THINK LIKE THE CASINO
February ended up my best month in terms of absolute profits, and my second best month in terms of % return on my capital (122%) … just narrowly missing my best month of 124% in June 2020.
It could’ve been better…I didn’t let some winners run enough, and I missed some what would’ve been really profitable trades.
I wasn’t green every day, but I was green on most days. Approximately 6 out of every 10 trades were winners, and the size of my winners exceeded the size of my losers. The net gain on my winners was over twice the net loss on my losers.
This is what I talk about when I tell new traders that they need to think like the casino and not the gambler. You need to have a statistical edge. You’re not going to win every trade. You’re going to have losing days. You will also have losing streaks. But if you have a statistical edge, you’ll make money over time.
It’s not what you make in one trade. It’s what you make when you take 100 trades of the same setup.
So do you have a statistical edge in your trading? If you don’t know, you need to start keeping a detailed journal. I generated these stats using Edgewonk, a trading journal that has a lot of cool stats to help you improve your trading.
Unless you’ve been living under a rock for the past week, you’ve probably at least heard about the GME/AMC debacle. It’s been framed as the common man beating Wall Street, the little guy beating the big guy, David vs. Goliath, the Rebellion against the Empire…
Except it’s none of those things. It makes for a good, gripping story, but, like Gary Taubes’s “Good Calories, Bad Calories” book (Gary is really good at coming up with compelling, yet false, narratives), it’s a story that just isn’t true.
The unfortunate thing is that false narratives have consequences. Gary’s false narrative leads people to an irrational paranoia surrounding carbs, a bad relationship with food, and potential struggles with weight loss when his “solution” doesn’t work. The GME/AMC false narrative perpetuated by Wallstreetbets and then spread through the echo chambers of social media has the consequence of causing a lot of people to lose money…some people who can’t afford to lose it.
Now, throughout this piece, some of you may read things you don’t want to hear. But that’s exactly why you need to hear it.
…throughout this piece, some of you may read things you don’t want to hear. But that’s exactly why you need to hear it.
THE TL;DR SUMMARY
If you’re too lazy to read this whole article, here’s a summary for you:
- The restrictions placed on GME/AMC trading by Robin Hood and other brokers were not conspiratorial or corrupt in nature. They were necessary to manage the risk caused by the volatile stocks. The brokers and clearing firms were following regulations that have been in place since 1974.
- The “little guy” didn’t win. Most little guys lost, and Wall Street won big. Only a few hedge funds with short positions lost.
- Shorting is not “bad”, and the anger directed at short sellers is misguided.
- GME/AMC became giant pump and dumps, and WSB orchestrated the pump. WSB did more to hurt the average Joe than it did to hurt Wall Street.
- The market isn’t rigged against you.
- The real reason most retail traders lost money on GME/AMC is because they showed the same bad habits that retail traders have had for years.
TABLE OF CONTENTS
- SO WHAT HAPPENED?
- POPULIST RAGE
- ROBIN HOOD: TAKE FROM THE RICH, GIVE TO THE POOR, OR VICE VERSA?
- THOSE EVIL SHORTS
- THE MARKET IS RIGGED…AGAINST SHORT SELLERS
- MARKET MANIPULATION…BY WSB, NOT THE SHORTIES
- AND THE WINNER IS…
- IT’S NOT ME (THE MARKET)…IT’S YOU
- THE HARDEST EASIEST WAY TO MAKE MONEY
- MASS HYSTERIA
- WHAT GOES UP MUST COME DOWN
- LISTEN TO THE EXPERIENCED TRADERS!
- WHAT WERE YOU THINKING?
- RETAIL TRADERS…ONLY HUMAN
- TODAY’S LESSON, KIDS
SO WHAT HAPPENED?
I’m not going to go into too much detail as to what happened. Gamestop (stock ticker symbol: GME) and AMC Movie Theaters (stock ticker symbol: AMC) made massive moves up to 1500% this past week due to a combination shorts squeeze/gamma options squeeze. The moves were initiated by a group of traders on the reddit forum /wallstreetbets. Both were heavily shorted stocks, with the hedge fund Melvin Capital and the well-known short seller Citron Research/Andrew Left having short positions. These funds were forced to close their positions which contributed to the massive move in the stock. If you want a more detailed explanation of the GME short squeeze/gamma squeeze, check out Sahil Bloom’s article on it (I highly recommend following his “Allegory of Finance” threads).
