Continuous Trading Turns from Innovation to Disaster

After the euphoria of my $80,000 three month winning streak from November to January, in February,    March and April I did everything wrong.  It's taken me three months of depression and gut wrenching losses to get to the point of writing this post. 

How it all went Wrong

When your portfolio outperforms both average growth rate and also hits all time highs, it's time to take profits across the entire portfolio, liquidate all losers, and take some time to reassess.

Making so much money in January had an inspiring impact. I was full of energy and possibility, and got a sense for what my Financial Wizard goal might feel like. The election of Joe Biden as President had made the markets explode in January as he was inaugurated, despite record covid cases, and the terrorist attack on the Capitol building by Trump supporters. I bought a new paragliding harness that I had wanted for a long time, and started dreaming about buying a black Porsche Panamera to replace our not so sexy minivan.

When my TDAmeritrade account hit its high of $126,000 in early February and my overall investment portfolio crossed $400,000,  I should have realized I that that was a overbought situation for my portfolio as a whole, and liquidated everything to give myself time to reassess and build a more balanced portfolio.  

Instead, I was caught up unconsciously in the euphoria around the Gamestop bubble in speculative retail stocks. I took on the attitude of 'gambling with house money' concept where you scale up your risk using profits you've already made. Athough I saw that the huge rally in January was that took many high flying stocks 100% higher in a month, was a bubble,  I failed to act on that by selling everything and shorting those massively inflated stocks. 

February's Vicious Turnaround

All rallies come to an end. The end of this europhoric period was brutal. In February, a profit of $11,000 in the first week turned around with weeks to a loss of nearly $20,000. Instead of closing out all the losing positions, I kept them all open, thinking they would recover along the lines of the volatility but overall upwards direction of November to January.

As a mulled over the losses, I found a new reasonably priced trading Algorithm via a Facebook post.  I used that Algorithm to develop the idea of a Continuous Trading System, where you stay invested in a small group of stocks in order to make sure you are in the market when it makes big moves. 

I was so confident in the backtest of the system and the accuracy of the Algoythm, that I invested heavily back into the same volatile stocks. But I failed to follow the system and reverse the positions when they all turned aroun in unision and dropped sharply.  

Hedge funds were abandoning growth stocks and moving to a boom in crypto currencies. Volatile stocks continued to go down a further 20-50%, doubling my existing losses from February.  As of April 16 2021 my losing positions peaked at $100,000, or approximately 25% of my total portfolio.

The Irony of the Lesson

Perhaps every trader has to go through an experience like this, where they really have to confront their own faults as a trader, pick themselves up, commit to learning the lessons,  and start again. The irony of the lesson is that perhaps subconsciously, I needed to experience the opposite polarity of the euphoria of Gamestop surged 500%, leading a bunch of stocks to unsustainable highs. In January I broke all my records, closed $15,000 in profits one week, having my portfolio gain over $10,000 in a single day.

Euphoria

Failure

Failure, panic, paralysis

After the hedge funds got shafted by the Reddit retail traders, they were out for revenge. The week after, all the hot stocks mysteriously collapsed, as hedge funds and institutional investors took their money out as fast as they could, leaving retail investors without stops taking a bloodbath.

There was one week of respite after the initial crash. I'd reinvested most of my profits on the bounce based on a new trading algorithm and trading concept. These gains were deceptive - they were a recovery in positions that already had big losses. But my second huge mistake was not to sell everything at this point and reassess. 

After one more fake rally, April was more of the same. Finally, at the end of April, these seemed to be a bit of stability, then another lurching week in May when I finally gave up and sold positions resulting in $50,000 of losses on a single day. 

Psychological lessons

I was mentally absorbing the idea that making more money trading means both my gains and losses get bigger. In hindsight, this may have opened up a possibility that I needed to experience what bigger losses would actually feel like. Well, I certainly got that.

I now know that making big losses really, really sucks. Psychologically, it's like taking a punch to the gut. When you have a $400,000 portfolio, you can expect it to go up and down by perhaps $2000 a day, with perhaps a variation of $20,000 from low to high in a month. But my portfolio was full of highly speculative stocks, that were universally being punished by the deserting hedge funds, while the rest of the market made new highs. I had no diversification, and all of the stocks I was trading went the same direction - down. I'd sold everything that was diversified  in a panic to free up cash, not realizing that it was simply my terrible focus on one sector that was the cause of my problem. 

