that admittedly left a bit of a sting. I even tried to step in on the other side of the trade and short the name, expecting the same type of stock shock we saw in 2010. Unfortunately, GS actually rose from the 131 area quickly to 135 and as high as almost 137 the next day. So I got burned twice in two days on Goldman Sachs. That kind of action and “twice burned” pain is enough to keep most away for a while. It probably has given me a negative bias on the stock as well, which honestly is not profitable in the long run.

The real point here is that I never went into the trade with a risk managed mindset. Part of the reason I got in was because of the massive bull trap that got a lot of people sucked into the market last week.

What I’d like to offer the stream tonight is not opinions, grief or regret. Instead, I’d like to provide what I think is a real actionable trade in $GS that allows you to participate to the long side of $GS without getting your face ripped off in the event Goldman takes it on the chin going forward.

AUGUST 140/150 CALL SPREAD

Have a look at the $GS August 140/150 Call Spread. This allows you to participate in a positive directional movement in Goldman without a lot of capital up front, and allows some time to pass so that the recent news can be absorbed. If the news isn’t absorbed by July’s expiration, you’d likely be down in a pure equity position, and it would be more of a loss than the cash outlay described here.

For the GS AUG 140 CALL, you can expect to pay close to the ask price of 4.85
For the GS AUG 150 CALL, you can expect to get close to the bid price of 1.58
=============================================================================
For the GS AUG 140/150 CALL SPREAD, you can expect to lay out a debit of 3.27

For each call spread you take on, you’ll spend $327 (max risk) to participate in (150-143.27)*100= 673 max profit.

It’s a lot easier to get net long $GS laying out $327 in risk capital than putting up the full $13,500 you’d need to buy 100 shares of GS otherwise. It will also allow you to sleep at night without worrying about waking up to yet another day of panic selling that I witnessed while I was long the stock.

GS Probabilities at Expiration

Does this mean you necessarily hold this position to expiration? Well, that depends on how bullish you are on the stock. If you plan on holding the entire time and are willing to risk the entire premium of the position, please keep your contracts small.

If you’d rather play a more active role in managing the position, you might want to consider increasing the number of spread contracts you take on. For instance, taking this scenario further, you will notice that your effective net delta of the position will be 41.03-19.53, or 21.50. You’ll be effectively long about 21.50 shares of GS stock at the time you take the position on.

You can use a Risk Analysis tool to adjust your potential stop loss price based on the maximum draw down you’d be willing to take. Just taking a look at one scenario, if Goldman took a $20 hit tomorrow while you were holding 100 shares, you’d be down $2,000 very quickly, and would likely bail on the shares. If in that same time you were holding 5 spread contracts instead, you’d be down less $ at the same share price because of your lower delta (not 1). Now, you have to account for theta and gamma exposure as time goes on, but this scenario is still safer and less risky than holding GS at these levels whether or not we are about to bounce off of multi-year support.

Please let me know if you have any comments, suggestions, or if you take the trade. Thanks!

GS ThinkOrSwim Analyze Tool

Categories: psychology, stocks Tags:

Personal Change Plan

May 12, 2011 1 comment

“Insanity is doing the same thing over and over again but expecting different results.”

You must unlearn what you have learned.

In my previous post, I described whyPassion is Not Enough in Trading. It is not enough to simply rely on your internal drive or emotions to get you to be a better trader; rather it is important to recognize that emotion should be left under the covers in your comfy bed before you get up and go to work.

Maybe you’re just as passionate as the next trader — that’s great, but that won’t get you to the next level. You must continuously challenge yourself to take steps towards getting better. For some, that means reading up on technical analysis, for others it means finding a mentor, and for many others it means learning through actual trade experience and the pain of learning to accept losses as part of the business.

Just like in other solo competitive games, one must know when to squeeze the throttle, play good defense and protect the queen, or when to stop throwing good stones after bad. For myself, it has helped to both find a mentor and to review trade execution before, during and after a trade. I’m getting better at handling reality checks from more experienced traders, and also getting more disciplined with stops. Months ago, things were easier. Half a year ago, one could throw darts at the market and pick up some profits the next day. The market has changed, and to get better you must change with it. If you are a less experienced trader, you must also make a concerted effort to change.

