Tuesday, March 14, 2017

The Trade That Made No Sense



We were were in agreement that we had to find a better way.

Clockwork and I started our trading careers as  professional minimum wage traders. We meticulously manufactured small profits--all amounting to a low payout that, after being chewed up by commissions, profit split, platform fees, and the occasional compliance fine, would fail to sustain even a mediocre life quality in high-priced NYC.

Every day, we would trade with the same bullshit trading piker mindset.

 We would look for tight consolidation patterns, squint at the level II for a large order that could be our exit to reduce slippage, buy the first tick-up with a tight stop, and hurriedly try to sell it for 10 cents. 

Yeah 10 cents. Why so little?

Well, every time a winning trade came back to our entry--which was literally every time it felt like--we would experience immense regret that we didn't sell it. Because we "knew" it would happen.

"Welp, looks like they're gonna run the stops again."


We had trapped ourselves psychologically. Taking mediocre ideas and trying to take mediocre profits before the trade proved its true colors--that it was a mediocre trade with little chance to form the sustained, powerful trend that's worthy of holding. Our only saving virtue, one that would ensure profitability, was being too cynical to believe in our own trades--because being patient and riding a winning trade was a sucker's game. Something they wrote about in trading psychology books from 20 years ago before the HFT's made the market too annoying to trade.

I joked about going to law school. He joked about getting an MBA. Enough was enough...  this was the final straw. If you don't make real money in a risk-taker's job, you might as well just quit and get a real job. And if you're about to quit, you might as well empty all the bullets and see what happens (especially on someone else's dime).

"Let's trade bigger and if we blow up, we blow up. Who cares at this point?"

We had a clock in our heads at this point--now or never to make this trading pipe dream a reality.

But we agreed the solution wouldn't be to increase size with our current piker bullshit trading strategies.

We needed to find scale-able strategies where we could hold positions with both size and conviction.

The type of strategy that would make us real money, the type of money that attracted us to trading in the first place.

First, we needed better...

...Role Models.

Slow Trot was one of the best traders from Crazy Capital Group. He had been trading for 14 years. He wore shorts, flip-flops, and an old raggedy t-shirt. He spoke with a slight Texan 'twang in his voice. He took his seat at the bar and ordered all of us a drink. We wanted to pick his brain. 

Slow Trot  told us about all the weird shit that guys at Branch B would do to make money. It was a whole different world outside of the repackaged vanilla technical strategies that over-saturated trading education circles.

Secret sauce trading strategies that included:
  • Buying thinly-traded ETN/ETF when they were mispriced from their NAV on price spikes
  • Preferred stock and warrant arbitrage
  • Trading the opening and closing imbalances
  • Having huge in positions in stocks I've never heard of, stocks that barely traded 10k shares a day
  • Exploiting an odd-lot algorithm glitch on shares of BRK.A when it was priced in the 100,000s
Slow Trot told us about the day the entire firm bought stocks during the flash crash. Their attitude stuck with me:

"It was someone else's money."

Copycat Trading

We decided to model ourselves after the best traders at the firm. 

Lucky for us, our firm implemented a new link-up system where we could see the real-time risk monitor, including all positions and respective PnL, of the best traders at the firm (provided they agree to a link-up).

I recorded their best and biggest trades on a daily basis, to see if there was something I could learn from the pro's.

One particular ticker caught my eye: AEPI

For one week, I noticed that every day Slow Trot and his buddies would be shorting AEPI Industries a few minutes before the close and covering afterhours for a profit.


AEPI: Chemical company. Thinly traded -- at most 200-300k in volume on a "highly traded" day. Never heard of them in either real life or the circles of FinTweet. Yet the most highly profitable ticker for the firm for the past month.

I couldn't understand what the edge was on the trade. Who is giving this money away?! This wasn't a day trade. Position trade. Technical trade. Fundamental trade. Trend trade. Mean reversion trade. Scalp. None of those labels could aptly describe what was going on here. AEPI was a mystery box that I couldn't wrack my head around. For starters, it made absolutely zero sense how all of these traders could close their positions at reasonable prices during the afterhours market (when there is "supposed" to be far less liquidity and very wide bid/ask  spreads), let alone why the stock would move at all afterhours with no news. 

The AEPI trade was more a weird phenomenon or glitch that kept repeating, over and over and over again.

The stock would trade close to half of its daily volume in one 5 minute bar from 4:00 to 4:05 and always trade in the same direction. DOWN. It never upticked, not even once.

And traders were making money hand over fist betting that it would keep repeating itself. They made their entire week/month on one pain-free trade that lasted a few minutes while pikers like myself would grind all day to pay the bills.



