I have tried to share real life trading lessons in previous columns, and this week’s entire Ukraine-Crimea-Russia quick roller-coaster provided for another entry in my series: When and how do you trade Conviction vs. Rules? More or less, this would qualify as one of those trading lessons on discipline.
You can find some of my prior columns here:
- Insights Into a Rough Month of Trading: Like a Botched Football Game
- 5 Thoughts: Portfolio Philosophy, the Human Condition, and a Farewell to Neil
- Investment / Trading Lessons For Life
As backup, please remember that while I have never been a professional trader, my trading, and my investing, helps pay for my bills, my goals, and even for other investments (including real estate). Over the past 16 years, I have partially relied on trading and investing to make a living.
Like many other active investors, and many incredibly more successful pros, I share the belief that you can only succeed in the markets if you have a system. And I also believe that you need to respect that system. Rules are paramount and create the difference between staying in the markets and becoming a casualty of the markets.
So, what happened on March 3rd? And how did that turn into one of my trading lessons? Well, in short, I sacrificed rules over conviction; gave up discipline for hope.
It all started on February 12 when I twitted:
Brazil, my most bullish trade of the year (love the idols that were burnt, the losers of 2013, and the soccer Gods): started 1/3 $BRZU 14.89
— Alex Salomon (@Alex__Salomon) February 12, 2014
Brazil (via EWZ and its riskier 3x ETF, BRZU which should only even be considered by experienced investors and with a stronger tolerance for risk) has become my #1 favorite play for the year. I love the Technical Analysis on many levels (the February lows had held; the major moving averages are trending up and the shorter-timed ones could be crossing up the longer-timed ones; the stock might have formed a long-term Stage 2 Weinstein base, not unlike Gold (GLD) did in January; the MACD was curling up; a weekly wave pattern indicating a tradeable bottom). I loved the Fundamental Analysis as well: the Brazilian GDP is spiking, better stats are coming back. Lastly, I see a “Spain 2013” effect for “Brazil 2014”: deep underperforming class assets can become darlings again!
In the following days, I completed my position by adding the missing 2 tiers and bringing it to 25% of my trading portfolio. My average cost was EWZ 39.85 or BRZU 13.95.
On February 27, I felt like a winner: EWZ touched 41.65 and BRZU 15.82. I was up 13% on $BRZU — on a large position, in a total of 15 days. A winner in my book.
Accordingly, I raised my stops to EWZ 40 and BRZU 14.50.
When the Ukraine crisis hit, I monitored the pre-hours quotes along with my position and I quickly realized that I’d get stopped with a brutal gap down. In any normal situation, I would have begrudgingly taken my loss and moved on. It’s never easy, never happy, but it’s survival: you follow the rules, take the small loss and move on for the next trade.
But not on Monday!! As I tweeted, I decided to cancel the stop orders, and what’s more, free more capital and add a “4th tier” (those exist!!): I saw the Ukraine debacle as a way to cost average down one last time, to choose Conviction over Discipline.
What happened? Conviction is the foundation of the trade, but then, it must yield to the system. Conviction is the root, the business case, then it must be dismissed!d
I quickly justified “Conviction” and the 4th tier: I set new stops, checked my levels, I was ready to take the larger loss and move on.
I justified the gut feeling’ the reaction, the trade.
And then? I got lucky… the market bounced back, I sold the 4th tier for a nice profit, reset levels and stops… I got lucky!
Where is the trading lesson in this play-by-play? I failed. That’s the lesson. I was human, I was emotional, I was wrong. I should have taken the loss, I should have cut my position and moved on. I did not. I got lucky!
All in all, conviction has no place once the trade has been executed. Conviction becomes poor excuse for fear of losses and for hope. Conviction becomes justification.
My stops are back in place and I’ll take the wins and losses as they come. Lesson re-learned — until I forget again, as I will.
Author is long EWZ and BRZU at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
