Day 2: A Comedy of Errors
Vanquish Trading 3
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While reading comprehension is one of my strongest points, following rules is one of my weakest — for example, I have never done my homework, have never studied seriously for a test, don’t follow dentists’ advice (sorry, I’m convinced that offering cavity fillings is essentially testing if you’re a mark), and always work backwards from what I think is right rather than starting with expert assumptions. (My teeth are pretty perfect, as it so happens.)
In trading, I have highly practiced methods that definitely diverge from common wisdom — for example, I don’t ever use stop losses:
But my own preference is to avoid using tight stops as much as possible (in fact, I won’t use them at all while actively at my desk.) Remember Caroline Ellison of FTX fame?
While she is rightly a subject of derision, I saw this clip make the rounds and, as an options trader, I think she’s right about not using stops. (Of course, she’s wrong about a myriad of other things, I don’t think she’s a good example of a profitable trader.) Her background as a market maker led her to the same realization that I had — every order you place in the book provides liquidity. Every order filled takes liquidity. Especially with options, if you are regularly crossing spreads, you will erode any edge you had and then some because of the nature and nonlinearity of the leverage. A limit order inherently implies that you are paying that liquidity premium to fill your order at your preferred price. Really think about what a midpoint fill is — if I place an order in the middle of the spread, and I get filled, there is liquidity beneath the screens. The question becomes, what’s that price worth?
Tight stops run into the natural problem that you kill a lot of trades that might have rebounded in your favor.
Now, let me tell you a story about how/
My account got flipped turned upside down/
And I’d like to take a minute, sit right there/
Of how my green account vanished in the air
The day started off normal enough. I used the same strategy I figured was optimal from Friday, but skipped the opening hour as I didn’t like the action:
The way I think of stock price movement is almost bucket-shop esque — I trade “point to point” rather than “real time price”. This is why I love recommending shares trading — if you’re drawing down on shares, it’s not really a big deal. AAPL is not going to zero, even a basic brownian motion argument generally indicates that you’ll roundtrip at some point….
…the number one rule of beating these challenge is always being deployed in some manner. Unless there is a specific reason to stay short, you should be net long. Even on an intraday basis, “time in the market” beats “timing the market”, which is why I was comfortable sitting on an AAPL long that wasn’t moving anywhere. There’s no cost of capital intraday, and when it’s not volatile, why not try to catch the bottom of the intraday drift and see if the market pushes stocks up in your favor?
Using this, I took some simple longs on MCD and DJT and let them sit, then took a reversion trade on AMZN to book some profit.
This put me up ~$1700, so I figured I could start building up a sizable position in DJT for the afternoon, trying to slingshot the gains again.
The reason I have been trading DJT is because it’s where all the volume is, and it’s a very reliable stock to trade (but this’ll change after the election, whenever it finishes):
DJT is a unique stock bc it's not option-driven at all while being a popular retail name, so the volume cascades very neatly. This is what a pure squeeze looks like, and there's no passive/create-redeem nonsense going on. You don't want to be short anything that has a positive skew — so you time the long around sentiment. If you can be objective about how society perceives trump, this is the easiest thing on the planet to trade as a result; for example, buy into trump trial, sell the news, buy when he gains momentum, sell when obviously people get overhyped, and trade into the liquidations from people who are shorting it on "fundamentals" or cause he's a "bad guy" and you will literally not lose on this stock.
Famous last words, eh?
It starts, of course, with one of the oldest trader errors in the book: a fat finger
This was right after I saw DJT cross 35, where I was going to see if I could catch the tail end of the squeeze that was going on prior. (This seemed like the last bit of capitulation, I figured I could catch a quick ~dollar move in the next couple minutes and then look for EOD.)
I market ordered 100 shares to see if I could get in something around 35.1.
Wait a sec.
I have a 1000 share position?
And where did it fill me??
Of course, the move passed while I was figuring this out, and then I had a decision to make — I was stuck with this massive position I didn’t want in that size at all, but I was positive the stock wasn’t going to do much worse than range for the rest of the day. Worst case, I’d scratch in a 50 cent band by EOD, best case scenario, bid returns to a new high.
Here’s where I made another error:
Since I didn’t have capital to deploy meaningfully elsewhere, I figured I’d toss the extra balance in the account (another ~400 shares) into DJT as well while I waited for the chop to go away. Remember what I said last week about leverage?
The reason why I closed out DJT is because inherently, betting more when you’re winning is leverage. You don’t want to blow out your gains waiting for a roundtrip, ever. This is also why I don’t like shorting — markets are upward biased. They will drift up rather than down, or follow the market, which is passively biased long due to the way price-insensitive inflows work.
Little did I know, this is precisely what overlevered my position and caused a blowout.
You see, the 3% drawdown rule is not solely a realized 3% drawdown. I can easily calculate 3% of 51000, that’s not the issue here. I figured that since there’s no levered products or margin available on these sim accounts, a shares sim wouldn’t fail you if the position drew down past that amount unrealized — e.g., you only fail when you’re actually closed out below the max drawdown.
(Obviously, with an options account, you do have to liquidate/fail people immediately because if you are trying to find profitable traders, you’re not going to find them by allowing people to take far OTM delta punts to get back above the benchmark.)
I was fully certain that DJT wasn’t going to go anywhere until the last ~30 minutes of the day — people got long it for gap up/exit polls tomorrow, Trump is clearly the favorite to win at this point — so I turned off my screen for a bit as I try and watch prices as little as possible.
When I opened up the trading portal again, after checking the price on my phone, I got a message saying my trades were rejected
Even though this was roughly the PNL of where I’d be at on the day at that time
Turns out, while I was logged off the trader, the position had drawn down past the “max unrealized loss” limit and I “failed” the challenge as a result, lol.
(~34.9 was my rough breakeven, but that drawdown to the low 33’s apparently pushed the unrealized PnL too low.)
So, bizarrely, with zero red days while up ~2.6% if I had gotten to let that trade play out, I failed the challenge on day 2!
This is genuinely the most fun I’ve had trading in 4 years — who would have thought sim trading would be so much fun? It’s an interesting challenge to have to fit my own optimizations into a system that doesn’t have the same “bend but not break” capacity as I do. I might be the only person with a purely intuitively calculated risk tolerance, and it’s clear that I have to bend the knee and work according to the system this time around.
Now that I’ve gotten some limit testing done, I’ll call my shot:
— Tuesday will be primarily a wash, not much activity will go on, but I’ll get revenge on DJT
— I’ll beat the examination challenge — 10 trades, 30% consistency, 6% profit, 3% drawdown — by Friday.
To come:
I’m going to experiment around with the options sim as well so I can get a feel for how entry/exit works. I have a particularly odd way of finding liquidity between spreads, so I’ll have to see how I can adjust to it for a while before trading it fully.
If you had Vanquish winning but Ven catching the Snitch, make sure other people read this post so they know you called it