The Case of Liquidty

Have you ever heard one of your trading buddies, tell you off by saying "wag mo bilhin yan! illiquid!"

Then you look at the board and think "okay naman ah"

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This can mean either two things. Either (A) You are correct and your friend is just a dumb-ass who got the same scolding from a trader with a bigger port size. Or (B) Your dear friend is right and you haven't experienced getting trapped on an illiquid stock.

To visualize this, let me tell you a story of two traders named Bravz and Andy.

Andy is not your ordinary trader. Aside from being an expert in cutting his positions he is also a rich kid.

One day, he decideds to allocate 5M in one trade. He thinks to himself, "Rich kid ako eh. I can afford." So he goes on and buy 1.385k shares of MEG at 3.61. By the middle of the day he realizes that he wanted something else, something faster. So he sells all of his shares at 3.6 with ease. Commission loss doesn't bother him. Rich kid kasi eh.

He then proceeds to buy LMG because his favorite guru told him.... "30% Discount! This is syurbol backdoor! Okadah bombah!" So he buys a million shares of LMG at 5.

By the closing hour things turned sour, supports didn't hold and Andy's -5% cut levels were hit. He was in shock! Prices were diving down faster than that racer reached the next tower in Fast and Furious 7.

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 He couldn't sell all his shares because there weren't enough buyers.

Prices went lower and At 4.3 he was now facing a 700k Loss. If he sold down everything before and during the market's closing, at what price would LMG reach? At this point he understood that he was trapped and that it was impossible to cut without incurring much damage. 

To give you a better image of Andy's situation and to the hundreds of traders who don't know how to sell their shares due to illiquidity, observe the following GIF :

So Andy decides to just hold all his positions because it was now too late and too deep to cut. He then thinks to himself : "Anyway Syurbul Backdoor naman toh. Okadah Bombah!" 

Does this sound like someone you know? 

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Now, Bravz was the same as Andy. He was also hyped by the Okada Rumors. Hindi nga lang siya rich kid. But instead of allocating all of his funds on a single play,  he decided to be a good boy and only allocate 25% of his whole port on the LMG play.

Just enough to get his balls wet.

Bravz is training to be a Knight Class Trader btw, holding only a maximum of 4 stocks at a time. Where a single stock has a budget limit of 25% of his whole portfolio. So he then proceeds to put in 50k at 5. Why 5? Monkey see, monkey do! Best buddies sila ni Andy eh.

Now at the moment that his cut loss levels were hit, Bravz was able to sell his 10k shares easily because his allocation allowed him to be liquid enough for this specific play.

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Not all traders are equal in size. Liquidity is Relative. There are huge sharks with 7 to 8 figures. There are Whales in the 9 Figures. And of course, let's not forget the cute little plankton traders that are just starting out by the 4-5 figures.

So how can we know if a stock is liquid or not?

I don't know about you and what other experts would say but I would classify a stock Liquid if I am able to use 100% of my total port, to buy or sell the stock at current prices and be ABLE to close positions on the SAME DAY without single handedly creating a 3-5% swing.


To further visualize this, if you had to buy 1 Million worth of shares within a minute without causing prices to fluctuate too much, between DMC and SPM, which one do you think would be able accommodate YOUR size?

Using our super powers, the common sense, we'd all agree that if we had to buy a million worth of shares, DMC is the liquid choice.

But if the stock I wanted to play was SPM and obviously it's illiquid for my size, I could always adjust my allocation so that it becomes a Liquid Trade. Instead of buying 1M worth, I'll just allocate 30k worth.

Because by the end of the day what matters is how you adapt and trade accordingly to your size. 

Don't be a whale swimming in shallow waters.

Bodega and The Law of Equivalent Exchange

Post Finished : 2:00AM 3.17.2016

Scheduled Post to Avoid Hype : 4.01.2016

"Bodega"

Also known as "Warehousing." This is quite a popular term in FB and other social media. And I have taken a liking to it. The popular belief on this system goes like this : "If you believe in the company, Buy it. Buy it slowly until you have amassed a lovely position that will bear you good gains somewhere in the future." 

I believe this method can be effective if used in the right way, by the right person - Be it a fundamentalist or a technician. But one should also be aware of the element of time when warehousing. You wouldn't want to be accumulating something while losing golden opportunities right? So today, we are going to talk about two groups of fictional characters, The Technicians and the Funnymentalists, for us to visualize and understand more about the bodega system. 

(The things you are about to see are of pure fiction)

Let's start with the Funnymentalist. These group of people believe in many truths, which oftentimes results to a non-truth. The most common practice they employ is the combining of the three Truths in the markets : Fundamentals, Technicals, and Speculation.

