Monday, March 12, 2007

Anatomy of a (near) disaster

A slow day. Low volume... no volatility, "best not to take much risk", I thought.

Then how do I explain what happened to me in TNH? A momentary lapse of reason I suppose? Not sure how to label it, but I know it happens over and over again to myself and others trading the market. I also know that if it happens too much, you're definitely doing something wrong.

Perhaps I was still burning about getting stopped out of my TNH long at 51.62, I don't know. I do know that when I looked up and saw the stock spiking up to 55 that I thought it MUST be a short. The market itself seemed weak to flat and none of the other stocks in the fertilizer sector were showing such strength. So I began to short. I was immediately wrong. However, instead of covering and taking a 20-30 cents loss on my 400 share position, I got stubborn and decided to short more. I 'knew' that if I covered and took the loss that the stock would definitely turn lower.

I began to hope the stock would turn in my favor... a sure sign of impending disaster.

Anyone who has traded for any amount of time will tell you that hoping a stock will either go up or down means that you are in some serious doo-doo. By the time the stock got up near 56, I was short 800 shares and down over $700 in the stock.

The stock traded above 56 and then shot down 75 cents very quickly. I would have loved to cover some of my short here but it was nearly impossible... the spreads were showing offers in the 60 and 70 cent range. Even though the stock was trading in the 30s had I entered a market order, I would have been filled at the offer.

Thank you for nothing, hybrid market.

So I waited, hoping some more that this was the break I was waiting for...

However, the stock was not done going up.

As quickly as it shot down, it ripped back up, taking out the old high and posting a new high at 56.22. I had put a buy stop for 200 shares at 56 and was filled around 56.19 or so. Ugly... my loss in the stock was now close to $1000 and I was still short 600 shares. Sounds like fun, no?

56.22 happened to be the top. I ended up covering most of my shares around 55.20 and some around 54.70. I actually used limit orders because I have lost faith in market orders. Is it only dinosaurs that use market orders? I cut my loss in the stock from close to $1000 to only about $150 but it wasn't because I did anything right. I was slow to close out a losing position and I got burned because of it. The fact that I made back some losses by being short when the stock did eventually drop was really just dumb luck.

And, as is often the case, when you get into a bad situation with one stock all of the other trades you have on at the same time tend to suffer as well. For example, the strength (that I was shorting) in TNH made me take a look at the other stocks in the fertilizer sector. I thought, "Well, TNH is strong and POT is strengthening, maybe I should pick up some AGU 'down here' in case he rallies..." That was mistake #2. I bought AGU around 39.45-39.50 and all the stock has done since that time is slowly trend down. Last I looked, it was trading below 39.25. At least I nipped that loss in the bud.

Then, while all the excitement of the fertilizer sector had my attention, my FED short was actually WORKING. However, I was so concerned with my blossoming loss in TNH that I never added to my working FED position.

So my reasonable $150 loss from the morning grew into a nearly $1000 loss and has now settled in around -$250 for the day. It's been unpleasant.

I can't believe the market is up again!!!

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