August

It was supposed to be the ghost month. Cash was to be the prevalent position. But it would seem as if the market is trying to deviate from its yearly routine by breaking the norm. Plays were popping left and right at a rate which rivals Pidgeys and Rattatas on a lure party.

There was the infamous WEB suspension followed by an almost double ceiling play. The rallies of MCP, BLOOM, MAXS and what-have-yous.

It seemed like most people in the tribe have ridden one or the other. I haven’t. So while everybody was cheering, there I was thinking what am I not getting? What am I doing wrong? I have always imagined that my next blog entry post-classes would be all sunshine and rainbows. But when it was clear that I wouldn’t be able to post something that my mentors would be proud of, I chalked it up to a lack of inspiration.

Sometime after the course, my overall port gain hit 16%. Thanks to a couple of TF (trendfollow) positions and a few tsupitas. It wasn’t much compared to what most of the people in the tribe make, but to me, it was everything. I was someone who was so used to seeing a bleeding port. More than the money gained, it was the testament that I have made progress which excited me the most. That I have learned, that I am, in some ways, applying the lessons correctly. But as fast as I made progress, it was in the same manner that I lost it.

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What preserved my capital and the gains that I’ve made during and after the course was this little thing called position sizing. Something that’s very important but is often overlooked. It falls under money management, one of those things we know we should care about but we hardly do. Position size simply means the amount of shares you buy in a trade.

Here’s a quick run through:

To determine the appropriate position size in a trade, you must first determine the following:

1. Account size: P100,000.
2. Cut loss point (%): Let’s say you use the -5% cut rule. Knowing where to stop your losses means knowing the risks involved.
3. Account risk per trade (%): 1 to 2%. This is the amount you are willing to lose in every trade. It doesn’t matter how many zeroes you have in your account. You shouldn’t be willing to risk more than 2% of your overall portfolio value in a single trade.  In our example, we have P100,000 and we are willing to risk 2% in every trade so that gives us: P2000.

Here is a chart of CEB on 06/08/16:

We want to buy CEB at 100 pesos/share. The cut loss is set at 5%. Hence, we risk 5 pesos/share (cut loss).

Earlier, we have determined that we are willing to risk 2% of our overall portfolio in a single trade, which is equivalent to: 2000 pesos (account risk).

To compute for the position size: account risk/cut loss

2000/5 = 400 shares or P40,000 at 100 pesos/share. This will be your position size, the only allowable allocation in the trade with the given risk tolerance. Of course, the position size will vary depending on the trader’s risk appetite.

In its most basic sense, position sizing means that the higher the risk, the lower the capital allocation, and vice versa.

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Practicing position sizing in my trades has been my portfolio's saving grace. It made it possible for me to lose small and win big. But when I saw my port turning greener and greener, I became more confident in placing positions. Too confident, in fact, that I became reckless. I found myself forgoing the usual risk computations and just entered trades because YOLO. 

For the first time since I started trading, I made money on consecutive trades, I have a very effective system behind me, surely I could afford myself some leeway.

Oh boy, was I wrong. It crept up so insidiously, it was too late when I realized I was in the midst of a Superman Syndrome. Due to my prior wins, I began to enter trades without accounting for the risks involved. I took on high risk positions without capital preservation in mind. I was blinded with my recent progress that I forgot I still have so much to learn. And the market, as unforgiving as she is, did not fail to remind me of my oversight. It wasn’t long when I saw my losses piling up. I watched as my 16% gain trickled to as low as 2% in just a matter of days. Not even weeks, just days. Most of the gains I worked hard on ran away from me faster than Usain Bolt in a 100-meter dash.

What frustrated me the most was the way I would spend hours scanning charts, looking for potential plays, creating trading plans only to throw them out of the window come morning. I was just fooling myself, wasting hours on plans I wasn’t going to follow anyways. I entered trades I wasn’t supposed to. I made decisions that were not part of the blueprint. I only considered what I could gain and not what I could loss. That’s when I realized that it wasn’t just the syndrome. I didn’t want to admit it, not at first. But it would seem that the fear of missing out still has me on a chokehold.

Here are a few of my what-was-I-thinking trades:

 

I have yet to develop the habit of taking port snapshots prior to selling. There are other failed trades that are recorded in my trade journal but I’m sure you get the picture. 

And so although this is not how I thought my next blog post would be, I needed to face the music. Discipline is not a one-time thing. It’s an everyday practice. How many more wake-up calls before we finally listen?

Luckily for me, I did when I realized that one more mistake would send my port tumbling down to the sea of red effectively negating all the months of hard work. I didn't want that to happen. Because it's not just myself I'm letting down. With all the noise shut down and the drawing board dusted off, I went back to work. 

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Always, always make your why stronger than your excuses.

Always, always stick to your trading plans.

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There are still hundreds of miles to go, acres of lands to toil, but I'm glad to know hard work does pay off.

Some, if not all, positions are sold.