The Weekend Trader - Continued Crash Autopsy

11:25PM Post Addendum -- The voice of the Pit crash replay referenced below is that of Ben Lichtenstein of TradersAudio.

Most know that for a number of reasons too numerous to mention, I typically try to avoid doing two things in this business: looking back (whether it be charts or my own performance) and reading industry "press".  

Instead, I prefer to simply show up each day and go to work.

Yet Thursday's historic market action has me doing both in order to assess recent events, learn from them, and share my views.

So in one of my longer posts, here is one trader's continuing perspective to the market meltdown.

Thursday's Post - I'll start with feeling it was important to get Thursday evening's blog post and video out as quickly as possible.  While I'd backed off on posting frequency and discussing my own trading recently, I felt it critical -- as well as personally therapeutic -- to get my candid thoughts out quickly, despite the tough personal day ... er, I mean 15 minutes.

I did so because it seemed in line with my diary mission from day one, which was to show everything in an industry where too much is left unsaid, or simply purposely hidden. For too often, analysts and rah-rah cheerleading "put-your-money-at-risk-not-mine" advisory services run and hide when things don't go well.  Plus, few bona-fide traders -- especially those on the liquidity (house) side -- ever want to talk about their (a) performance, especially when bad, and (b) strategies, less it ruin any real edge.

btw, in my searching, I'm still looking for liquidity providers -- any -- to publicly discuss their Thursday bruises, although some have indicated they simply shut down to prevent further losses.  Having said that, I do realize and respect the fact that none of us ever have to disclose private info.  Nevertheless if you come across any interesting reads, feel free to share via comments.

I suppose the same can be said for athletes, as has recently been the case when the press has tried to find David Ortiz after games to explain his sub-.200 batting average and complete loss of any resemblance to his former self.

So I came up with the silly idea a few years ago to launch this online diary.  Does that make me better than anyone?  Of course not.  It simply seemed to be a void in the industry then, and a continued void now.  So I babble away trying to educate, motivate (myself and others), and create a lasting chronicle of one man's journey and lessons.

btw, before I posted that night, I did have my usual Thursday massage and poker night just to "keep the feet moving", although as I look back, I don't remember much of either ... except I do remember telling one poker buddy that the day for many was like having someone tell you your uninsured house had burned to the ground, causing you to sell it quickly to an unknowing party to salvage SOMETHING, and then having the person who told you the news, say "KIDDING!!".

Post Feedback - Naturally, the post subsequently and quickly resulted in a flood of emails and industry chatter, which ranged from the 1% "Like Tiger, I like Miller better when he's been humbled" to the majority of supportive emails including one highly accurate reminder that we're all simply temporary stewards of God's assets. 

Which brings to mind why it's essential for traders to continually balance humility with aggression and confidence.  For like athletes, show me a passive trader and I'll show you missed opportunity and a losing P&L.  Talk to any Christian athlete, and they'll likely tell you of their daily struggle to balance the two.

Regardless, I couldn't help but to check the site traffic -- more of a curiosity than anything as I've never had a goal to drive traffic -- which as I mentioned yesterday spiked to all-time highs.  Perhaps Kevin's comment to yesterday's post explains it better than I did.  Sorry if I sounded a bit cynical.  And the YouTube video is now at 1,200 and climbing.

In part, what I believe may be happening is how crises in general tend to bond and unite traders.  After all, we're all in the same "fraternity".  And so to all and new friends, welcome (or welcome back).

And here's an incredible replay of the Pit action during the freefall as provided by a few onlookers.  The voice is that of Ben Lichtenstein of TradersAudio.

Debacle Autopsy - OK, back to Thursday's trade.  As of this writing, I'm still not sure whether to be perturbed or elated over how I handled the day.  Yet perhaps the best description is a rather ironic combination of disappointment and satisfaction.

This is because I could have (a) avoided the blindside hit (the disappointment that I didn't), (b) handsomely profited from it (another disappointment), and (b) gotten killed (the satisfaction that I didn't).

First, let me say that one regret is I wish I'd captured and printed the day's actual TT trade auto-plot chart, which I didn't amidst the closing chaos, and they reset each day.  But I do have my trade log and will walk through the sequence of events.

As I mentioned in Thursday's video and in several past posts, I have two business strategies - Providing Liquidity (the Casino "House") and Speculating (the guy walking into the Casino).  And as I've also said in the past, there's a fine line between the two and they actually tend to blur.  Suffice it to say that Speculating typically reflects longer-term trend type holds where I'm the aggressor.

Anyway, up until 2:30pm ET, I'd actually had a strong day going, keeping my sizes relatively light and providing liquidity on the long side near each barf point and exiting into the resistance.  Then, with ES down 40-50 points and charts signaling what is usually extremely high probability, I began to step in to provide some short-term liquidity with a teeny (for me) 30 contract size on the long side near 1120, with a second teeny 30-contract size just north of 1100, so my average price was around 1110.

