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Vacation Trading, Analysts & Forums

I was recently talking to a person who is a trader by profession. He asked my how many bad trades I had in my short trading career, and when I told him the number was small, he reiterated the importance of losing some money in the early stages of one’s trading career and the significance of learning from all your mistakes. Keeping that in mind, I have made it a point to analyze thoroughly every trade in which I lost money, and to try and make a lesson out of it for myself. I will try to share these lessons with my readers as well.

Since my method of trading involves frequent buying and selling, it is important for me to stay on top of the market and monitor my positions continuously. On my recent vacation, I saw what seemed to be a good price to buy while I was browsing the current day’s market activity on my cell phone at the Detroit airport. With the slow Internet on my phone, without doing too much research, I decided to buy. I trade that stock frequently and felt comfortable buying it without doing a lot of research. I had set up a limit order on selling the stock for a pretty hefty profit, but the order did not go through since my price was 1 cent above the highest market price. Since I was on my cruise and had no access to the internet, I had no control over this and could not sell the stock at the opportune time. After this, the stock fell a little bit over the next few days, and still with no access to a computer (now in Florida), I read up a few forums really quickly on my phone. All these forums seemed to indicate the price of the stock was going to be going down and made me decide to sell for a loss. The very next day, despite all the predictions on those forums, the stock climbed up dramatically. I was not happy.

I read online forums frequently, but never use them to make my trading decisions. I do not doubt the intelligence of people posting on there, but I wouldn’t be surprised if what they post on there is not exactly how they feel or think. I personally don’t like to share my exact trading strategies and the stocks that I am trading, and don’t see why other investors would either. If I want to buy a stock, I would love to make people believe for a short time that it is headed down, and buy the stock at a lower price myself.

To evaluate the postings on forums and what kind of traffic they get, I decided to take a closer look. The first thing I wanted to evaluate was the popularity of these forums. To do this, I posted a little message advertising www.EasyStockAnalyzer.com on about 30 message boards for the stocks in the Dow Jones. The results were stellar, in less than 2 days, I was able to get over 600 hits from these forums from all around the globe. This proved to me that these forums are widely read.

I then decided to evaluate the performance of stocks as compared to the predictions of people posting on these forums, as well as predictions made my leading Wall Street analysts. I have not done enough research on this to be able to generalize or make recommendations, but I don’t like what I uncovered. I have been keeping up with stocks of the big three, since they are so close to home for me and effect several friends of family of mine.

The chart below shows the performance of GM over the last 5 trading days:

So as we see, there was a big drop (about 20%) on those Dec 23 and 24, and then the price shot up again. I researched the reason for the drop - a downgrade to under perform by Credit Suisse and a price target of $1. The article on this can be seen here. After this downgrade, the forums were filled with negative chatter about GM and encouraged everyone to unload and get out of it while they still can. This resulted in the rapid tanking of the stock price, upon which I am sure these people who encouraged the sell-offs and suggested the low price targets went ahead and bought a lot of these under-priced stocks. After this, a couple of days later, the price rose again and I am sure the same people sold again for a big profit. I don’t have anything against these people for posting on the forums and trying to make people think in a certain way, it is just them practicing free speech. I just know for myself that I will back my tradings decisions based on my own research and instinct, rather than from what I read on these forums. My decision to trade while travelling was a bad one as well. I should have held in my urge to buy while I had no access to a computer. I have now realized that it is better to miss on a potentially good money making opportunity than risking to incurr a loss while having no control over it.

As weird as it might sound, I am glad I am making these mistakes with my trading. I do not have too much money vested in the market right now, and can afford to take losses like these. Writing about my experience and research on this blog will enable me to remember my mistakes and keep me from making them again.

December 29, 2008   Posted in: Lessons - Practices

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