My basic trading philosophy can be summed up by one simple quote:

"Trade the ticker, not the company" - Nate Michaud

Wednesday, May 20, 2015

Quick Recap of my PBMD Debacle

Blog posts about large losses are usually the best ones to learn from, so it's a good thing for all of you that I have another to share!

From the time I took a loss on LAKE, as well as a large NDRM loss early in 2015, I've been very good about avoiding the frontside of large runners. I was letting stocks spike, exhaust themselves, and THEN I would strike. This spring, VLTC was one of the most ridiculous short squeezes we've seen in quite a while, and I managed not to twist myself badly on that one at all! I was incredibly proud of myself.

Then, in the last couple of weeks, my habits began to change again for the worse. I had an early short on VGGL that I chose to get stubborn with, but my stubbornness was rewarded as I came away with a nice gain instead of the loss I deserved (I was down $40k at one point.) I can't remember the other example, but I know that I was stubborn on another and was rewarded with a nice win. Point being, I fell back into bad habits, and those bad habits were reinforced, unfortunately.

The other factor that set the stage for my recent loss was boredom. I've been on a very nice run the last six weeks, finally feeling back in my groove. This week started out SLOW. I spent most of each day staring at the screen looking for plays, and I could find nothing major that I liked. So, naturally, I became impatient. I tried to manufacture my own plays. This is where my problems started on PBMD.

Above is the daily chart for PBMD. Most of this move occurred on a straight up spike into close on good news. The volume was nothing special. I believed I saw resistance on the daily chart in the 1.90s, so I started in short 21,000 shares at a 1.67 average. I figured this would be like so many other low-volume runners I'd seen recently and gap down the next morning. This is where I broke my first rule, not to short the frontside of a move, ESPECIALLY day 1. I was gambling that the gap would go in my favor, and if it gapped up, I figured that I could just add a little playing off of the 1.90 area.

Unfortunately, it never occurred to me that PBMD might gap up HUGE. Above, you can see the PBMD chart after hours Tuesday and premarket Wednesday. I was watching PBMD after hours spike into the 2s, and knew I was in trouble. My position was at Centerpoint. Unfortunately, Centerpoint does not allow GTC orders. So I was unable to cover premarket Wednesday into the large dip because I couldn't have an order sitting there. I actually did try, but as I expected, the order was cancelled. THIS IS 100% MY FAULT, I KNEW THIS GOING IN. I just didn't care. I still had the nonchalant, "I can always average up if I don't get covered" attitude. 

As I watched PBMD gap up premarket and then open, I could see that I wasn't going to get my pullback for break even. So I decided to dig in my heels and fight. I was going to add big into spikes and then cover up into pullbacks to let myself out. If I was early on my adds, I would simply cut the losses on key high of day breaks. Through managing my position this way, I was sure I'd come out okay. After all, how high could it possibly go? It was already up from the $0.50 area!

Above is the first hour-and-a-half of market action on PBMD. Volume was absolutely massive now, so adding size wasn't difficult at all. Around 10:06, I added 40,000 shares at about $2.70, a bit early. The $2.95 high of day rejected though, so I was happy to hold on to my adds. As I watched PBMD fade back and fight in the mid $2s, I could see that there was a lot of support. It even briefly cracked the $2.60 area, yet no large breakdown occurred as I expected. I covered about 29,000 of my adds in the mid 2.60s before the next large perk up. To my dismay, the high of day $2.95 broke, as well as $3.00. I didn't want to take off the rest of my adds for a loss though! So I decided to dig in my heels again. I now was riding 32,000 shares from just over a $2.00 average. My unrealized loss was getting ugly.

I managed to sit on my hands until the perk and fail through $4, around 11:40 a.m. After the low $4s rejected, I once again tried adding large size into a lower high. I believe I brought my total size up to about 80,000 shares at this point. The $4.08 high didn't hold for long, though, and I was forced to cut my adds. Unfortunately, I made ANOTHER mistake here, once again only cutting partial size. I now had over 50,000 shares as PBMD continued to rip higher.

PBMD was quickly through $5 before I knew what had happened, and my unrealized loss was ballooning. After topping out at $5.48 and having a hard pullback under $5.00, I decided to try one more time into the rebound. I added large once again, risking off of the $5.50 area. Once again, PBMD ripped to new highs. At this point, I was mentally done. I cut everything into the strength, quite poorly, as I didn't even get out at $5.50. My covers were closer to the $5.80 area.

When all was said and done, I had a $188,000 loss on PBMD. I managed to recover a little bit of those losses before close, but below, you can see the end-of-day damage:

I actually had quite a few nice short entries into pops over $6.00 the last few hours of the day, but I fell into a homerun mentality and wouldn't pay myself into dips! I had a chance to minimize the damage, but I failed.

To recap, here are the mistakes I made:

  1. Shorted on Day 1 of a runner into close
  2. Decided to average up and fight rather than cut the loss after large gap up
  3. Ignored massive volume
  4. Made assumptions about how high it could or couldn't go
  5. Refused to cut entire losses on adds that didn't work
  6. Went for the "Homerun" and revenge on late day trades
Amazingly, I feel totally okay mentally after this loss. I'm more annoyed with my poor discipline than anything else. But I'm super excited to attack PBMD again going forward when the trend is finally on my side!

Stubbornness KILLS. I really hope you don't have to learn that lesson the hard way multiple times like I did. For all of the times it works out in your favor, the PBMDs, LAKEs, NDRMs, VLTCs, will wipe those gains out AND THEN SOME. Stay safe out there. Good luck the rest of the way with this ticker!!!