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A Painful Experience, by J.P. Highland
This morning while surfing through Briefing.com I found out the Federated Department Stores (FD) warned investors that it will slip into red in the first quarter of the next fiscal year and fall well short of expectations for the balance of the year. I checked the pre-markets quotes and FD was dropping around $4, and the NYOB was showing huge sale orders all around the $67 level and below. So what I did was to short pre-market against an ECN at $67 expecting the stock to drop more due to the size of the sellers.
I don't like trading FD much, even though I provides very good opportunities to make money due to the volatility it has, the huge spreads it shows can kill anyone. But I felt that shorting was a good idea. The stock had a delayed opening in the NYSE, I assumed that the Specialist was having trouble matching and finding a way to give exit to these orders. At 9.38 the first print appeared, in this print all the sellers were filled, I don't remember the number but it was huge and then the stock started to go up showing a monster spread. I had no chance to cover my position until $67.35 (Ouch!). Some might say that is not much, but as a Scalper who looks for 5 cents this is a big blow.
To lose in a trade is OK, is not the end of the world, but what I can't forgive is that I entered the trade following a bad reason. I was trying to sell following the frightened herd that wanted to get rid of the stock at any cost. When this panic situations arisen who buys the stock? the Specialist followed by the smart people. If the Specialist decided to take all these sellers at $67 is because he was sure that he was going to be able to sell this position at a higher price.
My mistake was to play on the same side of the frightened ones, of the irrational, of the dummies, and I got slaughtered which was well deserved.
But tomorrow will be a beautiful day.
James Lackey replies:
The list of mistakes here are numerous for trading stocks. However, I must compliment a fine post that is real close to being a meal for a lifetime speclist post. Your humility in admitting your mistakes and giving exact details of the trade for the mutual beneficial exchange of learning receives full honors from the spec list color guard.
"First have you tested that?" Vic. Did you run any sort of quantitative test on the stock or the market to give you an edge?
Next was trading news, it is incorrect in general to trade news. We must assume we are the "last to know" that is one of my "get the jokes" with Tom Ryan. We always laugh we are the last to know all things from the news. You must always assume that either smart speculators and certainly company insiders knew all of this weeks ago before the news hit the tape.
Next, selling a stock that is weak when the market is strong is not necessarily a bad thing to do, but it must be tested. I traded untested relative strength the individual horses current lap time vs the pack and its recent history a bit like playing the horses. When Vic first saw what I did he called it playing the field or betting to show. That in itself is a very difficult game to overcome due to the low payouts and high costs of the trading business in stocks.
However, to sell short a stock with a big down open, 5% at the market is a huge no-no. The only reason ever to do that is if you see a recent cycle change and many stocks that "normally were gaping X%" traded up pre-market to almost unched, as buyers that usually are trained to buy big down opens become impatient. I have a anecdote about INTC overnight I had in the late nineties. It was down 15 or so at 8am and by 915 they rallied the stock back to near unchanged. I sold half of my position and thought "wow it is coming back big buyers must be around." Yea right it was down big again in a few hours. The gist was that every big down open was bought, therefore no more big down opens. I write that to warn my self of the lack of big down opens in the last couple of years in the markets. I guess the move to limit down 5% worked.
Next is a scalper that looks for 5 cents on a trade. There is no way in Hades when stocks are traded in 1/8ths and I paid 2 cents a share in the late nineties, would I trade for a 1/4 point profit. Your risk is always a few levels down in liquidity. In the old days if a stock was 1/8th wide your risk was 3/8ths to a half a point. Therefore you should always trade for a full point profit. If you can't figure out a way to make double your risk, then pay vig and Sec-tax you are asking for it. The house will grind you down. Vic recommended to me when I talked of my trading 200 trades a day that I read "letters from a self made merchant to his son" - Lorimer, 1903.
Next there has always been a sort of mumbo mysticism about specialists and their abilities. I have traded with enough market makers, specialists, floor brokers and option traders in day trading firms that we recruited from the biggest banks, the floors of the NYSE and AMEX to know that they didn't know any more about real speculating than we did. We picked up a few hints by hiring them. However, most were so accustomed to order flow and picking up the spread all day they couldn't relearn how to trade in a new way.
On your trade, the specialist had to open the stock at a 5.5% discount and was being watched by the entire world. He will rip you off all day long trading at lunch next Tuesday. However, on this particular morning it was his job to get the stock opened at a price not to send the other members of the exchange off into a firestorm. Meaning some brokers had buy, some had sells, he adjusted the open price to match those orders. The moves up or down after that open are by the market makers or floor brokers from the big firms that had real orders. Granted, a bunch of retail orders may have at the open got me out at the market sells. I doubt it.
Do not get me wrong, he will open the stock down enough so he is not taking on any personal risk if it drops a few ticks lower from the open and he is forced to buy. On a stock halt, especially on the nazz it was always a good trade to buy the stock on the re-open. The market makers in the old days all opened it as low as they could so if they were forced to buy "more of it" it would be on their terms.
There is an entire firm named Bright Trading that trades with the so called specialist. They always buy and sell gaps of X. You might want to read their book and focus on taking their money. Like Patton said "Romel you genius SOB, I read your book!"
