![[llama-trades] 05: long swings are cool again](https://cdn-images-1.medium.com/max/1024/1*Adq3sytQDVBdlsjehL1qng.jpeg)
[llama-trades] 05: long swings are cool again
llama11 min read·Just now--
the cost of this business — a time to do nothing; a time to swing — flies in a jar — the art of doing nothing
March had oil bells tolling. February rolled by in a blur. April, April was something. first and foremost, economies around the world that were rattled by the middle east conflict slowly started recovering. the global dependence on oil and OPEC cannot be counted on, cannot NOT be hedged, this is something I sincerely hope governments around the world comprehended.
welcome to yet another newsletter. in this one, i talk about the following —
- the cost of doing business
- hitting hard vs hitting wide
- the art of doing nothing
- frontrunning the markets
- the GLW trade or how to protect paper profits better
- the best swing trades + the current best holding
the cost of doing business
when i first started trading, i barely knew the grocery list of things i would eventually encounter. i had started with a simple premise — money can and is made in the financial markets. i operated with this basic truth and set out to figure out how. first, i had to refute the counterfactual to my best ability. that’s data-speak for: i had to prove that markets are not completely random. what are the easiest ways of proving this? well, hunt for successful traders and see if you can find (hidden or tail-risk) flaws with their approaches. found, validated, checked. needless to say, i stumbled on all of the fin-fluencers selling their ideas on youtube and instagram. they are living proofs that they cannot make enough money from their trading and feel the need to force trade ideas locked behind paid accounts (their main way of making money) down a gullible newcomer’s throat. incidentally, back in 2015, i remember taking a trade on a ticker that was passed around as hot shit, a stock that eventually went to ~zero. my conviction for buying the stock? only i knew of the tip! the stock: MERCATOR. we grow up. we move away from these tips, these fin-fluencers, the news, we avoid them like pests. they’re hustling too, just not in your favour.
next, with the right masters (say Livermore, Darvas, Roppel, Al Brooks, Soros, Qualmaggie and so on and so forth), figure out what works for them — translate it to what would work for me — keep at it till it clicks. in between the lines is where the entire battlefield sprawls. how much do you size each idea? isn’t diversification a hedge for ignorance? margin who margin how? swing momentum, or mean revert to soothe your ego? tame the FOMO and hold the greed? flip the mental game that takes from the ninety and profits the ten? breathe between swings and most importantly, never try too hard!
there’s only one way to mastery — go through the motions, keep at it till you have unshakeable confidence that stems from your core. once it clicks, it clicks.
along the way comes another valuable lesson, the primal lesson that learning never ceases. it is both, fearful and joyous. the last two months had one (new) thing to teach me. and it has to do with the cost of trading (successfully), the risk that you put up each time you take a trade. my best trades have never caused me trouble. they never moved too close to my stop loss, they did not look like they were about to reverse all the time, they just chugged onwards. theoretically, the risk on these could be zero at the first point of buy, the exact tick that is the pivot. practically, very close to zero. the bigger lesson here — when you are trying hard to make positions work, know that your playing field isn’t yours(feb and march) and take a step back. when things are right, there is no effort needed, when things are wrong, everything and more works against you.
the cost of doing business is the risk you put up with at the very start till the business starts paying off. the lesson is that this cost can be as little as you want it to be. sloppiness is a hedge for mediocrity, provided persistance is a given. going forward, i want to use this to my advantage, and i want to thank Jim Roppel for a practical advice. 3–5–7% risk on any position (a third off at each); irrespective of what you buy, where you buy. if a giant can swing a giant size and use such a tight stop, so MUST i. so must you!
hitting hard vs hitting wide
what’s it like to have 10 positions of 10% net liquidity each? how does it compare to having 2 with 50% each?
i assume you’ve done your homework and understand Kelly criterion, correlation risk, black swan events, etc. i’m talking about a practical scenario. here are the main characteristics between concentrating and diversifying —
- power laws — your winner will be an order of magnitude bigger than your runner up. (if your volatility is capped only on the downside) ergo your winner (the top trade) should have size that’s an order of magnitude more than your runner up. why? make resources work for you, to the best of their abilities.
- cold feet — big positions swing the account both up and down much more than (uncorrelated) small positions. if you’re at a point in your trading journey where you are disciplining yourself to limit losses brutally, kill-switch approaches may serve as a thousand papercuts. (here, kill switch = kill trades if unrealized performance drops below a threshold).
- getting all the ducks in a row — whoever has traded the markets discretionarily knows how hard it is to manage multiple positions simultaneously. fewer quality positions >> a wide fishnet that catches all kinds of garbage.
- liquidity — not all account sizes can afford concentration. some must diversify.
- sign of the times — every other context where having a lot of triumphs being concentrated in just a few. (go long a leader and short its twin laggard, capture the delta between two valuations.)
for me, personally, the sweet spot is between 4–5 open positions at max, with an ideal of 1–2 positions with all available size once full. sometimes, when building a position, you cannot be sure of whether the stock would behave correctly and whether you will end up with a full size. since I trade on the daily timeframe, most setups occur in spurts, and sometimes, i end up taking multiple trades. the terrible ones are quickly killed, the decent ones are held for further action.
llama prefers an approach of hitting hard when the pitch is just right. sometimes it takes a while to find the footing (read swinging wide) but it is only to get going.
