Description

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!!!

30 comments:

  1. Could you explain this a little more "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."?

    ReplyDelete
    Replies
    1. GTC = "good til canceled" i put in a 1.65 good til cancel order yesterday after hours in case it dipped premarket, but centerpoint cancelled it overnight like i was afraid they might. Knew they do that sometimes, my bad entirely

      Delete
    2. How Much Did you lose in TOTAL????

      Delete
  2. Thank you Tim. Great post, great advice!

    ReplyDelete
    Replies
    1. This comment has been removed by a blog administrator.

      Delete
  3. One of my most golden sacred rules is never adding up a losing position, no matter what, market offers everyday opportunities, no revenge, and respect stop losses like your mum. Lesson learnt dude !!

    ReplyDelete
    Replies
    1. Spot on. My method/thoughts exactly.

      Delete
  4. I commend you for this post. As a new trader, this post makes a huge impression on my and I'll remember it for a long time. Thanks.

    ReplyDelete
  5. Thank you for the blog post Tim, and for sharing your daily lessons with us. Have a great rest of the week! Manuel

    ReplyDelete
  6. Tim, your transparency and willingness to help traders learn through your mistakes speaks volumes about you as a person. I truly appreciate you explaining your thought process. This is how twitter should always be. Pay it forward and help out new traders struggling!

    ReplyDelete
  7. Tim

    Thanks for your post. I took a pretty big loss recently on a long $USD/CHF trade I had into a multi-day down trend. It was so painful while it was happening but after I pulled the eject button at -5% It felt so good to be out.

    ReplyDelete
  8. This comment has been removed by the author.

    ReplyDelete
  9. Thanks for sharing Tim. In hearing of the thoughts you had leading into this trade outcome, I have a few questions: understanding the risk that you had on in terms of the share size, would it not be reasonable to suggest that you actually did understand the risk you are taking given the size of account you currently have? I understand because my question may have you think back to when you were first trading with the smaller account. I also ask because there is a very specific trait that I have observed among consistently successful traders versus those who win time to time but give it back. Namely that distinct difference is the mindset and which predefined risk is occurring within the process of the trader's decisions. As I learn, I Understand that the big dollars does tend to give one big eyes, per se, an easily cater 2 home run thinking...As Nate mentioned something like that in post market chat.

    However, in other words, if one has a small, medium, or large size account, would it not be disciplined (and best to net consistent profitable results over time) for that given trader to adjust their share size proportionate to the predefined risk they are willing to take for that given trade? like if I am willing to only risk 50 to 100$, and find it best to give myself that risk tolerance, that it may be best to only use 500 shares at a time (where each .01 tick is 5$) and therefore can risk.10-.20? Therefore enabling myself to participate in proportion to the size of a small account in a relatively well risk managed situation? AS to already be 'ok' with the loss of that trade if it moves that far against a trade?

    I know is I have came to the IU chat, and like any other trader, I may do homework in order to define an edge in the market, and then choose to take a position relative to the edge...is not having a plan that specifically includes what my pre-defined risk is, practically necessary for having the mindset to get up each day and be able to go at it (trading) unimpeded by the losses?

    Another thought (and question) that comes to mind is when Nate said in textbook trading "when it's okay to chase": I find that there seems to be an element were averaging down or everything up is actually going on among Traders like Phil, Derrick, and others who seem to amass great profits? And I'm currently trying to understand how that contradiction to the rule of " cutting losses quickly" applies...why do you guys do it? What would you say, is how much of your big wins are really results of averaging up or down? What , per se, is really enabling you to participate confidently, unimpeded by the losses, with clear focus?

    ReplyDelete
    Replies
    1. It all depends on the person man. Every good trader has their own specific rules within the larger scope of rules they are following. And as they get more experience they are able to adjust their preferences accordingly.
      I am just grateful that traders like this share their achievements as well as mistakes; it is invaluable as a new trader & it probably helps them too anyway.

      But yes, [in my understanding] generally you would have a predefined risk-reward ratio that may not be relative to your account size. Your position size, however, would definitely be in proportion to your account size. But that decision is up to you as a trader.