With these funds being forced to close their short positions, and with some WSB people now making money off the squeeze, the events began to take on a David vs. Goliath narrative. Wall Street was losing. The little guys were finally taking out those evil hedge funds.
The story took a conspiratorial turn when Robin Hood and other brokers restricted trading in the stocks due to the extreme volatility. This was viewed as the Big Guy changing the rules to stop the Little Guy from winning. The populist rage swept through the media. Even politicians started to get into the act, with calls for increased regulation. “Those corrupt brokers are in on it! The market is rigged against us!” said the little guy.
Suddenly, more and more people wanted to get in on the GME/AMC action. Everyone wanted to kick Wall Street’s ass now. “Let’s all herd together and buy more stock, forcing those evil shorts to cover more!” they yelled. I saw people on my FB feed now wanting to jump in. WSB became full of people exclaiming “Hold the line!”, encouraging people not to sell their positions. It was war.
Unfortunately, it was a war against the wrong people. It was a war based on misinformation and misconceptions of what was happening. And a lot of the little guys are now holding the bag.
Let’s get into all the misinformation and misconceptions, why the whole story was wrong, and why the suits won (spoiler alert: it’s not for the reasons you think).
ROBIN HOOD: TAKE FROM THE RICH, GIVE TO THE POOR, OR VICE VERSA?
First, let’s address the idea that Robin Hood was somehow conspiring with the suits by restricting trading in the stock. The reality is much less nefarious.
When you trade stocks through a broker with a margin account, you’re not the only one taking on risk. The broker takes on risk too, and there are regulations in place to make sure your broker manages that risk appropriately.
The decision by Robin Hood to restrict trading wasn’t due to some conspiracy with the suits. The restriction on trading happened across multiple brokers, not just Robin Hood. In fact, even some of those evil hedge funds were restricted from trading the stock. And there weren’t just restrictions from the long side. I wasn’t able to short GME at Cobra Trading because their clearing firm Wedbush wasn’t allowing shorts (I was able to short at Vision Financial, however).
The restrictions were necessary because the volatility had gotten extremely high. There were so many people with accounts trading these volatile stocks that the clearing firms didn’t have the cash to make sure that trades would be settled. Here’s an excellent explanation as to why Robin Hood and other brokers had to restrict trading in GMC and other highly volatile meme stocks.
If you want another thorough explanation, the Washington Post has a very detailed article on the mechanics of it all.
Or, if you want the “Robin Hood’s toilet was clogged” explanation that is even more technical, you can find the tweet thread here.
The fact is, Robin Hood and the other brokers were simply following the regulations that have been in place since 1974. There was no corruption or anything nefarious. Really, the restrictions on the stock were the fault of WSB and the masses of traders who created such massive volatility in the stock that put the brokers at risk. The WSB army didn’t hurt Wall Street, but it was starting to hurt the brokers that WSB traded through, and the brokers had to put a stop to it. WSB was biting the hand that fed it. And, as a result, WSB ended up hurting the retail traders.
WSB was biting the hand that fed it. And, as a result, WSB ended up hurting the retail traders.
The fact is, the brokers and clearing firms have every right to manage their risk. This is why the class-action suits being brought against Robin Hood won’t amount to anything. In fact, it says right in Robin Hood’s customer agreement form (the thing that most people don’t read) that they have the right to restrict your trading. Under section 16, “Restrictions on Trading.”
I understand that Robinhood may, in its discretion, prohibit or restrict the trading of securities, or the substitution of securities, in any of My Accounts.
People acted surprised at the restrictions on trading. But restrictions on volatile stocks are nothing new. For example, Interactive Brokers has been placing margin restrictions (often overnight without warning, forcing liquidation of people’s positions) on volatile stocks for years.
Also, it’s not like Robin Hood prevented people from taking profits on their positions. They only restricted people in the creation of new positions or adding to their existing positions. If anything, that may have saved people from losing even more money on the ensuing stock dump. In trading, adding to a loser usually isn’t a good idea and only compounds losses (this is different from dollar cost averaging on long-term investments, assuming it’s actually a good investment).