On multiple days, my portfolio went by $10,000 or more in a single day. Just like in the covid crash of March 2020, I was completely paralyzed, unable to pull the trigger to take losses out of pride and paralysis. I lost sleep, was depressed and irritable.

Bigger Questions

I have been fascinated by and wanted to make money in the stock market literally rom the first time I ever met someone that traded stocks in my early twenties. He was a Money and You graduate named Dean, and had hand drawn charts. It just seems to be something I am not willing to give up on, not willing to fail at. 

Can I do this? Can I succeed in this goal? Can I work myself out of $100,000 of losing trades? Can I make my Continuous Trading system work as well as the backtest.

Right now, I need to nurture an intense determination to succeed, a dedication and focus on making this work that I have rarely applied to anything in my life. The week that I wrote this, I made one trade and it netted $1,300 in two days. So I did something I have never actually done, and transfer the exact profit from that trade to my checking account, to pay myself for my success. 

Development of the Continuous Trading System

During the first week of March, my portfolio continued to drop between $5000 and $10,000 every single day.

Like during the 2008 crash and the covid crash, I felt paralyzed and frozen. Yet I had done some things right. Overall, only 64% of my portfolio was invested. Its just that all my open positions were in the high high flying electric vehicle stocks that were being hit the hardest. I had already sold everything else at profit as my portfolio had hit new hits almost every day in January and the first week of February.

I was still $13,000 up from Dec 21 2020, had $133,000 in cash my investment accounts, $38,000 in my checking account and $30,000 cash in my offshore account in New Zealand. Not so bad really.

But the flaws in my trading strategy had become very obvious, and perhaps the dramatic loss was the way to be in some much pain that I would put the effort in to learn the lesson.

Out of pain comes creativity

All my best ideas come while meditation. That's been true for over 30 years, when I first learnt to meditate using Transcendental Meditation when I was 20 years old. While surfing a Facebook trading group, I saw a post showing a chart with a clear Buy indicator. The indicator matched exactly where my AIM system would have put it. It was the first time that I had found a system that was doing exactly what AIM was attempting to do. But much more elegantly and unambiguously.

I signed up with the system, and was impressed by the young energetic team involved. The name "Spice Algo' was quirky, and the tagline "The worlds hottest trading community" self confident yet playful. Over a period of days, I threw myself into learning the new charting platform, setting up the algorithm, and seeing how it worked. 

Then I had the insight that really shifted me. What if the Spice Algo could make not only the decisions to buy or sell, but to indicate just the right moment when to reverse a trade. In effect, to never be out of the market, to always be betting on a move to one direction or the other, to move from long to short and back again, making profit on each direction.

Surprisingly, this is a rather unusual idea in trading, because in reality our emotions tend to get in the way, and picking reversals is quite difficult. But because of my investment in my own AIM system, I knew that the right set of technical studies will pick reversals reliably. But most traders spend too much time looking for the 'right' stocks to get gains, rather than seeking to maximize every directional change in a single stock.

Engineering out the human

The excitement of the stock market is the reason traders trade. There is something viscerally thrilling about seemingly making money from nothing but your own wits, research, intuition and decision-making skills. But when you are on the winning side comes a over-excitement, over-confidence, and complacency. When you are on the losing side, you step right into a mine-field of fear, anxiety, paralysis, self-judgement and depression. 

What excited me about Continuous Trading using Spice Algo was that potentially there would be none of that, because the methodology was so simple: If the indicator says buy. Hold until it says sell. Then sell the long position and go short exactly the same position size. Hold until it says buy again. Close the short position and go long. Reinvest the profits from both trades in the new long position.    

This strategy takes away the nightmare of trying to select which stock to be in when. Pick a stock, use the algorithm to optimize the available profit for that stock. If you get bored, switch to another stock. 

You could run the system on 1 stock or a 100. The results would be different, but would essentially work on every stock to a greater or lesser extent. The best stocks would be those with the wildest swings.

The Mind-Blowing Back-Test

The next step was to run a back-test. I picked 6 of the stocks that I had traded at various times over the past months. Some were insanely volatile, others less so. The results were shocking. With 6 initial investments of $15,000 - $18,000 per stock, the system created $112,000 profit from just 14 trades over two months. And these were stocks I had been trading. I knew my trades had often left money on the table, but how much I was leaving on the table was mind-blowing.

Admittedly, those two months had seen huge increases and then rapid decrease in several of those stocks. But that was exactly the sort of wild movement that this system seemed perfectly designed to capture, and it was this real world volatility that had caused my own portfolio to end up nearly where it started over that time, and a list of huge open losses. 

