Paper Week 1.5 Update

A little more than a week into paper trading, and I’ve made mistakes, excellent calls, and over yesterday and today, a bit of both.

 

This post relies on the following primers:

Short Selling

Volume and Volatility

 

Because the patterns I’m trading are usually pretty predictable within the time frames I wish to trade (hours to a few days), and because I’m short selling, the main dangers in holding a position lie in waiting too long to close out because of interest charges.  This makes the total time frame you have to make money dwindle as you try to be patient.  This came into play today.

 

I was trading a stock that I knew would eventually sink in value, as it had over the past few days (and on which I already profited (on paper, that is)).  But, the rate at which it changed slowed as volume dried up, and as it wasn’t where I wanted at the end of day 1, I held overnight.  Mistake #1.  Day 2 saw a gap up (where the opening price is higher than the closing price of the previous trading day), wherein I saw an unrealized loss of nearly $3,000, but knew it wouldn’t stay there, so I waited.  Good idea #1.  By the end of that trading day, having sold short 25% more shares than I had, I had averaged up my position, and held overnight again.  Good idea #2.

 

Today gaped up again, and I rolled my eyes when I read this at 6:10 this morning (the market opens at 9:30 EST, which is 6:00 AM for me).  Like the day before, the initial volume was high, but quickly waned over the next hour; the price action / motion wasn’t happening anymore.  I put in a buy limit order that would guarantee me a few dollars in profit, and walked away for about an hour.

 

Walking away from a position is sacrilege to many day traders, but I knew it would eventually do what I wanted, so I wasn’t worried.  How did I know?  Well, in the end, no one truly knows, but there was no evidence to support the idea that the price would stay high for long: news had come out that a funding deal had closed (a toxic one in which shares were diluted at a discount to market), the price history was far above the most recent action (the past week or two) and so I knew it would eventually return to those levels, and given the nature of the company and its share price, I had faith that the pattern I’ve been studying would repeat.  I was not wrong.

 

The lesson, however, is not so much that patience is a good thing (it is), but that I should cut my losses quicker instead of tying up my attention and money in trying to eek out a trade gone wrong.  In the end, though, I’ve made about a half dozen trades over the past week and a half.  All interest, trading fees, losses, and gains combined, and trading with the amount of money I have in my actual, real account, I’m up $3,382.  On paper.

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