It is easy to say “make a change”. It’s another to actually work towards that change.
So how can change be made? People have it within themselves to change their personal behavior. Sometimes that involves changing diet, paying down debt, becoming more physically active, or quitting smoking. While many people attempt to make changes, the majority of people fail again and again. It helps your chances of success to become consciously aware of the states of change by building a Personal Change Plan.

Unaware Stage
In a strong market, especially like the bull market we’ve been in since March ’09, it’s easy for inexperienced traders to attribute their success to their skills more than to the surrounding envelope of the bull market itself. At this point of the game, the trader has no idea that they may have a problem until the first correction comes and wipes out most, if not all, of their accidental gains. In fact, the trader doesn’t see that a problem is brewing, and is most likely not even considering the possibility that change is needed at all.

Raising of Concern Stage
At some point, the trader may have suffered some small losses in trades that they were sure should have worked — but because they stuck to their old methods (maybe didn’t use stop losses, for example) — the loss comes as a complete surprise. How could the market do this to me? I did nothing wrong. Maybe the losses start to grow in size or become more frequent, turning weeks of gains into flat or straight losses. At this point the trader may begin to see their personal behavior as a problem, and only now opens their mind to the idea that change is possible. Still, it won’t become a real priority until the big loss occurs, or the trader’s mentality becomes so distraught that nearly every decision made is emotional or paired with poor psychology. Hopefully you reach the next stage before too long.

Exploring Options Stage
So at this point, the trader probably has a laundry list of regrets. Why did I not buy more shares at the open? I could have been up big if I just bought the dip. Why didn’t I stick to my stops? I just knew XYZ stock was going to fall 5% after it fell through major support. Why do I keep doing this? I study every single night, I do charts and I feel like I have a great read on the market. What am I doing wrong? Why did I leverage up so much and get my face ripped off? Even with these regrets, it is of the utmost importance to SHIFT FOCUS from past problems to future plans and possibilities. It’s time to focus on the present, not the past, and what can be done to truly change. It’s done.

Action Stage
This is the stage I find myself in now. At this point, the person who seeks change deems is 100% necessary to seek change. It has become the number one priority. Here, the individual commits to a plan of action and puts it into practice. The individual should seek support from a mentor, surround themselves with people who are better or more experienced in the field than them. The trader should try alternatives to the same old thing they’ve been doing that’s getting them into trouble. THIS STAGE IS KEY. There cannot be a reaction to the change without the ACTION taking place first.

Stay With It Change
Trying too much at once can be hard for a person to bear over a prolonged period of time. The mind can become stressed, too much might be out of the ordinary, and it is often very difficult to step out of one’s comfort zone or add another tool to their trading tool chest. What’s important at this stage is for the individual to consistently review their change goals and plan in order to stay focused and committed. The trader should ask questions, learn from mistakes, and keep an open mind to stay agile. If necessary, the individual should change directions again and adjust their plan if it isn’t the right path for them.

My personal change plan currently includes purchasing @stevenplace’s OptionFu course to sharpen my skills in options trading so that I can learn and execute risk managed options trades. It also includes having @gtotoy as my personal mentor in #DTBC and SURROUND myself with top notch, real deal traders. They call it boot camp for a reason. You will get slapped back into reality when you’re about to put on a trade that doesn’t make sense for the given market environment, in real time. You will be humbled by the group when you are shown why it’s a bad idea. You might have an entire fundamental thesis shot down hard by several traders at once — but it is for your own good. They remind you to not take offense when your trade idea is bad. Hell, it might even be a good trade idea that they shoot down simply because it’s just not a good idea for the current market conditions. That type of advice is invaluable. Some people might get offended or feel ganged up on with that sort of in-your-face straight forward tell-it-like-it-is feedback, but I welcome it with open arms. It’s the only way to learn. Learn to not love a trade idea. Learn to live and fight another day without getting burned in the process.

I’m also learning to paper trade with real discipline. Some people argue that paper trading is not the real deal, that it’s too unemotional or you don’t treat it the same because it’s not real. I was once a member of the naysayers camp myself. My feelings on that have completely changed. Just like a scrimmage football game isn’t the real season, you still have to practice like you play in the real game or you will be unprepared, out of practice, or undisciplined.

Let go of everything you fear to lose. Especially if you fear losing your ego. Learn to fail. Learn to get back up again. That is how you can succeed.

Quite literally, be the change you want to see in the world.

Categories: psychology, stocks