There was no explanation from anyone as to why it would work.

To exacerbate my FOMO (fear of missing out), new traders on the desk started joining the trade, with no better an understanding on what was going, and would reap the rewards.

I had a voice of reason telling me "don't take risk on something you don't understand". Then I told that voice to cram it. I thought about some of the strategies that the top guys used. Did they truly understand their edge at every micro detail level? Not really. They just did what worked. I had to turn off my brain and leave the skepticism at home. This was free money and I just didn't know why yet.

The Next Day

Do I even have to tell you what we did next? There was only one logical course of action.



We saw Slow Trot get into the trade a few minutes before the close. We jammed into it as well.

Then we waited, in great anticipation.




Funny thing happened: the stock upticked.


Our positions were immediately out of the money.




Faced with paying up a big one point spread to take a loss, we chose to keep holding.

Then we saw the "pro traders" add to their positions so again, we just followed along and did what they did.

This was definitely going to end well.


The Day After That

The next day we hoped it would just stop and let us minimize our damage. Okay, the glitch stopped working but that doesn't mean there's reason for the stock to move up right?

At the open, our hopes were dashed. AEPI refused to slow down.

Our max-loss limits were triggered on the open and the firm liquidated our positions.

It was my worst loss of the year. It wiped out the last 3 months of hard earned piker trading profits. The firm as a whole took quite a beating.

They say the best trades have 3 phases:
Innovators.
Imitators.
...and Idiots.

And once the idiots hop on the bandwagon, the trade gets over-crowded and stops working.

Even though I don't know why the trade ever started working in the first place, I at least know why it stopped working.

Aftermath

To this day, I still have no idea what was going on in AEPI. I have many questions.

1) How did someone find out about it?
2) Why did this trade have an edge?
3) Why did it stop working?
4) Was this a case of a trader knowing something but not wanting to spell it out for legality reasons?
5) How was everyone else so willing to hop onto a trade that seemingly had no clear logical explanation for why it worked?

There's a lesson here about not getting into trades you don't understand, but I didn't start this blog to impart wise lessons. I'm just an idiot.

10 comments:

  1. I hate Weekends because there is no stock market
    Free Intraday Tips

    ReplyDelete
  2. تعمل على توفير كل خدمات عمليات التنظيف شركة تنظيف بالبخار بجدة بالإضافة إلى الخدمات الاخري شركة تنظيف كنب بالبخار بجدة التي تحتاجها ربات البيوت وأصحاب الشركات شركة تنظيف سجاد بالبخار بجدة والعقارات ومن خلال شركتنا المتمزية فى خدمات تنظيف المفروشات شركة تنظيف مجالس بالبخار بجدة بالبخار بافضل الاسعار تعرف على كافة شركة تنظيف بالبخار بمكة الخدمات المتميزة التى نقدمها شركة نقل عفش بمكة اليكن والى كل عملائنا الكرام

    ReplyDelete
  3. شركة نظافة خزانات بمكة تقدم خدمات لا يوجد شركة تنظيف بمكة منشأة لا تحتاج لها حيث أن الخزانات تعد من أهم المحتويات التي تحتاج لها المنشآت المختلفة خاصة شركة مكافحة حشرات بمكة في المملكة العربية السعودية التي تعتمد على المياه الجوفية ومياه الآبار شركة تنظيف خزانات بمكة والعيون وتخزينها في خزانات شركة تنظيف بالبخار بمكة بعد تصفيتها وتنقيتها لذا ظهرت الحاجة الشديدة للاستعانة بشركة متخصصة شركة نقل عفش بمكة يستعين بها مختلف الأشخاص في تنظيف وتعقيم الخزانات لديهم من أجل الحفاظ على المياه نظيفة وغير ملوثة

    ReplyDelete
  4. العمالة الفلبينية معروفة بأنها تتعلم شركة نقل عفش بجدة بسرعة كبيرة وجميع الأعمال التي تسند اليها تخرج جودتها بمستوى عالية فى حين ان مستوى الاجور لها منخفض وعليه فإن الشركة شركة تنظيف بالبخار بجدة تعمل على توفير تلك النوعية شركة تنظيف دكت المكيفات بمكة من العمالة ومن خلال افضل شركة نقل عفش بجده شركة تنظيف دكت المكيفات بجدة عمالة فلبينية سوف يتم الحصول على عمال متفوقين وقادرين شركة تنظيف دكت المكيفات بالطائف على نقل الاثاث بعناية كبيرة من اي مكان حتى الادوار العالية وتتم عملية النقل تبعا للأسلوب الحديث وهي كالتالي :-

