As part of our training process we ask our remote and in-house traders to tune into our training calls. I was trading AIG in the close and was leading the call. I received a couple of emails from some new trainees who were just confused by my style of trading. Their questions and comments are quite valid and educational so I want to share their concerns\/comments with you.<\/p>\n
But first let me put the trade into context. AIG was relatively weaker than the market all AM and we were short, chop. Around 10:50am the selling pattern changed and the stock had a powerful up move. The stock pulled back to great levels where the selling pattern had changed and the stock was accumulated and we got monkey long near this accumulation level. The stock had close to a two point up move off these levels – chop Gman. The stock pulled back later in the day close to 42 and got to 43 and change by the close. I got shaken out of the long and didn’t catch that last leg to the upside.<\/p>\n
The stock was setting up as a nice long in the close above 43 with confirmation above 43.5. But then the buying that took place between 42.20 and 43 changed. The stock got weak. The 43 offers were not lifting. There wasn’t a ton of volume at 43 so I wasn’t convinced on the short just yet… My point is that I traded the stock all day. I knew how it traded and I had a great feel for it. I knew the levels. I knew the buying and selling patterns in the stock. I knew what the ticks meant.<\/p>\n
Around 3:40pm the tape indicated weakness around 42.92 and I knew I had just missed my chance to load up with very little risk around 43. So I started the whacking parade on the bids. Three seconds later 42.80 dropped and the stock down ticked hard. Party time for my short as I had just gotten confirmation.<\/p>\n
So when the stock stopped at 42.5 I knew it was likely that it would trade up a little bit before going down lower. It needed to show the weakness and I wanted to short into the up move. I kept a small short from the 87c initial shorts and just wanted to add to my short. My comments in the call were interpreted as I was just shorting and shorting some more on the way up until it turned. And I want to clarify that point. So let me address the questions one by one as they were presented:<\/p>\n
1. Why am I am getting in and out of the stock?
\nI didn’t get the prices that I wanted to short aggressively initially and I was not going to miss the move as I had identified my edge. Once the stock confirmed my bias it was just a matter of finding a spot to load up with very little risk into the up move. Doing so lowered my risk. I was not just going to load up and put a stop on the trade. I trade the stock. I do not load up and pray for the move to take place \ud83d\ude42<\/p>\n
2. Why am I just shorting the stock while it is going up? It seemed like I was just short the stock knowing\/hoping it was going to come back down.
\nI was not. I was TRADING the stock. I know my out is above 43 but I really do not expect the stock to trade above 87c (that’s where the tape told me it was weak and that’s where the move started from). So the stock goes from 55c to 65c I see selling at 65c so I get short 1 lot at 65c. The stock rebids at 60c so I cover 0.5 lots on the bid for a small gain. 65c lifts and it slows at 73c so I get short 2 lots. It stops at 65c so I cover only 1 lot on the bid for another small gain. Then it pops to my price at 80c and I am now fully loaded 5 lots. Yes I have been shorting the stock for a quarter but in fact I have been making money on the shorts while going up and with an average price on my big short of around 76-77c.<\/p>\n
3. Why not wait for the stock to get to the prices where you really want them.
\nI really wanted the stock to get to 80 cents for me to get the big shorts. But what if it didn’t and it started a down move? It was not going to go down without me that’s for sure. That is what happened to begin with – I missed the big shorts near 43 but I was short. I just had to adjust my size to account for the increased risk. And I hate hitting the new low because I know Goldman is printing money with that strategy and I refuse to let them take mine. I adjust my style to account for that so I short into pops. Yes I shorted the stock for a quarter but I actually made money shorting while the stock was going up and got my biggest size at the price that I wanted. I call that trading \ud83d\ude42<\/p>\n
4. Did I really have the 1:5 risk reward we look for in the plays?
\nThey were all part of a much bigger trade. On every trade I risked a penny or so for a chance for the stock to 42.20 if I got lucky – so the risk:reward was clearly above 1:5. But I also understood that the stock was not ready to go down the moment I got short into the little pops. It needed more volume. It needed a catalyst. It needed to shake out weak hand shorts. I needed to see the selling pressure over-power the buying pressure. I was not shorting my heaviest until I got the risk:reward I wanted. But I also knew that if the stock didn’t go to 80c I was not going to miss the short.<\/p>\n
Look the truth is that my style of trading is very different from that of many traders on the street. I do not believe in loading up and either losing on the position or making a chop. I scratch most of my losers and make a chop on my winners. Let me repeat that: I scratch 70-80% of my losing trades. I do this because I trade the stock in and out. I trade constantly in and out to identify when the stock is ready to go so I can load up. When I am fully loaded I am comfortable with my position. I am in full control of the position and let the market determine whether I crush it or I scratch the trade.<\/p>\n
For Alan and Isaac I hope this answers some of your questions. I know I get a bit caught up in what I do and can see how if you do not know how I trade it can come across the wrong way. Do send me an email or write a comment if you would like me to further clarify something. Happy trading. Gman out!<\/p>\n","protected":false},"excerpt":{"rendered":"