Ever have one of those days that starts out just great then, goes in the dumper real fast and you’re powerless to do anything about it? Well, that can happen real easily in the stock market if you fail to keep your focus on the facts and don’t recognize the warning signs.
A Touch of History
Those with experience in the Markets are often heard to say, “The stock market has it’s seasons just like the Spring, Summer, Fall, and Winter of our world.” In the market, some of the well known effects are called “The January Effect:, “The Spring Madness”, “Dreadful October”, and others. History repeats it’s self in the market and if you fail to study it’s history, you’ll have your broker account emptied in a heart beat. Keep this in mind as I’ll include this in an interesting tale in a few minutes. But first, a few points to consider.
In a copyright released article by DIANA B. HENRIQUES, Diana points out how Dr. Ari Kiev coaches day traders on how to not gamble in the stock market. All too often, when you are on a winning streak it’s all too easy to slip into a Gambling mode where your emotions take over and you lose your objectivity. Also, keep this in mind for later.
Ignorance Spells Disaster
When trading in the stock market, it is very important to do good research. However, good research requires a greater depth of knowledge that most of us don’t have when starting out. Therefore, it’s a good idea to find a good stock guru and pay his price for his information and picks. At our Research page you will find a research guideline that will get you started.
All too often, when doing research, for hours on end, the average person develops tunnel vision and concentrates solely on the stock they are reviewing. They fail to observe other events in the market and around the world that can have an effect on almost every aspect of their trading strategy. That’s why a good stock guru is invaluable to keeping you on the right track while you learn.
Again, I’m preparing the ground work for my little tale to follow. Hold on, there’s just two more points to review.
Why Me? Or is it, Murphy’s Law?
Well…, Michael Murphy, a well know Market guru might take an offense at calling it Murphy’s law however, this sure falls into that age old category.
Have you ever been getting ready to place an order only to discover that your broker’s site is down. Or, the portion of the internet that you’re on has a failure and you can’t connect to any site on the internet. All without warning. Well, you know how it feels, right! That sudden loss of communications gives you the feeling that you’re cutoff from humanity and the world. Definitely a gut wrencher. How about if everything goes out, power, telephone, dial-ups or direct connections to the internet? Definitely, a bad day in the making.
Money, Money, Money. Just Waiting to be Mine!
As a day trader, one of the hardest things to do is overcome your emotions. Greed is one of the most powerful and driving factors in the downfall of a trader. Fear doesn’t enter the picture until it’s too late and then it all turns into the denial stage. At that point, the dumbstruck traders are powerless to make any decisions on their own as they watch the value of their position fall towards Zero. Lastly, the ego takes hold and the trader blames everyone and everything except themselves. Sound familiar, you bet. I hear it every week in e-mails.
As Paul Harvey says each day on the Radio, “Now, for the rest of the story.”
It all started early in September this year as the market started moving into a volatile stage with the approach of the anniversary of the October 1929 Market crash. The market started to make some wide and dramatic swings in stock and index prices as it has every year about this time. One day up and the next day down and so on and so on. Day after day.
The price swings became so timely that it was easy to spot the lows and buy the stock. Spot the highs and sell out the position. Then, immediately sell short and ride the curve down to the lows and repeat the process all over again. Just like clock work every day. It was a day trader’s wildest dream come true. Make money every day in both directions of the market.
As trading progressed through October it was obvious that the Advance/Decline line was on a downward trend. The infamous Alan Greenspan at the Fed was talking inflation control and the market kept trending down. As the earnings season approached many companies began to hint at less than projected earnings. The market continued it’s decline but, the price swings were still there.
Soon, traders began to start the feeding frenzy on the constant price swings; buy, sell, sell short, buy-to-cover and so it went, on and on. Gradually, greed rather than technical skill began to take hold. It became easy; albeit too easy. Traders in chat rooms began to cry “Yeeha” with every rise and fall of the market. Some of the less fortunate that had never learned to short stocks cried “No, No, No” as the trend line continued to decline. They were stuck in positions from the mid-summer highs of many stocks.
And so, the Fall season of the rough trade winds was upon us and it continued on day after day. Remember me telling you about TokyoJoe and his “seasons of the market”? Well, in time, each season has it’s end and so we neared the end of “dreadful October”.
What would Alan Greenspan do? Raise rates again? It seemed that every time he spoke somewhere, the market reacted sharply downward. The economic reports came out and the market continued it’s wild swings. We were rapidly approaching the end of October and everyone kept holding their collective breaths just waiting for someone (a.k.a. Alan Greenspan) or another economic report to push the market into the dreaded downward spiral. We waited and we continued to play the swings each day; everyday. When would it end? Who cares, we were making money hand over fists in both directions on the market’s daily prices. Yeeha! Moma just got a new car!
Then, quite insidiously it seemed, Alan Greenspan spoke one evening and basically, didn’t say anything other than “We’re OK.” What?!!! No economic predictions! I can’t believe it! Well…OK. That’s all right, I guess. Hmmm…
Next, the employment figures came out. “We’re OK.” What?!!! They were supposed to have a downward affect on the market. Nope..it didn’t happen. Hmmm… Well, OK.
