Getting Caught

Yesterday after the Close SMB celebrated our outstanding month of September with some drinks, cigars and food (lots and lots of food).  Nothing against Queens but I am going to have to talk to CBA about choosing that locale.  It was a little far from Manhattan.  During our celebration I had an interesting discussion with a new trader (“Triple Threat”) who got caught in GS yesterday after the passage of the rescue plan.   Let’s discuss what to do if you get caught in a position well out of the money.

All of our traders are taught to develop an exit plan for if their stock trades against them before they enter a position.  Most new traders focus on making money.  All good, experienced, profitable traders focus on not losing money and just letting the gains materialize.  Defense first.  You don’t want to be playing basketball with a guy who scores 20 but gives up 30.  But that is way too much information about me already.  Before you enter a position decide where and who you will hit if the stock trades against you.

Now there will be the unusual occasion where you just can’t get out.  First please do not be that trader who cannot get out of a stock.  Being a great intraday trader necessitates being fast.  If you are not then get faster.  You should almost never get caught in a position.  There better be breaking news, or system failures, or a stock that just drops out like a falling knife for you to get caught.  So first, don’t get caught.  Be fast. 

But again there are going to be those rare occasions where you get caught.  What do we do?  Yesterday Triple Threat got long GS and was immediately 2 points out of the money.  I could hear him behind me trying to trade out of his position.  First, remain calm and think.  You have already taken a huge loss.  The first time Triple Threat took a huge rip (he was four points out of the money) his hands were shaking as he was attempting to trade out of his position.  Yesterday he was calm and thinking out loud with a trader whose advice he values about what to do.  So that was well done.  Second, you should develop a new exit plan.  If the stock gets below a new exit level that you determine then exit.  Third, your overall mindset should be to exit at the best price possible.  You goal at this point should be to take the smallest loss possible.  Finally, move on.  The act of taking your loss often frees the trader to make another good trade.  When they are still in this losing position they are paralyzed with their exit.  They are consumed with this loss and unable to place a new good trade.  But when you hit the bids and just accept your loss a burden is lifted from your shoulders and you can go back to work.  You can concentrate on making One Good Trade. 


Hey I have gotten caught before and am here to write about it.  I remember back in the day making a technical play in CMRC and losing $36k.  Yeah that was no fun.  But the most encouraging statement from Triple Threat last evening was his thought that his rip in GS would make him a better trader.  That has been true for me.  That rip in CMRC taught me a valuable lesson about technical analysis.  I was buying CMRC based upon prices from a different market.  A market created during the Internet bubble.  And I was buying during the bursting of the internet bubble.  The prices and support levels created on the way up were not going to be support in a different market and on the way down.  And so I learned.  That $36k lesson has made me much more since.  And Triple Threat will become a better trader because the lesson the market taught him yesterday.

Specifically what did the market teach Triple Threat yesterday?  Price is important.  And that patterns must be seen for the market that they are trading.  More clearly, Triple Threat bought GS into a pullback because GS had developed a pattern over the past few days of pulling back and then trading higher.  There were two new variables for his trade yesterday, however.  GS was much higher.  And the rescue plan had been passed.  Buy the rumor and sell the news.  Stocks sold off hard after the passage and GS and the market was now going to trade much differently than the previous two days. 

Triple Threat is probably our most consistent new trader.  He does not have too many trading days when he is net negative.  And so him getting caught ought to provide more color on this trading anecdote.  And Triple Threat will make back the rip.  And go on one day to share this rip with a new trader.  Good traders get caught.  They find the lesson in their rip.  They learn and they get better.  They turn a rip into a positive learning experience. 

Enjoy your weekend.


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