    ReplyDelete
  5. توفر شركة تنظيف دبي أفضل خدمات نظافة شركة تنظيف بدبي من خلال خبراء في عالم النظافة شركة تنظيف كنب بدبي لديهم احتراف ومهارة عالية وعلى درجة كبيرة من الأمانة والالتزام لديهم حلول شركة تنظيف عجمان عملية وسريعة لجميع شركة تنظيف بالشارقة مشاكل التنظيف ملتزمون بتلبية شركة تنظيف ابو ظبي رغبات العملاء وتنفيذها وعدم إهدار الوقت

    ReplyDelete
  6. تنظيف المساحات الشاسعة ليس بالأمر الهين شركة تنظيف دبي ولا يقدر عليه فرد واحد أو الخدم الذين قد يتواجدون شركة تنظيف ابو ظبي بالمنشأة حيث أنه يلزم توافر معدات خاصة شركة تنظيف كنب بدبي من أجل التنظيف تساعد شركة تنظيف بالشارقة على تقديم أفضل الخدمات وتعمل على تيسيرها بأسعار لا تعد عبء على من يبحث عن شركة تنظيف عجمان هذه الخدمات لذا تقدم الشركة كافة الخدمات التي تلزم في تنظيف الفلل شركة تنظيف العين بما تحتويه من محتويات وأغراض

    ReplyDelete
  7. سميت بحشرات الفراش لانها غالبا ما تتواجد شركة مكافحة حشرات بمكة فيه وتعيش وتتغذى على الدم سواء دم الإنسان أو الحيوان شركة تنظيف شقق بمكة تعد الحيوانات شركة تنظيف خزانات بمكة الأليفة ذات الشعر شركة مكافحة حشرات بالطائف الكثيف أيضاً أحد المصادر الناقلة لهذه العدوى تقوم حشرة البق بوضع البيض شركة نقل عفش بمكة الخاص بها على المراتب والآسرة شركة تنظيف خزانات بالطائف والذي يتميز بلون ابيض شفاف وملمس لز

    ReplyDelete
  8. يمكنكم اللجوء لتنظيف منازل عجمان إذا شركة تنظيف دبي أصبحتم في حاجة إلى تنظيف المنزل شركة تنظيف عجمان في أي وقت تحددوه أنتم , فقط اتصلوا بتنظيف منازل عجمان شركة تنظيف بالشارقة وسوف يرد عليكم فريق متخصص من خدمة العملاء والذي يحدد معكم المطلوب شركة تنظيف ابو ظبي والوقت المحدد لإتمام تلك المهمة الضرورية وفي أسرع وقت ممكن سوف تجدونها انتهت شركة تنظيف كنب بدبي , فقط انسوا هم الأسعار التي تقلق الجميع في حالة الرغبة في التعامل مع أي شركة نظافة

    ReplyDelete
  9. German Translation Legal Translation services German Translation The German German Translation dubai language has a great influence on the world because Germany plays a vital role in the European Union chinese Translation dubai . Also, the economy of Germany russian translation in dubai encourages the growth Translation services in Dubai of the English Translation dubai German translation industry.

    ReplyDelete
  10. كما يقوم فريق العمل بتنظيف الموكيت حيث أن الموكيت شركة تنظيف بدبي يعتبر من أهم الأشياء التي توجد في المنزل ويتميز بوجود الزخارف المختلفة شركة تنظيف بالعين به، لهذا فإنه يحتاج إلى التنظيف بكل دقة وحرص ويتم هذا من خلال استخدام شركة تنظيف عجمان الماء الفاتر والمنظفات المخصصة للموكيت، أو يتم تنظيفه عن طريق البخار شركة تنظيف كنب بدبي حتى يعطي أفضل النتائج وفي أسرع وقت
    تعتبر طريقة التنظيف بالبخار من أفضل شركة تنظيف بدبي وأحدث الطرق التي تستخدم في عمليات التنظيف شركة تنظيف كنب بدبي للوصول إلى أفضل النتائج، وتقوم شركة تنظيف بالبخار في دبي شركة تنظيف بالشارقة في استخدامه في العديد من عمليات التنظيف؛ لهذا فإن جميع الأعمال شركة تنظيف ابو ظبي التي تقوم بها الشركة شركة تنظيف بعجمان تكون على درجة شركة تنظيف بدبي عالية من الكفاءة شركة تنظيف بعجمان، ومن ضمن عمليات التنظيف التي تستخدم بها البخار

    ReplyDelete