Here are some words of wisdom from the great stock market speculator Jesse Livermore, that seem appropriate for this web page. They came directly from the famous book about him – “Reminiscences of a Stock Operator”.
(Chapter III) … “If I hadn’t made money some of the time I might have acquired market wisdom quicker.”
Jesse Livermore points out here that he probably would have learned how the markets worked much faster if he hadn’t won “some of the time” in his early days as a professional speculator. Celebrate your wins, but make sure you study and learn from your losses too!
(Chapter IV) … “There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!”
I must be a slow learner, because after all these years I’m still learning what Not To Do:
Like so many other non-professional stock market traders, I hit a few stock trading home runs in my day. Unfortunately, because of my subsequent exhilaration and renewed self-confidence, I proceeded to take liberal chances with my new found wealth and gave much of my gains back. Losing in weeks what it took months or years to gain was painful and depressing. For instance, in May of 2002 I made over 300% profit and many thousands of $$ on Durban Roodeport Deep (DROOY on NASDAQ), a gold stock that I learned about from a glowing newsletter report in 1999. Because gold was supposed to start rising in value, and the gold newsletter guru pegged DROOY as a performance darling in such an event, I started accumulating DROOY for over two years (a terribly bad practice, nonetheless, as it involved buying this stock much too early and while it was still in a down trend). I bought some shares at $2.00 and several thousand more at just $.75 a year later, and sold them in late May, 2002 at over $5.00. It was a poorly timed long term trade, and nothing to brag about, even though it eventually yielded a fantastic result. Later on, when it became frustratingly clear that gold stocks were extremely volatile and unpredictable, I correctly ordered myself to short term swing trade DROOY using the standard candlesticks technique. However, after I bought in again on a dip in price, those human emotions got in the way of my new and well defined trading plan, and I just held DROOY through several significant price dips for fear of missing the next big move in gold. Each time the DROOY candlestick chart showed a bearish candlestick pattern and signaled an imminent downward price, I convinced myself that it would be of short duration and that, if I sold out, I might miss the next move up. Out of fear, I eventually sold out on an up swing in price in early Dec. 2002 with a moderate loss. Then, in less than a week, the standard candlestick chart said buy, but I had now become gun shy, and volatile DROOY took off without me to a price that would have netted me significant profits. Do any of you, my website visitors, resemble me here? Doesn’t this argue that the long term buy and hold strategy, regulated as it is by the human emotions of greed and fear, is exactly what Not To Do?
Regrets, I’ve had a few:
In April, 2003 when I created the Market Detective study and applied it across that same DROOY chart, it became crystal clear that had I faithfully traded the Market Detective indicator ‘SRL’ signals, and gone long and short several times during DROOY’s volatile movements, I would have grown my equity steadily week after week. I then tested my new indicator study on all the charts of my portfolio. I discovered to my dismay and regret that I would not have had even one losing week in all that time! I instead would have increased my equity steadily every week for the past year, instead of feeding back so much of it. How ego deflating to realize that the long term buy and hold strategy that I was using, based on sound bullish gold fundamentals (significantly degraded, of course, by my personal fear and greed) was so pathetically inferior to a simple mechanical study that cared nothing for long term trends or emotions, and that only called for more short term trading activity. And I thought the long trend was supposed to be my friend! My marked up DROOY chart below argues well against the long term buy and hold strategy.
Ya gotta know when to hold ’em and when to fold ’em:
Yet my DROOY story falls way short of the trauma I experienced from another failed gold mining stock trade involving Silverado. This Silverado trade is significant because it dramatically illustrates how short term trading is the only correct way to trade a volatile and unpredictable stock, and why my MD study is a perfect indicator for this job. In December, 2002 I bought many thousands of shares of Silverado (SLGLF on OTCBB) at $.60. After one month of holding it, I became complacent about my long position, feeling that Silverado was in a safe $.60 to $.70 trading range. Yet on Jan. 10th , 2003 my standard, unmarked candlestick chart displayed a Doji candle after a short bullish move. It was followed on Jan 13th by a bearish red candle. According to basic Candlestick theory, this pattern is a clear sell signal. It told me to sell at $.69 while I was a few grand ahead. I almost did, but my longer term frame of mind overruled this short term fact of life, and I stayed long, as I was afraid to miss the explosive move to $1.00 predicted by several respected gold stock prognosticators. I also felt that the effect on gold from the imminent Iraq war was another bullish reason to hold Silverado (ah yes, long term fundamental analysis again, compounded by human greed).
