The greatest trade ever made -so far-  

Posted by Book Eater

The action in the Dow Jones for the past two days is described by financial experts as "the mother of all short squeezes" and that the implications of the government's action has changed Wall Street FOREVER. The term that we are living in very interesting times is an understatement. I am privileged that I started trading and watching the markets only since Jan 2008. Previously, I was telling myself that it is such a sad thing that I never experienced the bull market but the learning experience of 2008 has really been great. It's worth a blog post definitely. I am honored to have lived in a time when everyone else will be writing in history books the entire action of this whole week. Lehman Brothers falls, Merrill Lynch gets bought, AIG in the verge of bankruptcy, bonds off 10 points at least, stocks crumbling more than 30-50% in a matter of hours and falling another the next day. Black swans and bizarre does not give justice to what we are experiencing today. Even family and friends who do not care what the financial markets are doing, suddenly call me up 7am in the morning to ask how their deposits and insurances will be. Massive panic , financial armageddon and the end of the world was being highlighted all over the headlines and articles in Seeking Alpha, WSJ, BW and all leading finance journals.

My mind recalls a couple of things I heard from my mentor. He was sharing to me a story about greatness. He told me that plungers such as Jesse Livermore are usually taken out of the game not because they weren't right, not because they lacked fundamental and technical analysis, not because of anything that you can ever pinpoint of but mainly because of position size. Plungers get jackpots or wipeouts. It's always an all-or nothing trade. The greatest trade made by Jesse happened during the 1987 crash when he was heavily short the market. There is a book called "Shark Investing" that thoroughly states that sharks like to take advantage of their preys at the most opportune time. The "PERFECT STORM" that we, as traders, always searched for in our lives was converging last Friday. We were preparing for it. I was very much giddy when Hangseng opened down 600 points last Thursday and fell 700 points more to close down 1300 points during the morning session. All of us were already calculating at which price we were going to bottom pick. We were so happy to see capitulation at the brink of our lives. Our boss would always recall the 20% drop in the DOW in a single day last 1987, when all the exchanges were halted for a week. All of us were short the market. Neither one of us took out our shorts. I was expecting to bottom pick HSI at the support of 15,000. It was a gamble indeed because my guess that it will hold is as good as everyone else's. It was the 10 yr moving average. It was the 50% psychological support. Everyone was panicky. We wanted to have the time of our lives. THE GREATEST TRADE EVER MADE.

Lo and behold, I was already calling my folks and close friends that they should not be swayed by their emotions when the market falls 1000 points the next day. To pick up a few stocks was my battle cry. I even had spoken superstitions that the kneejerk reaction rallies happened August 17, March 18 and now the inevitable SEPTEMBER 19!

Of course, we all know that just that afternoon, Shanghai was the first to lead the market. From being down 100 points, it suddenly erased all the losses and even made gains of about 20 points in the first 30 minutes of trading.

I was damn scared. 230pm. The first trigger of my hand was to sell all my shorts, and to go long. I went long my favorite stock, went long some bull warrants and made a hefty 42% return on the total capital I invested that day. Wow. To see the index move 3000 points! from 16,200 to 19,200! WOW WOW WOW! You never see such a rally like this. Historical experts say there was never any recovery like this since the 1920's.

The news that there was coordinated central bank action only came out 3pm. Can you imagine how those 30 minutes would have changed my portfolio forever? Had I not seen the move in Shanghai? It's really just like a scene whether if Michael Phelps really beat the other swimmer (forgive I can't remember his name) by a hundredth of a second! It's really like a buzzer beater shot! I can't quite explain the entire feeling.

I am conflicted though. You know, if there was ever a loss that I will take? It would probably be getting squeezed yesterday (Thursday). Although the action in Thursday did give traders ample time to really cover!!! Watch the DJIA move! It was up 100 points, and down 100 points and surged 500 points to close up 410. It's so damn cool! Ok, so i got hit in the US. My mind thought maybe the gov't couldn't help the market when DJIA fell 100 points.

Here's the thing. Greatest trades always get interrupted. Capitulation is almost always prevented by someone or something. If I'm gonna make an investment gamble (note it is a calculated gamble), I'll bet that there's a 100% chance that capitulation never comes. I was surprised that Lehman was allowed to fail. Hell I would have made a killing. My boss would have been earning millions with his shorts at $45 in LEH had he held with his convictions that LEH will fail and tumble to cents! 2008 was a really difficult year but it was bound with so many life-changing opportunities: whether it's to the downside or to the upside.

I guess all I want to highlight is that although the excitement to make lots of money is there, position sizing has been key. The stocks that make the most gains in the past two days are not fundamentally good but the most shorted. That is clear short covering folks! The ones that lost the most money today are the conviction shortsellers.

Clearly, when the pendulum swings violently, I am reminded by the words of one of our bosses: The greatest traders are dead before they are proven right. We may want to hit those jackpot trades, but there's a commensurate risk. We need to watch our position sizes. Clearly I didn't make money in the US because I was "all in" early in the open and had to cut when the DJIA fell 100 points. I was so convinced with the HSI thursday rally that it will do it again in the US! I forgot my real cutloss, when I calculated them it was too much to handle. I couldn't bear the possibility of losing that much and I had to cut the trade. Hindsight will kill a trader because the trades I made would have made more than 50% of my capital. They were call options and some longs in Chinese stocks. That's why.

In summary, I really just had to say that this market move has given me confidence but cautious optimism only. I relish the "shark investing principle" that our boss told us, that our advantage against the huge elephants(hedgefunds) in this financial jungle, is that we can move so fast, and make a 360 degree reversal in our portfolios, while hedgefunds will take numerous days to do just the same (and by then, they will have been late).

We live in interesting times.
Don't shoot for the greatest trades.
Always take a calculated investment gamble.


- Nix

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