20.0 Mind Games

If you want to be successful in the stock market, you have to be really good at mind games where 1) understanding and riding market sentiments correctly and 2) having the ability to make tough and decisive actions account for probably more than half of your success or failure. The other half or lesser percentage is accounted for by your technical skills, be it in fundamental analysis or chart reading. A small percentage is given to luck. After more than a year of active trading, I arrived at this surprising conclusion. Surprising because market sentiment and trader psychology were not given prominence as topics of interest in the certification program I enrolled in (See Blog Post No. 8, "Back to School") more than a year ago. While this may have come a bit belated, it still is never too late to be useful for me in  my next trades and for any neophyte trader who cares to profit and prosper in this profession. 

 

In my previous trades, I basically relied on technical analysis in screening stocks. I tried coming out with different stock selection methodology for uptrends, downtrends, sideways, reversals and pullbacks but the result is always inconsistent (See Blog Post No. 18, "Staying Alive") . Sometimes I won and sometimes I lost and lost badly I did in not a few occasions. So what gives?

My misplaced belief that technical analysis is the only tool to having winning trades is what gives. I totally disregarded general and specific market sentiments here and abroad and doggedly bought stocks that my stock selection methodology screened out for me even when the market was down. When the market is bullish my stock selection methodology is validated and I have a winning trade. But when the market is bearish I end up having a bad trade and am left  questioning my methodology.

Realizing this, do I now throw technical analysis out of the window? The answer is no. My technical analysis is not wrong but market sentiment tells me that the timing is off. This is the one missing ingredient all these months. If I have to make an analogy, it is like figuring out correctly that the girl you were eyeing on also had hots for you but  things fell apart because you asked her out at the time she had dysmenorrhea.  Not being able to understand market sentiment will make you lose money and disregarding it totally will make you lose your head. Wrong timing, even when the analysis is right, equals bad trade.

Now, how do bad trade become worse? The answer is bad trader psychology. Because I was not prepared to accept trading mistakes, I stubbornly held on to these stocks even when they continued to go down. Cutting losses was not in my vocabulary arguing these were just paper losses.  I simply watched my portfolio as they lost market value instead of taking decisive action to stop the bleeding. I always told myself things will be better but every passing day it did not. Those days were filled with great anxiety and it certainly hurt my pride.  

But why did I not do anything at all? That is because in my mind there is a little angel and a cute little devil playing games. The little angel is telling me to cut losses and move on but the cute little devil is telling me to hold on and just enjoy the pain. As was the case, the cute little devil almost always won. But this is no longer now; I learned my lesson well. I say not anymore, never. 

19.0 The Third Wheel

If business, as they say, is war then rightly so the stock market is its daily battlefield where the bulls, the bears, and the bullshits meet. I have been in this market for more than a year now to recognize that apart from the bulls and the bears who are continually locked in battle, there is a third wheel that influences and manipulates market sentiment and trader psychology for its own devious purposes. This third wheel, who I call with a less than flattering name as the "bullshits", ultimately wants to control price. 

Like the TV Program bearing the same title, the third wheel is a seductive master or, to make it more gender neutral, a master seducer who plays her/his part very well. He/she can be beguiling and enthralling one time, and a doomsayer and scare monger the next whenever it suits his/her self-serving designs. Regardless of the direction he/she wants the market to take, expect it to be a rough and deadly ride at the end for that is when the third wheel dumps the bull's shit on the unsuspecting. Hence, the name. 

I came to sense the existence of the Third Wheel a year ago when a shell company was rumored to be bought out by another who was planning to go into the gaming industry. When the Exchange inquired into it, both parties flatly denied such rumors. But even with such denials the rumor continued, fanned mostly by people who knew better than the rest. The result? A mind boggling increase in the stock price by 1,887% in less than a month's time. But as soon as other traders jumped into the fray hoping to catch windfall gains as price pierced through the roof, boom! the third wheel dropped the bomb and the price to this day is back near the level to where it started. The ploy worked - the bulls became greedier going up and the bears scurried in fear going down like puppet toys being masterminded by its bullshit master.  


This scenario would be repeated several times over and just did so very recently. An agri-based company had a very successful IPO at P7.50 per share. In only nine days of trading, its closing price jumped more than three times from P7.70 to P23.95 and there were speculations it could hit in the vicinity of  P50.00 in a few more days. Having had my lessons learned last year, alarm bells were ringing in my ears. Although I was tempted to join in the fray, I held my guns silent. Everywhere else, it created a lot of excitement and adrenaline rush at a time when global and domestic sentiments were down and sorrowful. It was like the only stock being traded that defied all the odds; the only man left standing in a street littered with blood. 


I monitored its trading every day and noticed a wide disparity between the volumes of the bid and ask prices - bids were thick in millions while asks were thinly spread in hundreds and tens. Somebody was jockeying it up - a term I learned only recently when I joined in an online social network of this profession. The bullshit jockey did his/her job quite well in padding a false demand. But then history repeats itself and cold blooded murder took place on the two days that followed as the price of the stock nosedived by 59.0%. Again, there is blood in the streets. You could only guess who benefited from it the most and who scratched their heads in clueless frustration.

I am writing about the Third Wheel to caution my fellow traders who, like me, are new in this stock trading business to tread very carefully and not to fall into the trap. There are dark shadows everywhere and their motives ill. A Third Wheel is easily spotted to be in the works when the stock price suddenly moves sharply without any accompanying disclosure to support such trading behavior. How else could that be explained when the IPO price has supposedly discounted the company's foreseeable future cashflows? Novice as we are, we know for a fact that perhaps somebody got ahead of information we are not privileged to obtain as is always the case. 


How must we then better respond to these machinations? We only have two options  - to stay clear of trouble by playing possum (not participate) or beat the Third Wheel in its own game by always getting ahead of him in the curve (contain your greed and jump ship before he unloads that filthy dung). I was actually happy for those independent traders who did earn money when that particular stock went up but mourn for those who fell wasted. Well, there is always something to be learned at every turn and we can only hope not to become willing victims again.   


To the Bullshits, not a single glass would I raise. We will someday beat you in your own game as others have already done. To the Bulls and the Bears who trade honestly in this market, I stand in ovation as we perpetually dance to the excitement and buzz of this trade. We are the true wheels of this market and not the Third Wheel.