First Steps into Trading

General Note:
The purpose of this blog is to provide commentary on my simulated trading experience. It is mainly aimed to students and graduates interested in a career in trading and looking for ways to improve their knowledge of the field by providing them examples of the material I have found helpful so far. Comments from professionals are nonetheless welcome. The trading simulation is hosted by stockfuse.com.

Introduction: strong>

I started my two portfolios approximately last December, trading stocks listed on the London Stock Exchange and Exchanged Traded Funds listed on the New York Stock Exchange. While I make some ‘’real markets’’ experience, I try to expand my knowledge reading blogs and books on the topic. One that has been particularly influential so far is ‘’Market Wizards’’ by Jack D. Schwager. It’s a series of interviews with some of the most profitable traders until 1989 and provided me a number of key principles I would say anyone who starts trading should keep in mind:

• There isn’t a single correct way to make money. Some make money following trends, some make money on ‘’reversals’’, some trading a single product, others by trading everything.
• If you have a strategy, stick to it. The easiest way to lose money is to chase the market because it is not going in the direction you thought.
• Have a stop loss. Stop loss is the maximum amount you are willing to lose on a single trade. Just like there isn’t a single way to make money, there isn’t a single method to ‘’stop the losses’’. It is completely arbitrary, what is important is that you stick to your own method.
• Don’t take tips. It isn’t trading. Someone else is trading and you are completely dependent on them.

The Good and the Bad:

So, how would I judge my first 4 months of trading? December was the time of rookie mistakes, January was great, February was ok, March was nasty. In April so far I’m doing well, learning from the mistake of the previous month. During December I basically did the opposite of what I just described above; by January I had learned to stick to my strategy and the value of my portfolios went from 100,000$ (or £ in the LSE portfolio) to 166,000$ and 171,000£. I will describe my strategy in details below. During one of those days I thought ‘’wow, trading is easy’’. By the time March was over I was down to 119,000£ and 117,000$. Not only I lost more than half of the returns I had made, but I lost for 6 weeks consecutively, often losing for four days out of five business days. That hurt. The first half of April is being satisfactory.
I'm back to +40% and +22%.

See the attachments for the screenshots of my portfolios

Lessons learned:
• Markets can make you poor as easily and as fast as they make you rich.
• Know when to get out. (I understood the importance of having a stop loss in March)
• Diversification is a hedge for ignorance (William O’Neill in ‘’Market Wizards’’).

The Ongoing Strategy:

My primary choice has been short-selling the energy and commodities industry. I read various explanations about the collapse of oil prices last year, ranging from the oversupply, to a market share war between Saudi Arabia and Russia, or Saudi Arabia and the shale oil industry of the US, I’d personally add that the Islamic State selling oil at 30$ per barrel in the black market did not help either; whatever you want to believe it does not change the reality of oil prices, hence shorting LON:TLW, NYSEARCA:USO. As it affects the whole industry, it makes little sense to me focusing on the fundamentals of companies, thus I regularly switched to LON:BP, LON:RDSB or NYSEARCA:OIL.

Additionally, the low copper prices due to the slowing down of the Chinese economic growth add pressure to those companies that operate in both the oil and metal industries: LON:RIO, whose core operations are in Australia, a major exporter of metals to China, and interchangeably LON:AAL or LON:GLEN proved so far to be satisfactory picks.

What happened in the second half of February and March, the 50% surge in oil prices, seems to be explained by the mass liquidation of short positions. Mark Weinstein in Market Wizards says that ‘’people taking profits’’ is often misunderstood, the reality is that they are cutting losses. It might as well be true. In a hindsight, since I did not know what was going on, I should have stayed out. Lesson for the future.
I tend to agree with this explanation; the reasons behind the short logic are still standing, the Baltic Dry Index collapse additionally points towards a return to the downward trend, thus I resumed my strategy, though I might temporarily get out as we approach an important meeting of the oil producing countries in the second half of April.

The above mentioned index collapse paired with a number of reasons indicating the possibility of a recession ahead for the US lead me to buy LON:RRS, a gold mining company and NYSEARCA:GLD in late December.
I originally bought 1800 stocks of Randgold Resources at approximately 4700£ and liquidated at the end of January at 6000£ , which has proved to be my best trade so far. I remain bullish on gold, thus after taking profits at 6000£ and again at 6200£ I recently reopened the position.
An alternative to gold is the so called ‘’volatility index’’ NYSEARCA:VXX, the Standard & Poor’s short-term futures indicator of the anxiety and fear of markets.