Next, the Dow Industrials lost 4 leaders and gained 4 new members. OK..I guess that’s OK. There didn’t appear to be any dramatic effect. At least, not yet.
Then, quite surprisingly, on that last Thursday of October the market sustained a continued rise in the DOW, the NASDAQ, and many quality stocks. Hmmm… OK, let’s make more money and load up on the low prices and ride this train to the top. By the end of the day it was still climbing steadily. There was a good base support that showed that it would continue into Friday and so it did. Again, we rode it higher and higher.
But wait, all through September and October the market would swing back and forth. Well then, by the end of Friday we were looking for the opportunity to start our short positions. It had to be there. We just knew it.
Now, I hope you can see the pattern that has developed. We were running on Greed and threw out all technical reasoning. Two months of constant profits without nary a loss. It was Gambling fever for sure; one of the greatest downfalls of any daytrader. Unfortunately, it happens at least once to every trader. It’s just a matter of how heavy it hits as to how deep the casualties. Statistics show that 70% of all aspiring daytraders lose money and 60% of them lose it all.
On Monday, the market moved a bit sideways with prices swinging in a small range. We thought for sure that the end was near. Or was it? The winter winds of change were blowing in the North but, we weren’t listening. We had the fever.
Now, on Monday night, in our chat room we all tossed the prospects around. Yep..we were all in agreement. Even if the PPI numbers due out the next morning would be as rumored, the DOW should only increase about 60 to 70 points. OK..we had our strategy. We would set our short sell orders accordingly, just at the point where we just knew the DOW would peak and start to level off thus starting it’s decline after three days of a constant rise. We were still stuck in the September and October (Fall season) mentality that a volatile market would surely continue.
It’s now Tuesday morning and the PPI figures have been released prior to the market opening. The futures market showed a sharp uptrend, but, nothing to be concerned about. The trend was expected.
Then, the opening Bell. The race was on, BUT, instead, to our horror, in a matter of minutes the market zoomed up past 70 points, on it’s way to a 187 point rise in the “first 9 minutes” of the market. WHAT??!! WAIT!!! Someone, please, push the Pause button on the VCR. This has got to be a movie!! This can’t be happening!!! Now, the trader begins to feel the fear of failure and is powerless to stop it.
At approx. 3 minutes into the market, when the DOW passed the 75 point mark, a major communications node in the SW was knocked out. OH NO. Where’s Murphy? I’ll kill’m. Now, the ego takes over and the rage begins.
The stampede started. Traders could not contact brokers, either via the internet, or by phone (as lines were either down or jammed) to reverse these orders. The pace quickened. Not NOW!!
As the DOW, NASDAQ, and Futures markets climbed, the palms got sweaty and the gut wrenched! Eyes bulged and the Rolaids bottles were empty; you just knew that this was going to be a bad day. Rage and fear are intertwined and rapidly denial built to it’s full paralyzing effect.
After a time, communications was restored. However, this sweeping rise in the market has literally wiped out 2 months of profit. All in the space of 9 minutes. It was over in a flash. Just like that. Oh, *&%#! Now what?
By the way, if you were expecting a longer drama I’m sure you’ll understand when I say that those were the shortest 9 minutes in a daytrader’s life. It all went by in a flash. So unreal yet, so true. Many are still in denial.
Well, for those of us that have been around awhile and have built up our accounts, we were able to ride it out and eventually turned our positions back around and rode the market as it continued to make new highs for eight straight days.
Sure we’ve gained a lot back. However, the road to day trading lost a lot of aspiring day traders that caught the “fever” and “gambled” in the market. On the other hand, there are a lot of new aspiring day traders and experienced day traders that were able to control their emotions and stayed technical and focused and did their research each night. To those successful, we say congratulations. For those that lost it all we say a silent prayer, for someday it could be us.
What Went Wrong?
The bottom line..it was our emotions. Especially greed.
We had wrongly estimated the impact and timing of a major economic report based on previous rumors.
We failed our history lessons. Sorry Joe. I know you tried to pound it into us. It was the end of “dreadful October”, the Fall season, and many investors waiting on the sidelines jump in on November 1. Big time.
After the initial poor round of earnings reports many companies started releasing good reports. If we had dug a bit deeper into the news and company reports we would have seen this coming.
In short, (Pun intended) we let the gambling fever blind us to the fact that we needed to do our research (Due Diligence) each night. We were riding high on our winnings. No, you can’t call them earnings. They were plainly, Las Vegas style winnings.
The Moral of the Story
Stay alert, don’t let greed and gambling take hold. Get away for a break once in a while. You don’t have to trade every day. Take a step or two back and really see what’s going on in the market and with yourself.
Spend that extra time doing your research because you and only you are responsible for your actions. Not others.
If you’re going to buy some of those nice extras with your earnings, make sure you pull the cash out of your account first.
Lastly, the worst part was telling my wife that the new car in the driveway was really here for a test drive.
Good Luck and Gook Trading
The Rookie DayTrader
PS: Don’t quit your day job just yet. You’ve still got a lot to learn.