Observe.

This is an example of a funnymentalist's port snapshot with a little taste of his wisdom. There has been no full disclosure of where he made his bodegas but we can only assume the following :

"Why don't they buy when the uptrend is confirmed? Isn't it easier that way?" 

Good question. I'm confused as well. But the thing is, Funnymentalists have Vision like no other. They see things in different dimensions and will buy in every season. They see the market's downtrend as golden opportunities to add to their positions. But why not? They are Millionaires! If not Billionaires!

They could have bought on the shifting of the trend. But no. They like to have an underdog's story of breaking even while others are profiting. Who knows how their minds operate? Sometimes they practice cutting their losses and sometimes they don't. Sometimes they have legal wives and sometimes they don't. 

Funnymentalists don't mind holding for a long time because eventually, the universe will align to their favor. This is their truth and their minds will forever remain a mystery.

"A 6-8 Figure Loss? That's nothing to me. BACAT (Buy Cut) 'Till you get it right! Do not think! Be one with the Market."

How about the Technicians? 

They are people bound by strict rules and discipline. Raw data is their Truth. Trends are what they follow. And if a trade goes against them, they immediately cut their losses.

Observe.

When the market shows signs of a favorable trend, Technicians do not hesitate to execute the bodega system. For why fear a trend that is for you? I made a post before on Trend following and Money Management, You might want to read it by Clicking Here. 

Now to understand these signs, one must look for several ingredients :

(1.) A clear continuous and brutal downtrend for at least 6 months - the longer the downtrend, the better. (2.) Next is a rally, a mini ZS or a ZS, that breaks the downtrend with considerable volume. (Click here to know more about the ZS) And (3.)  A time of consolidation from the initial rally, followed by a sequence of breakouts that confirms the shift in trend.

Below is an example of how a Technican would probably do things if given similar amount of money as the Funnymentalist.

Before I proceed, I'd like to make a shameless plug.

"Humankind cannot gain anything without first giving something in return. To obtain, something of equal value must be lost. That is Alchemy's First Law of Equivalent Exchange."

"Alchemy: the science of understanding the structure of matter, breaking it down, then reconstructing it as something else. It can even make gold from lead. But alchemy is a science so it must follow the natural laws: to create, something of equal value must be lost. This is the principal of equivalent exchange. But I learned that night that some things cannot be measured on a simple scale. My brother and I knew the laws of science, of equivalent exchange. The game required sacrifice, that something had to be taken from us, but we thought there was nothing more we could loose....We were wrong."

~Edward Elric (Fullmetal Alchemist)

It's one of the best Animes out there. 

You should watch it if you still haven't.

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Now, where was I?

When we tread the markets, it is of utmost importance that we understand our place. While we are part of the market, we are not the market. If the market decides you are wrong, then you are wrong! Your opinion and positions worth millions or billions are irrelevant. For what we speak and what we have is not necessarily truth. Only the Market speaks truth. And when the Market speaks, we listen. 

(Snapshot as of 3.16.2016)

By the time this is published, either BHI is no more or probably still there. Who knows? Oh what a lovely case of Schrodinger's Cat.

The Rationale Behind Multiple Ports

You are the most fearless archer in the whole village. You wander around the woods to hunt the evil that lurks in it. You have found your target, a tiger. The foul beast that has been killing all the villager's animals and your beloved turkey that you have so dearly taken care of for the coming winter. 

You approach silently and pull out your dagger from your sidepocket. The mighty tiger knows what's going on and motions its tail as if beckoning you closer to its presence.

"I've got this" You think to yourself.

You breathe deeply as you prepare to strike. When suddenly, the tiger disappears from your sight! You then notice the painful warmth of your own blood gushing from your neck as the beast delivers a critical bite that ends you instantly.

What the hell were you thinking archer!? You had one job and you used the dagger!

Welcome to portfolio Mind setting 101 ZF Style.

I'm assuming all of you have read these 3 Posts Below :

http://zeefreaks.blogspot.com/p/zf-portfolio-class.html

http://zeefreaks.blogspot.com/2015/01/the-trading-port.html

http://zeefreaks.blogspot.com/2015/06/the-cost-to-trade-for-living.html

Some of you have been wondering why the hell I do resets and have 3 different ports. Let me explain.

I'm a gamer and I look at the markets as a game. If you've played FPS (First Person Shooter), RPG (Role Playing Games), RTS (Real Time Strategy, or TBS (Turn Based Strategy) games like Team Fortress, UFO, Heroes, Final Fantasy, Diablo, Mech Commander, DOTa, etc, you will notice that there's a wide spectrum of characters and classes with their unique abilities and skill sets. One class just can't have it all. And every character has their own set of strengths and weaknesses.