the art of doing nothing
the Indian stock market has been in a limbo for almost two years now. i don’t care about the reason as much as i care about the reality. finally, last month, it looked like the whole market was ready to move up. i bought MTARTECH on 08 April, and I finished adding size by 15th. so far so good. then, the stock began to wobble in place. alert1. volume seemed to be below average when it moved up, a caution flag. alert2. overall, i still held a decent paper profit.
eventually, thanks to Donald Duck, strong stocks in the energy (green, clean, solar, etc) sector started setting up. i bought into some. this is where i went wrong — i reduced the size of MTARTECH to fund another good looking setup. wrong. wrong. terribly wrong. the art of doing nothing is in actually doing nothing. selling isn’t nothing.
doing nothing is extremely paranoia inducing. “am i being complacent and missing a signal?” — “am i about to give back my paper profits and then some?” — “surely, i can be smart and frontrun the trade?” — “here are ten reasons why this stock is about to go against you: fundamental, mystical and mathematical…”
no; maybe(beyond you), no; and zip it.
if you bought where you were supposed to buy, if you sized in when the trade showed you that you were right, if you have a stop that will take care of your immeasurable ignorance, if none of your sell rules are triggered and if another position isn’t demanding funds for being a significantly better performer with a smaller than needed size; do nothing.
all’s not in vain. the beauty of learning a craft yourself is that you don’t end up failing completely even when things go south — a good chef salvages a dish, a decent horticulturist a rose bush post a storm. i didn’t close the whole position, i held a portion; and last week, it had a fantastic run up. this is it’s chart. i failed to do nothing correctly, and it cost me.
front-running the market
the US market is to go live 24–7 soon. remember, it’s not just for you and me, it’s for everyone. my core strategy will have no changes, it works the same way of assets traded round the clock (like BTC, or gold). here’s the strategy again, for the curious — buy a breakout of an near/all time high; add size on confirmation; sell a ridiculous all time high.
these days, outside regular trading hours, thin volume drives prices up and down by ridiculous magnitude of stocks traded in the US markets, big and small. you can expect a flutter of activity for almost any active stock. this is guaranteed for earnings days, and even more so around key levels.
what do we make of these flutterbys?
- there’s no point in trading these for the marginal gains, unless that’s churned out to be a strategy in itself. not for me, too unreliable.
- stops — if a stock is trading beyond my stop outside regular trading hours, what does this signal say? one, there’s liquidity, however thin, on the wrong side of your stop: bad. two, for entry signals, recheck your entry to make sure it is actually one you want to take. three: use thin liquidity only when it suits you, ex. buying climax days when you’re ready to execute a sell.
- unnecessary noise in performance — ignore this to avoid biasing yourself in the wrong direction.
remember, llama trades momentum which is a result of price flowing upwards, which is a result of price piercing a key pivot point, which is a result of net buying consuming net selling. given a working environment, the momentum will last till it no longer does. in no way does it say anything about how the price will move beyond the key pivot point. the assumption is that a bad start is a bad start, second only to a terrible start that triggers your stop. the rest, is mostly noise.
those trying to front-run the markets will be caught in a stampede every so often, and you don’t want to be in one. there’s hardly any use in scalping ticks when the entire move is worth hundreds. and much to the ideological relief, most time in a trend is spent in a countertrend move. note: most TIME. it’s the little bursts of momentum in the direction of the trend lasting just a short while that you need to be a part of. impatience plays a character in the theatre of front-run (stock) plays.
the GLW trade or how to protect paper profits better
In February, i held GLW with full size. In March, in my reports, i noticed that my performance dropped by a big chunk. this was confusing, as i knew every trade i had taken in March and the due diligence behind each point of risk. i looked closer. the culprit: vanishing paper profits from one month to the next!
the paper profits in Feb were wiped off in March on that one GLW trade; and since i size big, this had a big effect on the net performance.
GLW was traded so —
in this case, even though the position was big, the net paper profits were small; around +10% of the full size. i am comfortable seeing 50s and 100s of % on my true winners, and sometimes, i exchange a little downside for a bigger upside.
that’s fine and dandy if it’s a winner. if not, i’d be better off taking what i get.
a lesson here is to further chisel the protocol for protecting profits. leeway applies to positions in deep, deep green.
an ideal GLW trade would’ve been so —
some reasons for raising caution could be — price action as the main driver, a bad/sideways market, no other major positions in the portfolio as a signal that things are switching up, and failed recovery post a cranky pullback.
if this situation were to repeat itself, i would love to secure half the paper profits, instead of none, as was the case.
notable swing trades + other thoughts
- i looked at my best months and my worst months, here they are on the SP500 chart. the best and the worst months are close by; the best ones follow the deepest corrections, the worst ones track the end of a bull streak!
- April was the third best month in terms of performance! traders are always armed with disclaimers, and rightfully so, but the market is extremely solid right now. i expect a few months of upward action! nevertheless, caution for sudden turns.
- after watching from the sidelines for two months, one fine day, i declared the following. this was when BRENT suddenly dropped a bunch in 15 minutes after a consolidation—
llama declares an end to the US Iran conflict. (March 31, 18:45 CET)
— llama’s telegram.
the markets have recovered and gone to all time highs in a piercingly loud rally ever since!
- we are close to wrapping up. some top trades this month were — CLS(trade might set up again) MRVL and AMZN. no losers that went beyond the initial risk on the pilot buy, the thing i’m most proud of.
the best ones are still in the account —
full sized (long) positions in QPOWER, POWERIND and AMD!
llama’s bullish* as fuck on stocks!
(*subject to change at a moment’s notice. not financial advice.)
have a wonderful month ahead, and see you in the next one.
— llama.