This blog post Isn’t about any one topic, just various thoughts and realizations I have had lately as my bankroll/position sizing increased and the new challenges that came with it.
1. Small vs Large positions and liquidity:
When I was using positions of under 5k, getting fills was relatively easy and I rarely ever had partial fills. Once I started pushing more size as my bankroll grew, upwards of 20k, I occasionally ran into problems with getting fills. In small caps, liquidity is limited and there is certainly a limit to the size you can use comfortably without trapping yourself in a position. Its difficult to gauge and depends on the ticker, time of day, market environment etc. Generally the more size you use, the more your edge is reduced as the impact of slippage and partial fills is not linear, it will rise exponentially in relation to position size.
A solution to this is to only trade at peak liquidity levels (at the open) and only on tickers with good volume. Keep in mind that you really only need liquidity when entering short positions, after a stock has dumped the dollar value needed to cover your position is less than when entering so you will be able to get filled easier and there are usually plenty of bagholders willing to cover you. So I’m not too worried about volume after entering. I actually prefer volume to dry up as the most troublesome stocks are the crowded ones.
2. Partial fills on winners:
Something I noticed is that you will ALWAYS have full size on your losers, but you wont always on your winners. If you top tick a short entry there is no guarantee that you will fill your entire order, and that probability will decrease as your position size increases. The impact of this on your edge is hard to predict and is dependent on liquidity and your position size. I have a personal rule of not chasing entries. I have a certain entry price and I place my order at that spot, if I dont fill then so be it.
Like most of you guys I am using a discount broker (TradeZero) and they use EDGX as their market maker, unfortunately for all the discount/rebate friendly routing options we always get bad fills. Basically we get last priority. So if you have the option I would recommend a direct access broker.
For example if the bid/ask for a ticker is 2.97/3.00 and you want to short at 3.00, every other market maker at that level will fill before you do while using these discount routing options. A trick to beat that is to place your orders 1-2 cents below these key levels where you know alot of people will have orders waiting. If you set it to 2.99 or 2.98 there will be less competition for those fills and you will also have that 3.00 level as resistance just overhead.
3. Predicting price action:
Throughout the day I am constantly trying to predict what is going to happen, but the bottom line is you cant. In a short time frame the results are completely random. You can have all the best indicators, candlestick patterns, level 2 and tape reading skills, fundamental analysis, volume forecasts, etc and it still doesnt matter, NOBODY can predict what will happen in the short term.
Thats why its so important to have a system that allows you to remove yourself from the equation. If you allow yourself to trade based on what you “think” or “see in the tape/lvl2” you WILL lose. There is so much noise in the lvl2 and tape, so much manipulation that its better to be immune to it all and ignore it, how can you make sense of things that are inorganic and fabricated? You cant read the minds of pumpers/manipulators, you dont know when they will stop propping the bids, you dont know when they will start unloading shares, you dont know, period.
I love how all these guys on twitter claim to be fundamental experts and can tell from filings what is going to happen. Bottom line is you DONT know what will happen or more importantly, WHEN it will happen. I have been short stocks with active ATMs and you think surely this will dump, but it rips your face off. I’ve watched tiny market cap/float stocks with zero dilution and SSR, tickers that have 10 red flags not to short and they dump 40% without putting up a fight. Bottom line is you dont know what is going to happen on any one ticker!
Sure you can increase your odds with certain variables lining up in your favor, but at the end of the day it comes down to proper entry/exit, position sizing, risk management, and execution over a LONG period of time. So stop trying to predict, because you dont know shit, and neither do I. Just execute your plan! Im at a point where I dont even care what a ticker does, only thing I care about is executing my plan 100%, the gains will come as a byproduct, so long as your system has an edge.
4. Emotional trading and short vs long term mentality:
Like I said in my last post, emotional trading is losing trading, yet 90% of traders do just that. They trade based on what they see in the short term and let emotions drive their decisions. Even if they have a “system” it wont be long before they deviate to satisfy some emotional drive within. Be hard on yourself, tell yourself you dont know shit and you never will, just sit there and follow the system!
Example: The other day I was short KTOV from 2.40 and watched it rip into the close from 2.10 to 2.90. I sat there and watched my unrealized gain get wiped away and turn into a losing trade. That was painful and demoralizing no doubt, but I was proud that I followed my plan and didn’t allow emotion to take over. In the past I surely would have fought it, added to the loss, and probably would have blown up or taken a massive hit. But I just sat there and thought, “Ok this is all part of the system, a small percentage of the time a winner will turn into a loser late in the day, and THAT’S OK. One trade, one day, one week doesn’t matter”.
At this point in my trading career, its taking the losses that I am more proud of than having winning trades. Losing is unavoidable so dont fight it. Your ability to take losses PROPERLY without getting emotional or breaking rules is what will determine if you make it in this game or not. Winning is easy, your rules are never tested when you win. Its always when those losing streaks come around that test your strength as a trader.
Its short term thinking and always wanting to win, always wanting to be right, always wanting to close green that will lead to you blowing up. The biggest realization that I have come to is that winning traders can take a loss. They can sit there and watch a ticker rip against them and be unfazed. Their mindset is in the aggregate, not short term.
5. Why I stepped back from Twitter:
I allowed the opinions of other traders who I regard highly to influence my decision making while I was in trades. It was too much noise and I have done alot to eliminate that noise in order to focus on what matters, and thats executing my system with absolutely no interference.
Also posting P/Ls every day did impact my trading negatively, I wanted to be green every day just to have something good to post, but thats the wrong mindset. Not to mention twitter is a complete shit show and I see why others have gone dark. Im still around but not to the same degree.
Best of Luck
Kris Verma