If you're an archer, you attack and kill from afar. You don't go all out rambo knockin' on the enemy's front door! You play what's given to you and use it to your advantage. So act your class if you want to survive and stay in the game. If you feel the need to pet that darned tiger on the head before you kill it, switch to an assassin or a character that can take extreme punishment.

If you're a tsupitero, handling and growing a port that has 500k is easier than a port that has 2M. The bigger the port, the harder it is for the tsupitero.

If you're a trend follower, you'll probably have no issues with handling a 10M port, But it wouldn't be easy growing it performance wise as opposed to the tsuptiero.

If you are handling a sleeper port, you need to have extreme patience to endure the times when you see other stocks moving while your's are sleeping.

It's all about balancing volume, technique and the mind.

The most lethal thing a trader can do is to act the trader that they are not.

When you come to a deep level of understanding of who you are as a person, as a trader - your strengths and weaknesses, and put this into your advantage when you enter the markets, you'll be surprised of what you can do.

Port Snapshot as of 2.23.2016 Lunchbreak

Do not try to be someone who you are not. Embrace who you are. 

The Cost to Trade for a Living

"How Much does it take?"

A few days ago I posted this

Click here to read the comments.

That survey, as vague as it might seem, has deeper truth.

Once you have exposed yourself to a certain degree of risk in the

 stock market, there would come a time when you would think

I noticed that a lot of people actually consider having a "career" 
in trading. To those who answered, thank you for 

your time - your entries are duly noted.

So let's talk about this survey shall we?

There were those who answered 50-100k, 3M, and even 

a whopping 8 Figures. Nothing wrong with those numbers. 

But Yes, to be on the philosophical safe side, the answer 

depends on your personal lifestyle.

Example

This is how my monthly budget looks. I consume a lot less, 

I guess around 16-18k. I'm not much of a spender, I stay home

 most of the time, and since I'm province based, living expenses 

are cheap compared to the big cities.

And just for sample's sake, here's my "made up" projected budget

 when my port gets reset by the end of this month. 

(As of 6.12.2015)I call this, "The Table of Needs"

For those of you who just tuned in to my blog, Every 3 or 6

 months, I press the reset button on my trading port and it 

goes back to its original port size which is 2M.

The profits go to the projected budget above.

If no profits have been made, no withdrawals will be done and poor

 ZF will have to live on cup noodles and the emergency fund until

 the trading port yields gains and improves on the next reset.

On the table above and with my port size, I just need to make a

clean +1.25% or 25k in order to survive for a month. And 

+1.25% is something I can achieve with ease and no pressure.

I'm currently on the 6-month port reset mode and already got my

 2nd half 'needs' covered - anything excess of that +7.5% is the area that I consider

 "enjoying my stock profits"

But what if my port size was smaller? 

A lot answered 100k Capital. So let's see how that goes 

and how it will affect my current Budget.

To maintain my monthly "lifestyle" I'll have to at least make 

25% A MONTH! Now That's crazy and full of pressure.

You'll have to be a guru who always goes All In on basuras and can

 consistently see the future to be able to live with 100k Capital.

Di pa kasama yung "enjoying profits" area jan and some existing commitments 

I have won't be supported or would be "short sa budget."

So how about those who say, 500k Capital is the way to go?

In this example, let's assume I'm a family man living in the big city,

 got kids and a wife to support and I'll need to get 100k of profits

(+20k bonus) every month to sustain my family.

20% A month. And that 4% only gave a small boost.

Still a High number, budget screwed and is 

definitely NOT Sustainable. 

If you're single and have a smaller budget,

it might be acceptable.

I can imagine the look on people's faces when they've 

reached their target and got wiped out in a single trade 

because of the pressure to have "more"

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After discussing with my students on the subject, majority agreed

 that 5% is the "minimum" target one should gain in a month on his

 or her overall port that isn't too stressful to maintain as long as a

 system is in place and assuming trading consistency is achieved.

Now let's try ZF the Family Man with 3M Capital, 

Living in the big city, with wife and kids and 

a more balanced Budget.

A +3.33% monthly target ain't that hard right?

And that extra +1.67% or 50k pretty much gets you 

somewhere fancy for some R&R.

These tables are just projections. If you seriously consider trading

 for a living. You better be prepared and consider all angles. 

Here's a link to that spreadsheet If you wish to do 
some tweaking of your own:

Click here

And If you haven't reached your ideal Port Size yet, 

then dream big and work hard for it.

Because one day, hopefully,

You will.

I did.

Volume of Emotions

Great things start with small beginnings.

Most traders when starting out, make the mistake of trading 

with all they have, trading big or going all in - Instead of experimenting and starting small.

