How Fundamentals killed my portfolio...

If you’ve been following me for a while now then you already know that technical analysis is my bread and butter. I love charts… If you need proof, check out an example of my daily watch list.

Some people will tell you they make all of their trades based off the fundamentals, but to me, that’s all just noise and I’ll tell you why.

When it comes down to developing a trading style you have to come up with something that fits your personality, for some, Fundamentals will work just fine, but for others, like me, it will drive you crazy.

When I first started out trading I got pretty cocky off of a few lucky trades that I made based off the fundamentals (we’ll get more into that soon), I was pretty happy with my progress... that was until I lost everything.

When I first started trading, right of the bat, I managed a few nice wins, which got me feeling confident enough to make a bigger play. A little while later I found the play I was looking for and decided to buy Google options shortly after it went public. After I bought the contracts, a piece of news caused the stock to go berserk and I ended up making a 50% return on my portfolio in one trade!

It was the best and worst thing that could have happened to me. I was amazed at how much money I made and how quickly I made it. That’s when I decided that being a trader was definitely the path for me.

But there was one problem... I still didn’t know what I was doing. I thought I was being smart when I was actually just getting lucky. So naturally I just kept diving in. In retrospect, the worst thing was that I didn’t really understand anything about risk management, but my success made me feel like a genius.

I caught my first hint of reality when I began trading a company called Research in Motion (RIMM)–you might remember it as the precursor to Blackberry. RIMM had started to get real newsy and made a ton of headlines because it was predicted to win a patent lawsuit. So what did I do? I opened a HUGE position–I was convinced that betting on this binary event (the release of the court decision) would be my next big trade. Obviously things didn’t go as planned and the stock ended up cratering by the time they ended up settling.

My problem here was that I reached too high trying to predict a lawsuit–something so far out of my control with too many variables. I was gambling. The loss forced me to recognize that I didn’t know anything about risk management or position size for that matter.

You learn more from your losses than you’ll ever learn from your wins. I didn’t have a mentor who pushed me towards technical analysis or a specific trading strategy, but I learned my lesson the hard way.

And this was the hard way... Although my loss with RIMM stung, I still didn’t take the hint and chalked it up to bad luck. So naturally it was only a matter of time before I went after a similar play.

I made another crazy out of the money options trade on the Dow index betting that there would be a Christmas rally. I dumped pretty much my whole portfolio into it, but the rally didn’t happen. I lost all of my capital. This was another event that was out of my control. I might as well have taken a trip to the Casino and put all my money on black.

This is really when it became obvious to me that my prior successes were just luck. It was time to start from scratch.

After that, I stopped looking at anything fundamental. I needed to clear away the noise and stop gambling on these binary events that were out of my control. I realized that it doesn’t matter how great your fundamental research is, if the market prices something in before you know about it, or the public knows about it, you will see it on a chart first. I want to know how stocks are moving right now– what gives my trades the highest probability of success.



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Posted to Zero Sum Trading on Jun 02, 2015 — 1:06 PM

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