      Delete
  10. This comment has been removed by the author.

    ReplyDelete
    Replies
    1. This comment has been removed by the author.

      Delete
  11. Very interesting post. Not to disrespect but I think the main point of all this is that resistance actually doesn't exist. Any random line plotted on any price chart will seem to act like important support/resistance level, which has been proven time and time again.

    ReplyDelete
  12. opened a small account $2700 on suretrader just to see how the platform works, clicked by mistake to short PBMD at 2.80 , 2 mins later it spiked to 3s, got really pissed nd though " no way its going to 3.50, i know its going down nd will take it back" we all, know it didnt nd lost pretty much the whole acount $2400 loss, really bad hit, but deff a great lesson nd never ever again going in a trade even by mistake with an exit point, anything nd everything can happen with this kind of stock. i know i will take the $2400 back. funding again nd lets trade it the right way.

    ReplyDelete
    Replies
    1. This comment has been removed by a blog administrator.

      Delete
  13. Thanks Tim for being transparent and sharing this lesson.

    ReplyDelete
  14. Tim what do you mean by :
    " This is where I broke my first rule, not to short the frontside of a move, ESPECIALLY day 1."

    What is the front side of a move ?

    ReplyDelete
  15. Hi Tim, I am an avid reader and follower of your blog, as always, thank you so much for putting this up. I was waiting since Jan for your new post.

    I have a request for a new blogpost. Did not know where to mail you so posting here. For many days now, I am struggling to identify a good scale in and
    scale out strategy. I am very interested to know how do you decide to
    scale in and out from short trades? Some specific questions below in that regards. I would really appreciate if you could respond with a post explaining some of these questions with your past trade examples/charts like you often do.

    Say once a trade starts to go in your direction -
    1. How do you decide 'when' to add and how much.
    2. Assuming the back side of the move with lower high and lower low, what acts as a trigger for you to do your 'first add' after your initial entry.
    3. Before doing the add, do you wait for the trend to give you some cushion in form of unrealized or realized gains, how much? It seems to me that adding too early may have the risk of trend reverts leading to turning tiny profits to twice the loser size (with the add).
    4. Vice versa when adding too late, the trend may revert. In such cases, do you 'cut' your add instantly?
    5. How do you decide when to take profit from your add or 'cut' that add.
    6. Do you take profits in scaling out fashion or all-out in one go.
    7. This question has got me pondering for long -> Say trend is now on back side of the move with lower high and lower lows, for any of your subsequent adds (1st add, 2nd add, 3rd add), do you continue to risk off of the initial entry or do you risk every add based off the last lower high?

    These questions have puzzled me for a while, and I do realize it may not be a '1 technique fit-all strategy', but still would love to learn from your expertise on how you tackle these situations. Appreciate your time, and as always thanks so much!

    ReplyDelete
  16. My biggest problem in my paper (simulated) Forex account is letting losses ride and eventually lost more than I gained because of it. Definitely gotta work on that, and this lesson is just positive reinforcement. I'm a new trader just getting into stocks and I really appreciate this post!

    ReplyDelete
  17. Mad respect for posting this... I did the same thing on a JCP short (puts) a few years back when it was 28. I knew it was going to tank just didn't think it would go to 40 first. Just remember it's always better to cut your losses than average them when trading.

    ReplyDelete
  18. This comment has been removed by the author.

    ReplyDelete
  19. It was certainly interesting for me to read U.S equity trades. Thanks for it. I like such topics and anything that is connected to this matter. Equity Tips

    ReplyDelete
  20. Wow Tim, thank you sooo much for sharing & your transparancy. I learned sooo much out of this post & it helps a lot to understand what mistakes can cost you.

    ReplyDelete
  21. This comment has been removed by a blog administrator.

    ReplyDelete
  22. Silver lining - this reinforced that you never overnight short a day 1 runner..perhaps this saved you on KBIO which could have been a 7 figure loss if played similarly...

    ReplyDelete