Thursday, January 11, 2007

Reflection of my costly mistake

I'm on the sidelines watching today.

I can't trade cos my contra loss exceeded a certain percentage of my trading limits, so until I paid off my losses, I can't do a buy in. But I can't pay until they bill me right?? According to my experience, it might take 2 to 3 days. Good time for a break lah anyway..

I took the opportunity to do some studying of hsi. Last time, I bought warrants without looking at overall market trend and betted against the trend. Trend is my friend, if I buy against the trend, I'm bound to get small profits and huge losses, which is exactly what I did. My wins are 100, 130 but my losses counts in the thousands. This is because while hsi reverses its uptrend, I still bought call warrants. This is betting against the trend, a doomed outcome is ensured.

Look closely at hsi monthly charts. Ema has clearly reached the maximum point and is reversing towards a downtrend. Look at the stochastics - both lines going south with the red %K line below the blue %D line. No sign of reaching its bottom yet. Look at the rsi, it has been trending downwards when it reached its peak, again no sign of bottoming yet. Look at the volume divergence, the volume actually increases when it downtrends, a sign that selling is heavier and heavier. All of these indicators point towards at least a short term downtrend in hsi, and YET I BOUGHT CALL WARRANTS!

Goodness, I didn't even bother to read this monthly chart when I bought. I just looked at the highest volume in sgx for warrants, looked at nikkei and dow to see if its positive. Positive, buy call. Negative buy puts. Life is so simple?

I'm glad in a way that my losses helped me to realise this fatal flaw in my trading. If not corrected now, it could lead to even greater losses. That's the magic of trading. Every mistake, if u learn it well, provide a vast opportunity to learn things the hard way. I don't believe after falling here and there for another 5 years I can't be a better trader.

Notice that there's a gap up around early to mid dec? According to technicals, all gaps need to be filled up (except certain cases). Clearly, hsi is reversing to cover the gap, otherwise it will not move up. My belief is that hsi will cover the gap within this week, while all the indicators would have reached the bottom already, and will resume its uptrend from there. While there is more downside risk now, it is limited. The gap is at 19,300, so it should go down to there and trend upwards. When it reached 19,300, that would be an excellent time to buy call warrants again. For now, if there's a day when hsi goes up, put warrants is an attractive buy.

Do I regret losing all these hard earned money? No. If I learn the ropes properly now, this will be more insurance against any kind of employment situations. Even if I'm out of job, I can still rely on this to give me some kind of income. I hope at that kind of age, I'll be a savy investor to really not working anymore but trade daily. What better time but to train now?

Good courage breaks bad luck!