By Seine Yumnam
In the winter of 2013, I was offered an externship opportunity at Cheevers & Company, a small woman-owned brokerage firm at CBOE. I got it through one of our Wabash alumni, John Castro. I walked into their office and John started describing the buy side and the sell side. I had no clue whatsoever what that meant. I had just finished my first semester of my freshman year and John did not know I had only taken Economics 101 and had no familiarity with the market. But the words `buy side` and the `sell side` sounded interesting. I asked John, `So the buy side buys stocks and the sell side sell stocks?` It was only then John understood where I was in terms of market knowledge.
One week into the externship, I was already writing buy and sell tickets for John for his institutional clients. He saw my confidence and eagerness to take on anything related to the market and he gave all he could. Every day when the market opened, one of the brokers would ring a bell and the conversation would start and orders would start coming in. The morning markets could be unpredictable, with high openings and low openings coming at random points of time. This random nature of the numbers that I heard every day in the office intrigued me. Why? Having brought up in a small state of India with repeated issues of cease-fire and insurgencies, uncertainty was a part of our life-style. Life was a random walk. We never knew when the next bomb would blow up, just like we never know when the market would drop 10% overnight. The only thing that was certain in our life was uncertainty. I am sure you hear this very often when referring to the market.
John and the other brokers in the office also taught me about technical analysis and fundamental analysis. Again, I had no clue what they were. All I knew was that technical analysis involves lines, graphs, and something called candles. I was told that traders who use technical analysis make their decision based on what they see. While fundamental analysis involved reading 60 pages of SEC filings and ultimately trying to analyze it. Because I have always enjoyed sketching and painting cartoons and sceneries (though I was an average in it), I was interested in trading based on what I saw. My visual senses are the most appealing ones to me, given my myopic eye condition.
I started reading some technical analysis books. Investopedia was the first online resources that I came across. I drilled it until there was nothing left to pump. I started looking at charts at Yahoo Finance and drawing imaginary trend lines, support, and resistance and said to myself `if I buy at this support area is and sell at this resistance areas, I would make 20% return. How easy!` Yes, I thought it was easy and we all know it is not.
After learning these technical analysis methods, I was pumped to trade real money. But being a poor college kid, I couldn`™t. The only choice left was to paper trade. So, I signed up at market watch to start paper trading and guess what, I did not care what I was doing. I was not applying any of the technical analysis techniques that I learned reading all those books. Then I said to myself, `maybe I need to participate in a competition so that I will at least have the urge to win. Ah! Then I will use the technical skills I have.`
I signed up for a Trading competition for college students. It`™s organized by Upgrade Capital. We were given 10K and were allowed to trade stocks, ETFs, and currencies. I was excited and prepared. The day before the competition began, I said down all night pre-determining what trades to put on. I looked up stocks that had falling wedge breakout to buy and rising wedge breakdown to short. The next day, I woke up without much sleep and immediately started putting the trade I planned to put.
A couple of days had passed and the stock that I bought kept falling and the stock I sold kept rising. I said to myself, `Wait a minute; I did exactly what the technical analysis textbooks told me to do. I am right. The market is wrong.` I kept finding reason to support my analysis and reject the reality. The next thing I did was to go to marketwatch.com, type the symbol in, and look for market sentiment based on tweets. They all had the same `sentiment` that I had. 160 tweets say I am right but the market is not acting right. Isn`™t this what most new traders think when it comes to buying and selling stocks? For me it was.
Having terribly failed in the competition, I text John in the summer of 2014 and told him `John, I want to learn how to actually trade. I have two more months left before the semester starts and after these two months I want to be able to trade profitably.` John, being a man who is always willing to help this hungry boy, connected me to a trader. His was Tim Fligg.
I went to Chicago after finishing up my two months long internship in Michigan and met Tim. He said we would meet two days in a week. The first time we met, he gave a list of books I should read. But the truth was that I have already read all the books he just told me to read and yet I did not know how to trade. I didn`™t tell this to him. I said I would read them and we finished the conversation for the day. The second time we met, he showed me his track record which he uploaded in his website every week and it completely blew my mind. He had double digits gain every single month and I said `if the books he gave me made him this good in trading, what is inherently wrong with me. Is a good trader born as a good trader?`
The weekend after we met for the second time, he said he had something big coming up and he wanted me to be a part of it. It was a competition called Battlefin 7.0, also known as the Hedge Fund Hunger game. The competition had three categories for different levels of fund managers and Tim had already won the first category. So, this time, he was going to compete in the second category.
He said I should be the risk manager for this competition. I said `of course` knowing nothing about what risk management is. We were to use the Interactive Brokers platform and he showed me how the platform works. He did not tell me why he was buying a stock or selling. The only thing he told me was this, `For this trade, I am risking 3% of my account. The current price is at 98 and my stop is at 85.`
For three months before the competition began, he gave me training on how to put the stops in his own account. He was generous and trusted me in doing so and I was not the person to let him down. I was active and disciplined in doing what he told me to do. Every other day he would send me an excel file with all the stops for each position he had in his portfolio and I would just copy it and paste it. I knew that this was the price level he would sell the stock or buy back the shorted stock at if the market turns against him.
I did this same thing again and again before and during the competition for six months. We were doing very well with the portfolio. By using the stops, we were able to get out of the stocks that failed to meet our expectation without building up too much loss. By continuously trailing the stop we were able to protect our profits on the stocks that met our expectation (long or short).
It took me six months to realize the fact that technical analysis is not a money making machine. It is a method to put the odds in our favour. If we have 70% of winning, we still have 30% of losing in the game. The only way to bet on these odds was to take the calculated risk which is done by putting the stop. The risk is the cost we would pay if we lose the game.
I have started to make my own trading decisions using my family friend`™s account. The first thing that comes to my mind when I get a buy signal from a stock or an ETF is `where is the STOP LOSS.` The exit price level is more important to me than the entry price level. Because the money I am trading is not my own, I limit the risk to 1% of the portfolio on any given position. If the stop is way below my entry price, I will probably ignore the trade. I could put on the trade with smaller position size but it won`™t be worth it. If a position size of only 10 or 20 shares meet my risk limit, then I would definitely ignore the trade. I want at least 50 shares in each position.
`Where do I exit if I am wrong?` is the first question I ask before I put on any trade. Thanks to Tim Fligg for the training he provided to me. I am not sure if he intended to teach me this concept but I have learned it. Six months of just putting stop loss has burned this concept into my brain.
`Nurture trumps nature.` If you are a fan of Michael Covel, you will know where I got this quote from.