The path to a consistent, profitable system, always starts with

 experimentation. Because admit it, even if you read all those 

books and blogs, mimic your favorite guru, watch

 expert trading videos... 

Knowing...

 is very different from Doing.

One of the basic self-check, flow chart a beginner 
must have when trading is this.

It always starts with a trading plan.

And the emphasis is more on the volume of the trade
and your mental state if ever you lost the trade. 

Why?

Because the trader's mental and emotional capacity has an

interesting correlation to the volume of the trade.

Confused?

Here's an example.

Scenario 1:

You allocated 1/10th of your portfolio to DNL.

Whether you win or lose, this will probably be your reaction:

Nothing much really. Because the volume wasn't 

that significant to move your port to begin with.

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Scenario 2:

You allocated at least 1/2 of your port to TAPET

at the lows before it went sky high.

Your probable reaction?

#YOLO

You get a confidence boost - Feeling like some 

hero or tyrant that can conquer anything in the world.

----------------------------------------------

Scenario 3:

You went all in FNI because of strong FA and TA.

(Facebook Analysis / Tsismis Analysis)

Your reaction?

(Admit it... you sang that one out)

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Makes sense now huh?

Now when you document a trade, add up the numbers. 
And after getting a hefty sum of trades, review and look for 
the plays you are strongest and those that you are weakest.

(Sample Trade Stats)

This doesn't mean that you should stop trading the setups that you
 are weakest. But it should be a challenge for you to experiment
 and practice until you finally get your batting average 
into the green.

These numbers speak out to YOU. Think of the 'wins' column 
as confidence points. The greater the wins you have, the 
more volume you can allocate. The greater the losses 
you have, the lesser the volume you should commit.

When you gain confidence because of the numerous trial and 
errors, and when you can properly handle and tolerate losses to a
 certain degree of exposure, only then should you "up the dose."

I recommend risking only 1-2% of your portfolio per trade. This will allow you to stay longer in the game.  

And why am I emphasizing on Losses? 

Because losses are inevitable.

Also because when I started out, I remembered and learned 
from my losses more than my winning trades. You're already in pain, take something from it.

Everyone loses. But the only time it truly becomes a loss, 
is when you don't learn from the experience.

Trading 101 : Osmosis

On this post, I'd like to emphasize on money management and
 diversification when dealing with 3rd liners.

But before that....

This game is really kick ass!

Extremely Fun when played using Pads.

Here's a link if you want to try it out

(Click Here)

Quick definition of Osmosis.

Definition taken from : http://www.merriam-webster.com/dictionary/

Totally related to trading right?

Well.. not really.. But if you played the game, 

you'll get what I mean. Hopefully. Hahahaha

Anyways, 

When buying 3rd liners, assuming the chart 
is good and all, make sure you study its liquidity.  
You don't want to be buying something you can't sell.

So Ask yourself this question:
"If i put in X amount of money in stock Y, 
would I be able to sell it with ease on the same day?"

If your answer is YES, then you're one step 
ready to make that trade.



Moving on...

I usually keep 1 to 4 Trending Stocks - all with almost the same trade value. 
And when a stock is ready for profit taking, I sell all, if not some of it and 
transfer the funds to the remaining three stocks or add to a new stock position.

Sometimes I go over 4 stocks, but when I do, 
I switch and sell the weakest of my holdings and go 
back to the original 4 or less.. 

Focus is extremely important. 

Just imagine if lets say, you have 10 basuras in your port,
all with equal value, then suddenly a wild bear appears! 

"Imma eat yea alive biotch!"

And the worst part is, your broker... let's say.. just out of total "randomness"  
House 203 would have one of those "stroke moments" during market panics.

What do you do?


Imagine the pain...


So as much as possible, keep or buy only what you can manage.


"Okay Zee Enough with the talk". 
I get it. You want results.

Here ya go...

This is the Unshaded Version of 

Request Granted January 2012 Edition

Port as of 1.20.2012

Port as of 1.24.2012

Port as of 1.25.2012

Port as of 1.26.2012

 Port as of 1.27.2012

 Port as of 1.30.2012

 Port as of 1.31.2012

Here are my other trading rules:

On Cutting Losses:

Don't let a loss reach -4%

Cut before it reaches that level.

On Taking Profits:

There are no Target Prices,

Only Trailing Stops.

On Trading A stock:

Trade with bias. If a stock does not 

move according to your bias, Sell.

I also get this question a lot, So i'll just Include it here:

"What is my average holding period?"

4 Trading days. Or until a stock's uptrend snaps.

And If I'm dead sure of a killer trade? 

I never hesitate to go All-In!

Happy Valentines Everyone.