How Tim Saved the Day

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I'd like to tell you about my trading day. It was a profitable day – – not wildly so, but profitable nonetheless – – but I think I learned at least one good lesson today that is worth sharing.

As a preface to this little tale, I'd like to provide a few quick reminders:

1. I greatly prefer the short side of the market. This is a curse and a tragedy, but it's how I tick. For whatever reason, I am put together in such a way that I'd rather be short a given security than long. I think I'm old enough to recognize that this is just who I am, and thus, Slope tends to have a very bearish bias.

2. I run a small hedge fund, and as much as I like to trade the short side, I recognize there are times when long positions make sense. Sometimes I'll "hedge" with just one enormous single position (like the SPY), and at times when I feel the market is more of a bargain, I'll do what I do with shorts – – take on a lot of little positions.

3. I tend to trade a large quantity of positions. I wrote a huge post on this topic, so I won't rehash the reasons here.

4. Not that long ago, on August 29, I bought a large variety of long positions. Only a couple of days later, I decided to dump every single one of them. I simply got a funny feeling that it was time to take profits. That flies in the face of my trading rules, but my feeling is that we are in a broad downtrend, and holding on to a ton of little longs is too risky. So I sold 'em, made a nice profit, and – – since they all went down not long after that – – I felt pretty good about my rule-breaking.

5. Just two days ago, I pulled the same stunt, buying up 19 small long positions, and yesterday morning I wrote about buying 20 more longs. Not long after I wrote that post, however, I sold all 39 of those longs too, defying the same rules I just talked about. The market got a little stronger yesterday, so I was sure I had left some money on the table, but I simply didn't want to stay long in a market like this.

6. This morning, I felt somewhat validated by my decision, because the Euro was down hard and equities were likewise down.

7. I came into the day only 48% committed (52% in cash) with only short positions. So I was positioned bearish, but not aggressively so.

Now that you've got the background, today's trading tale will make somewhat more sense.

There were two big "events" today (Thursday). The first one was the Bernanke speech, which was a few hours into the trading day. The market opened, and my portfolio was in the green. However, equities started getting stronger, and my profit shrank and shrank until – horrors! – it was in the red. The market kept getting stronger, in spite of a lot of Euro weakness, and I started really worrying (and this is where dangerous self-talk kicks in during the heat of the trading battle): "If equities are up in the face of a Euro that is getting smashed, what's going to happen if Bernanke makes some kind of QE3 announcement and sends futures soaring? What if I don't have a single long position and, in the blink on an eye, the ES is up 30 points?"

I already had 30 stocks in my Long Candidates watch list, so I decided to take action, just as I had done in the aforementioned two recent instances. I still had time before the Bernanke speech, so I swiftly went through all the charts, set my stop levels, and executed the orders. I now had a substantial quantity of longs, giving my portfolio a 50/50 balance.

Then something ugly happened. The market started weakening again, and every single one of my new longs was in the red. Keep in mind this was still 20 minutes before Bernanke spoke, so I was in a very high-pressure situation. Should I hang on to these longs for their intended purpose?

Then something occurred to me that I wish had occurred to me in the first place. Let me try to phrase this as well as I can, because this is the lesson I believe I learned: in a situation where you want to hedge against what you believe is the broad direction, keep your hedge simple for the sake of nimbleness. In other words, I believed the market's most likely direction was down, but I was concerned we might spike up. The right thing to do would have been to take on a meaningfully large SPY position – just one single position – instead of gobbling up dozens of little longs, which are unwieldly and, by definition, have much wider stops than a huge ETF.

I decided then and there that I had made a grave error and I had exposed myself (and my clients) to an inappropriate amount of risk. I swiftly sold all 30 positions (you've never seen someone on the keyboard so fast). I was in them for less than 10 minutes, but it cost me thousands of dollars in that short span of time. I felt like an idiot, and I was furious at myself. In my many years of trading, I don't think I've made an error like that, but I simply felt hanging on to those longs would have been sustaining an error.

That was the right decision. I then made another right decision. I decided to take on more short positions.

Now this may seem not-too-bright given the looming Bernanke speech, but all the charts I was looking at were giving me confidence that the market was going to go soft. I therefore amped up the quantity of my positions substantially and pushed my commitment level to 66%. The Bernanke speech was just moments away, and I was in place with something like 70 shorts, 0 longs, and a nasty loss from my "10 minute boondoggle" earlier. The stakes, psychologically, were quite high, because if the market pushed higher, not only would I have amped up my losses by having all these shorts, but my recently-killed longs were no longer there to protect me.

My heart was racing as the speech approached. It started to sink a few moments after the appointed hour, since the ES ticked up a little, then a little more, then a little more. And then it started getting soft. Fast. And the fat red number on my screen showing my portfolio's daily loss suddenly got smaller, and smaller, and smaller.

And then the world's most beautiful color (on a P/L line, at least) appeared – green. I had enough shorts that they not only provided a profit in their own right, they were substantial enough to curb-stomp the losses from the longs. I had, through an act of reasoned-base courage, saved my butt for the moment.

The day continued to be volatile, as you all know, and even as I'm typing this in the aftermath of the Jobs Creation speech (rolls eyes……) the ES has been lurching from positive to negative and everywhere in between. But when that closing bell rang, I had a nice profit for the day. It was a good feeling. It was a better feeling than if the entire longs debacle hadn't happened at all, because I was able to operate swiftly, calmly, and decisively in the face of what was – excuse my language – a somewhat reprehensible fuck-up on my part. I was still angry with myself, but I was also proud that I had found the resolve the position myself based on my own real-time analysis.

Were I to face a day like this again, I believe I would had acquired and held on to a large SPY and simply suffered a loss on it. I am more than happy to take a loss, but I want to do so with something like the SPY which is not only incredibly liquid but also is much easier to manage than 30 individual positions. So I say again – when taking on very short-term trades, keep it simple, and keep it nimble!

In closing, I will say that the intraday charts are almost screaming "down market" to me. The psychological damage I experienced from the whole QE1/POMO nightmare of 2010/2011 has made me somewhat more cautious. If the Tim from October 2008 were teleported to September 9, 2011 and saw these same charts, he would be 200% short. But that Tim is different than this Tim, and I am in 88 short positions with about a 66% commitment.

And thus ends my tale. I hope it helps some of you. It has helped me to tell it. Good night, and good luck.