Certainly the market makers standing on the post and all the boys on their ecn's all wait for these opportunities to buy. However if a big enough seller sees enough liquidity there and he wants out, all those buyer can be run over like a car on the railroad tracks. eBay last Spring when it gaped down and immediately traded lower came to mind. It is all a poker game. No one really knows what the other guys are holding. Every broker wants to do a good job for his client to gain repeat business. However there were notoriously bad managers from Janus that would blow out stocks and we would laugh. There were great traders like Fidelity that would run all of us over like we were clowns.
A good rule of thumb on the NYSE was to only be long with big offers 999 and no size bid. A big fish can't buy electronicaly unless there is liquidity. If there is, everyone sees it, blocks time and sales and the beautiful picture you see. The stock gently grinds up and the specialist keeps refreshing 999, printing blocks of 50-100,000 shares. If it was a bullish newsy day, you will have one big seller and perhaps many smaller buyers that sooner or later overcome that limit order and the stock can tick up a level and the big have no qualms about showing a big size offer when thy have plenty of wind in their sales. A big buyer has no problem taking down an entire 100,000 at once if he "feels" the stock may go higher and the time to buy is Now. They are those days when you see a very tight spread, a battle between the bulls and bears, huge orders all day. The 999 up is the way many big trades at firms would buy.
A guy that we trained came from a bond desk at Goldman. He took his big bonus and lived in Europe for a year. He came back and gave the day trading firms a shot. He said Pimpco was notorious from blasting his desk and running over the entire street with an armored attack that left everyone wounded. Yet, they would never dare lose Pimpco as a client. Johnny Tonic worked for Fidelity another guy in the NY office left MLCO when he saw the watcher program that his firm installed, so he went to Daytek to profit for himself.
Those were a few of the guys that gave us a few rules of thumb. One was when a stock had an unusually narrow spread there were many big buyers and sellers working that day. It was not good to go against that day. Next was if a stock had a sharp up move, like your (FD) did that morning, from the open to about 11 am, at the end of the order the spread would become unusually wide. What that is called "filled in the hole" on the down side and a "half day order" on the upside. Usually it the the buyer like Goldman juicing the stock one last time above the VWAP and the buyers AP and has the client on the phone "Mr Biggs we bought a million for you AP 78 stock trades 79.5...a final price spike up.
Next was your comment about "trading with the dummies" You have little idea who you were trading with. It could be insiders that once the news was released they sold 77 stock at the open that they bought at 7 dollars. Their broker took them for two points. They took the market for 70 points. Not only that but they could be registering to sell alot more stock if they think things can be much worse in the future. "now for the rest of the story" who knows that stock might be $37 a share in three quarters and those 77 dollar sales might be brilliant.
My point is your time frame is 5 cents, so 30 seconds? For self improvement you might want to take a step or two back to move forward. I would highly recommend you look at daily returns and moves rather than 30 seconds. Also Vic highly recommends insider trading for stocks and has the stats to prove it. Value-line has been tested here to provide an edge. Keep in mind Reg-FD made the playing field more equal. Now nobody knows, except the insiders and their friends. Perhaps a few do know, that use a great amount of money and energy to do real research on companies like a covert operation. Hence the mid quarter update trades. This is why preannouncement seasons have been altered.
The next lesson was the proper way to call out a stock. There is a bid, which you can hit or be hit if you are the bid. The next is take the offer or you were taken @ price. It is always bid for price then size, example INTC, 22 bid for 5000. The offer is always size at price, example INTC 19,000 at 22.02.
Next, never to say trading at .. unless you were calling the offer price. The last trade or "stock trade" was the last price on the tape. Where is INTC? You would either say at 22.02 which better be the offer or say last trade 22 or best INTC trades 22, (you can't hit an offer or take a bid, unless you are in real estate and can afford the 7% vig).
Please do not ask me how to profit in stocks. I long ago lost that ability and if I did have it was luck. I intentionally left out decimalization because you should think in 5 cent spread increments, not pennies. I look at stocks now and my head spins. However I know exactly why I started in stocks. I was lucky.
I am lucky Lackey and have been called that since I was 10 years old racing. I was lucky to be in the best brigade for an Armor unit he Army, I was lucky to start trading when electronics and the new order handling rules gave me an edge. I was lucky to find the Spec List, Laurel and Vic. I was incredibly fortunate to be at the right place at the right time for Vic to teach me how to trade properly.
However it says in Ed Spec start with stocks, then move up or into new areas. There is no better way to learn how to trade for a living than to day trade stocks, for at least a short amount of time. The lessons learned will be valuable for a lifetime. Even being a clerk for a big fish does not convey the emotion of combat. I don't care how many live fire exercises you have been to, there is nothing like being shot at, yet not hit/killed.
I wish you all the best in stocks. Never forget the difference in probability vs. possibility. The best lesson ever in stocks was taking a tiny amount of money, moving it 100 times a day and making astronomical returns on capital. Not to forget the losses for months in a row from grinding it out due to vig. These lessons are meals for a lifetime. I see so many men with goals that are far too low. When I think back of how aggressively we traded stocks I am ashamed at my lack of strength at times. For all I learned here on the spec list over the years I should be far more confident and aggressive.
This is a reminder of what I learned the hard way by trading panics or grinding it out in the summer in stocks. When things are seemingly risky is when you should trade aggressively and do many trades a day. When things are slow and safe bets abound, is when you need to keep your costs low and your risks manageable for the next twister that comes tearing through the prairie as often as Nebraska hail storms in the spring.
Lastly, I love your optimism. Never lose that or your confidence. "But tomorrow will be a beautiful day" great line.