And that was stock. What if I had been trading options?

To throw some curve balls I added 3 other stocks and three extra months, so a five month total timeframe. During the first of those months the market had been in a choppy decline. Again, the system didn't blink, just churned out profit.  I ended up with $280,000 of profit, trading just 9 stocks in 5 months, and using perhaps 60% of my actual available capital.  At the end of the test I would have had over $100,000 of profit still in open trades, with the other $180,000 in closed profits. Out of 32 trades, just four were losses.

I added another high flying, extremely volatile stock into the back test (its not shown below). This stock alone created another $160,000 in profit. Admittedly, the back test was in a highly volatile market. But that meant it was a market that went down dramatically as well. Many traders lost big in this market.

Continuous trading just took the market volatility in it's stride, correctly going short every single time in order to take advantage of the downturn. A downturn that my biased view that these hot stocks would keep going up forever had not seen.

Yet I could see that continuous trading would also do great in an overall rising market. It would just hang on to stocks that were going up and even accelerating in their growth. Because it never really sold too early, leaving often 10% gains on the table sometimes, it was quite conservative. It only really got confused when the market went sideways with big swings. That would be the time when you would need to excercise a manual override and wait for a clearer trend to emerge. 

Continuous Trading Back-Test Results

Documenting the System

Next Step was to document the system, and create a transition plan for how to gradually merge over my current portfolio full of huge losses into the new system.

Financial Wizard Reality

It it is as successful as my back test, Continuous Trading would take me by the end of 2021 to the Financial Wizard level of my trading plan, which has a target $500,000 in my trading account and $500,000 in my retirement account.

This represents a gain of $400,000 in my trading account and $230,000 in my retirement account from the balances in early March.

Perhaps surprisingly, this is only a 15% gain per month in each account. I would need to stay very focused to achieve this. The critical success factors are:

1. Following the signals exactly.
2. Scaling up trades using the profits to increase trade size.

Both of these critical success factors is an extreme emotional test, in terms of having nearly 100% of my portfolio invested at all times. If my results are good, it may be better to have about 30% in cash to look for the best possible opportunities, and be able to switch investments.  

Continuous Trading System

February's Wild Ride

So many things are happening around my new identify as a Professional Trader are some of them to get the 'what actually happened' straight.

Over the three month period November 2020  - January 2021, I increased my investment accounts by $67,000. To put that in perspective, the median American income in 2020 was $61,000. 

Breaking into Being a Professional Trader

Based on my own definition of how a Professional Trader is defined, I declared that I had achieved that goal in November 2020.

During that three months I had a 'winning streak' of 46 profitable closed, many with gains of over $1000 and overall profit of $47,000.

At the start of February, I had $11,000 profit in the first week. But by the end of February, my portfolio was down for the month of February by $20,000, an overall drop of $31,000 from it's peak in the first week in February, to be a total of $42,655 of losing positions, which represents a 20.7% average loss. As of Feb 26, every open position in my portfolio is at a loss, with the except of one that I brought on the last day of February. 

Key Questions to Answer

Why didn't I set stop losses for these positions?

In 2020, I followed the traditional tactic of setting stop losses on most positions. I was stopped out on almost every trade, frequently to see the price turn around just under my stops loss and recover to new highs or go on to dramatic trends. 

Clearly, I was setting my stops in such a way that more experienced traders would sense where my stops were. Also when I had a profitable trade, I often did not have enough profit to set a stop bigger than the trading range for the stock without sacrificing all the profit when being stopped out trying to protect relatively small profits.

Eventually, I stopped using stops at all, and reframed myself as a trader to be willing to hold positions through a dip and wait for it to recover.   I did this because I had identified that one of the mistakes I consistently made was being too pessimistic about stocks recovering. Many were dropping and then immediately recovering, with the overall positive market trend supporting those recoveries. 

How did I end up with so many losing positions?

The end of February was a very sharp correction after huge jump in January in February. Some of the current losing positions were in profit until just a day ago, and could quickly turn around if this correction reverses. 

What are some of the emotional lessons?

It's still really only just sinking in that I've not had a full time job for over 18 months, yet my net worth has still increased during that time. 

One of the hardest things about the last months was actually imagining accurately what it would feel like to be more successful as a trader. Now I've learnt that the feeling I missed was a determination to keep profits from a successful few months, and to be more cautious that I would have to change my strategy if the market shifted. 