Now one important note about this strategy.  As I teach, this was NOT doubling down.  Rather it's scaling into wholesale market points with very partial pre-determined sizes, and not putting a larger wholesale position on UNLESS the market confirms the expected move.  Further, I purposely chose for this sequence to manage risk via partial position size vs. a hard stop, which is one of those elements that most "hang out a shingle" non-trading analysts never discuss.  It's a strategy that in the long run and despite the rare hit like this, has earned me well over seven figures.

Now I will say that looking back, I'm not quite sure why I only had 60 on, because my current "standard" trade size is 120, with a maximum of 480.  Perhaps it was some inner feeling that it just didn't feel right, who knows.  Yet there were no bottoming signs warranting anything more than a toe in the water, and thus was in line with my plan that if 1100 HAD held after an initial probe south and rebound, I would have put the other 60 on upon confirmation with a hard stop then on a further break.

Ironically, in hindsight it still would have worked ... except the 40 point plunge below 1100 made it difficult for me to conceptually re-buy when it finally traded back above 1100, as it would have been 40 points off the low.  If liquidity hadn't taken its once-in-its-history 10-minute near-death experience that required defibrillators to restart, it would have been a very profitable trade.

Now those of us who have been around for a while have of course seen illiquid markets before, especially in the context of surprise interest rate cuts, employment reports, & FOMC decisions (the latter two being anticipated).  And we know some of the most illiquid markets can occur during the overnight trade.

Yet few, if any of us have ever seen instances where liquidity was breached intraday to a point where some stocks momentarily lost ALL of their value (can you say Accenture?) amidst the electronic trading chaos.

So, how do I feel I handled it?

Perhaps the best analogy this poker playing trader can reference, is losing quad Aces to a Royal Flush.

We'll start with what I did well.

- Partial sizing.  Huge safety net.  Who knows what I might have done if sized larger given the emotion of the situation (btw, I was keenly aware of the intraday P&L during the plunge ... I just tried to not let it affect my decisions.)  And despite the above trade plan rationale, why I didn't instinctively bet the Quad Aces harder before the final plunge will perhaps forever be a mystery. 

- Not barfing it out at the lows for close to a 5% hit, and instead waiting for a 30 point rebound to bail.  Don't get me wrong ... it was and still is a bit painful and will take some time to heal, but if you had to make a choice between losing a sure finger versus a possible arm under extremely pressing conditions, the choice seemed clear.

Here's what I didn't do so well:

- Trading the afternoon.  I normally don't, due largely due to lesser probability and increased pattern uncertainty.  Plus, I'm usually tired by 2pm and simply either call it day or trade incredibly small for fun.  That was probably my largest mistake.  Yet I sensed opportunity and usually have pretty good judgment in terms of when rules can be appropriately bypassed.  I just didn't count on the Royal Flush.

- Not putting a trailing stop on my strong intraday P&L.

- Selling all 60 on the initial rebound instead of only 30 which I should have held to get more info on what was going on.  Again, risk would have been managed via sizing.  If I had done so, I would have had the option of selling the other 30 at a higher price or putting the other 30 back on after realizing what had happened.

btw, in the heat of the battle I did consider buying the 1060-1080 area, yet had a concern of possible CME busted trades lingering in my mind given the extraordinary conditions.  That coupled with an impossible tape/DOM read at the time kept me from doing so.  I was also concerned about the possibility of a 9/11 type market halt or the lock limit kicking in around 1050.

- Not having a longer-term speculative short trade on to hedge the shorter-term liquidity trades.  Yet the risk/reward on doing so and getting decent wholesale entry prices simply seemed poor the further the market fell, so that one's not a big issue.

- Scaling back my aggression a bit on Friday morning. I was a too apprehensive on Friday's MATD as I simply wanted to let the dust settle when I'd normally trade it hard.  And I left far too much money on the table in doing so, and as a result will extend the recovery period.  Yet I got back on the horse the moment I got up, so that's a plus.

In summary, some larger draws are the result of poor judgment, others the result of the lesser probability happening in which you only incur a small ding, and still others the result of some once-in-a-lifetime black swan.  And if I had to weight 10 points to all three elements this time, I suppose I'd give the black swan a 7 or 8.  Yet responsibility still lies with the trader to deal with the swan, and I still remain accountable for my actions from a stewardship perspective.

# # #

So I guess that's it in terms of looking back for now.

In my daily job of providing a liquidity service for other traders, I lost a finger ($55K on about $2.9 Million in trading capital or 1.9%).

The bright side?  Well, consider that the worst case of an ill-timed & fully-sized "leveraged" 480 contract position at my average purchase price barfed out at the lows would have cost me $1.2 Million. 

In the course of careers, traders get dinged like hockey players lose teeth.

Yet nothing in this business worth pursuing comes without risk.  And as Charles Sanford pointed out (a must read if you missed it), playing it safe over the long run is often more dangerous.

It's called the cost of doing business.

Fortunately, with nine fingers I can still type ... and trade ... and the comeback has already begun.

And in this business, the finger does grow back ... but you have to protect the arm and hand.

For those who aren't quite as fortunate, I hope that remembering that we are all only temporary stewards of whatever capital we have will provide some measure of relief.

We simply do the best we can.

A wise man once told me that.

He's my father.