My 19th nervous breakdown:
Then, because of an unexpected family emergency, I had to make a trip to Europe on Jan. 21st. It was on exactly this day that a most unbelievable and unusual event took place for Silverado shareholders. As if preordained by the fickle finger of fate, Silverado was accused of an Enron style fraud on its shareholders by a mining news bulletin on January 21st, and its price tumbled from $.58 to $.26 on the morning of Jan. 22nd. The volume also ballooned from an average 2 million shares a day to 27 million. I was away from the internet until late on Jan. 22nd and totally oblivious to this market’s movements. SLGLF was sitting at $.39 when I finally discovered this horror via an internet cafe. Cursing my luck, I closed my long position and understood that going short would really be in order now, but discovered after trying to go short that Ameritrade did not allow the shorting of an OTCBB stock. So there went my opportunity to immediately recapture some of my very sudden losses. Had Ameritrade allowed me to perform this sure thing short of SLGLF at $.39 (a 27 million share down day versus a 2 million share average day typically guarantees more down days), I could have recouped all the $.60 to $.39 loss, as over the next two months Silverado went to $.12. Such is the power of immediately shorting a stock that has just been crippled by a bad news bulletin. Too bad that not all stocks are allowed to be shorted by the brokerage firms. So, for the sake of example, try to imagine a shortable stock like Enron, that went from $80 to $0.10, or Worldcom, that fell from $50 to $0.10, when viewing the Silverado stock chart below. Consider how well a nimble trader would have done if he had the Market Detective market timing indicator available, and trusted it as much as a paid private consultant. A trader would have been short, and stayed short based on all the consecutive “s” signals until the first green “r” reversal signal to go long. In the real life Silverado case, three negative factors caused me to lose a large portion of my 2002 profits: 1) The Market Detective indicator had not been created by me yet, 2) the human curse of complacency that allowed my one day of interrupted vigilance, and 3) the fact that Ameritrade did not allow the shorting of SLGLF.
Trust not in wishful thinking or ‘funnymental‘ analysis:
Now, this huge trading loss of mine was an embarrassing, depressing event, but I’m making it public because I want my website visitors to identify with a real and honest stock market horror story, that argues against the long term buy and hold strategy. I also want to convince you how my Market Detective indicator study, had I had it at the time and trusted in it, would have easily prevented this and any other of my losing trades and, at the very least, preserved my capital. On Jan. 13th , when the standard unmarked candlestick chart was telling me to go short, or at least in the case of non-shortable Silverado, to exit my long at about $.69, I didn’t because, once again, I allowed the wishful thinking portion of my brain to convince me that a longer term breakout over $.80 and above was imminent. It seems the standard, unmarked candlesticks were just not compelling enough indicators to incite me into exiting my long position. This again exposes the fundamental folly of fundamental stock analysis compounded by wishful thinking and human greed. Fundamental analysis never gives you a realistic or specific exit strategy, and marries you to an inflexible belief system that works against you much too often during unusual and unexpected market moves. I believe one must trust a proven short term mechanical system over all others. Short term exit signals should always have the highest priority, while fundamental, or to put it another way, funnymental analysis should always have the lowest priority.
I shoulda, woulda, coulda preserved my capital by blindly taking the short term mechanical signals:
If I had the Market Detective indicator available in January of 2003, look at how my (SLGLF) Silverado chart below would have displayed a red ‘r’ market timing signal above the January 13th, 2003 candle, indicating the price at which to exit a long position and to go short, i.e., if shorting were allowed for this OTCBB stock. I also had a mental stop to sell at $.59, just under the $.60 support level. The move down to $.58 on Jan. 21st, my non-internet day, was the final signal to get out with a small loss. Incidently, the rapid move from the 69 cent range down to 58 cents also indicates how a mechanical chart already knows that something, like a bad news item, that hasn’t been made public yet, is beginning to trickle through the marketplace. Too bad I wasn’t on the internet to my broker’s website to see the Jan. 22nd drop coming. The bad news became public knowledge on Jan. 22nd and the bottom fell out of Silverado, even as gold was starting a two week upswing from $353 to $384. Had I been allowed by Ameritrade to sell SLGLF short on the huge volume down day of January 22, 2003, I would have been short until March 14, 2003 where it bottomed at $.12. How’s that for another great reason to never be a complacent long term trader, and to be ever vigilant on a daily basis. The Market Detective indicator is, in my slightly biased opinion, the best tool for that very job, and I regret not having it in the year 2002 and early 2003. My marked up Silverado chart below is the best argument I have against long term complacency, and the loss of even one trading day of vigilance.