In a way I needed this big drop in my portfolio to provide a new emotional experience that both extended my previous tolerance for losses, and motivates me to work harder to become a consistently profitable trader.  

Its hard to mentally grasp what it feels like to make  increasingly large amounts of money, and just as difficult to grasp what it is like to lose it quickly. Until both happens.  I had identified that it was the complex mixture of feelings around what being a successful trader might make me into, that perhaps that led me to play small and be scared of losing the profits I already had.  I estimate I missed out on another $50,000 of profits in the last months because I sold much too early in many trades.

The amount of daily variation in my portfolio had increased as it got bigger, to the point where just a few days of gains or losses would be enough to either cover my living expenses for a whole month, or wipe them out for a month too. Paying the bills becomes less consequential when a single successful trade over 2-3 days can net $1000, enough to pay electricity, gas, water and phone for a whole month. 

AIM

Baker Symes Option Philosophy

If you have $1,000 and you double it 10 times, you are a millionaire. So if you choose wisely and successfully 10 times in a row, even if it is call or put options on one stock, and that trade doubles your money, you're a millionaire after 10 times doubling. So to me the goal is always to make better choices and work towards perfect timing, and keep your profits, rather than lose them. 

For example, I will look for a a stock chart try to pick a stock that is just breaking out, along with the sector and stock market that are in favor. AAL had such a chart 3 weeks ago and I watched it like a crouched leopard, ready to pounce. All the other airlines were already up and this one was lagging. 

Sure enough, it jumped out of its base pattern, I bought calls $1 out of the money ($12) and followed the rally up to about 18 and sold it. Why did I sell if it was still rising? Because I had an 80% profit! It went on up to 22, I think and started coming back down. I'll buy it again after the second bottom. It's that simple. Yes, it is.

Just takes good research, good chart reading, lock in step with wall street and do it. You don't have to wait until it reverses. You should not try to guess the absolute bottom or how far the rally will go. You look at the chart to calculate where the stock will rally to and sell it when it gets there. If it doesn't get there, you sell and collect whatever profit you have. 

Brokers will tell you options are so risky, but not if you choose the right stock at the right time and get a expiration time a few months in the future for insurance. You still sell when it reaches your calculated goal based on the chart. It doesn't matter when it expires. Never hold an option just because there's a long time for expiration. If the stock continually goes up, great. But 5 day rallies are the best for me. Once you have your profit you are out. You can always buy it again tomorrow if you look at the chart as if it was a new stock and determine it it still a perfect buy. 

I love bank stocks, but had to learn that bank stocks often just sit there for months and months without going anywhere. Time is only on your side until you are out at least three months to expiration. Then your option drops in half for every month until its worthless. If you choose an expiration date one month out, you better be right that this stock will rally tomorrow. Racing against the clock is not usually in your favor. Sometimes buying an option with an expiration date one or two months further away only cost a a few more cents. That's insurance money in case you are wrong in your timing or something unexpected happens. Use time to your advantage and get a close ask/bid price in case you have to sell tomorrow. 

Ok, so you might say you can't always get 100% profit and your options may suddenly tank if the earnings come in bad or the stock market crashes. Yes, that's true, but it doesn't change the premise. Last Thursday when the Dow dropped 1,800 points 6 of the stocks I was watching hit buy points. But I didn't know if the market would continue to fall on Friday, so I bought 1/2 of the call options I would normally buy. Well on Friday the market bounced up 800 points out of the gate and my options jumped 15% and I sold them. Why? I didn't expect that the market would bounce that high, but my charting showed that the DJIa, the Russel 2000 both breached their 200 day moving averages and the Nasdaq broke through its uptrend channel on Thursday, which is very bearish. I thought this might be when the markets start to drop for the second bottom. I don't trust the bounce. Any profit in your pocket is profit towards your goal. 

So I actually set a monthly goal of 50% increase in my entire portfolio and then work towards choosing well and taking profits. Hell it only cost $3.00 to buy and sell, so I would rather not wait for the options to drop $2,000 and say, "Oh shit now I have less than if I sold yesterday." I always keep 50% in cash, except for certain instances. For example, if these markets go down for a second bottom, I will be be all in with calls. I can't pretend to pick the exact bottom, but I have a trading range I will start buying calls, probably expiring 3-4 months out, and will expect a huge rally that first week, when everything will be discounted. I will look for everything to double, then....take profits! Until then, most of my stuff will stay in cash. I have two short positions for next week, but I usually don't like to short. I have made a lot of money shorting, but I have lost even more. No thank-you.

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