That said, it doesn’t mean I think Robin Hood is totally innocent in all this. As Packy McCormick writes, Robin Hood’s business model encouraged reckless trading that eventually led to Robin Hood getting a margin call of its own and having to get $1 billion to avoid a cash liquidity crisis.
Another irony is all the little guys using Robin Hood and other free commission brokers to do their trades in their fight against the big baddie hedge funds. They don’t realize that these brokers sell their order flow to high-frequency trading institutions like Citadel. How else do people think these commission-free brokers make their money? They’ve got to get it from somewhere. By using Robin Hood, you’re helping out the big guy. My two main brokers Cobra Trading and Vision Financial don’t sell their order flow. I pay commissions (0.004 to 0.005/share) and I can route my orders directly to exchanges. You get what you pay for.
THOSE EVIL SHORTS
The populist rage spilled over to hedge funds. But no, not just any hedge fund. It was hedge funds that like to short stock, because shorting is the work of Satan.
Shitting on short sellers is nothing new. Short sellers have long been scapegoated for all things bad in the stock market since the stock market crash of 1929. Yet, there’s never been ANY evidence to implicate them in any of it. Hell, I remember a blog post on my old Welcome to the Gutter trading blog where I talked about the Daily Show (which I usually enjoyed) doing the typical short sellers are evil nonsense. I’m surprised people aren’t blaming shorts for global warming and Jar Jar Binks.
A short is nothing more than a bet that a stock will go down, just like a long is a bet that a stock will go up. So I ask all the people out there who think shorts are “bad”…why is it only OK to bet that a stock will go up? I didn’t know that betting on a stock direction was moral if the bet is for one direction, and immoral to bet on the other direction.
Why it is only OK to bet that a stock will go up?
People that know me personally know that I’m a “good guy.” I’m extremely ethical in the way I run my businesses and the way I treat others. So because I make a lot of short bets in the stock market, does that suddenly make me evil and manipulative? Why? I’m only betting on price reversals.
Me shorting the stock isn’t going to impact the price. The stock is going to go up or down. Either I’ll win or lose. Big deal. The bet that I take is irrelevant to the outcome.
“But shorts manipulate the market!!!” you say? Where is your evidence for this? And I want hard data, not speculation. Remember, I’m an evidence-based person, and not just in the exercise/nutrition industry.
The fact is, when you look at the hard data, the evidence shows the opposite. As Michael Goode writes:
“While bear raids are legend on Wall Street, there is much less evidence of bearish stock price manipulation than there is of bullish manipulation, even back in the wild days before there was much stock market regulation. So while tens millions of dollars of illicit profits are made each year in pump and dump schemes there have only been a couple of ‘short and distort’ schemes prosecuted in the last couple decades (in fact, of the two cases of which I am aware, Anthony Elgindy’s case involved no distortion; his crime was conspiring with FBI agents to gain information on companies actually being investigated by the FBI).“
The fact is that the vast majority of stock manipulation occurs on the long side, not the short side. In fact, restrictions on short selling have aided in illegal stock price manipulation. Thus, the hatred directed towards short sellers is extremely misguided and undeserved.
The hatred directed towards short sellers is extremely misguided and undeserved.
Somebody PMed me on my Instagram, blaming the 2008 crash on shorts. This is despite the fact that shorts had nothing to do with the 2008 market crash. He went on to claim that people were shorting AMC and GME to “ruin” the companies. I responded:
“I don’t think you understand how shorting works. Nobody shorts a stock to “ruin” the company. Shorts can’t “ruin” a company no more than longs can make a company successful. Shorts are only betting that the stock will go down for some reason (fraud, bad business practices, bad financial position, highly overextended and thus high probability of reversal, etc.), no different from longs betting a stock will go up for some reason (good product, etc). Enron didn’t fail because of shorts. It failed because they were engaging in fraudulent business practices. Jim Chanos just happened to be short. Luckin Coffee didn’t get delisted because of shorts. It got delisted because it was engaging in fraud. Carson Block just happened to be short. But Block or Chanos didn’t force those companies to fail.”
The person went on to say that he had just turned $4000 to $40000. My response:
“I think that’s great! But also keep in mind, if you made that money on GME or one of the other short squeezes, the very thing you’re hating on (shorts) is the reason you made that money. You can’t have short squeezes without shorts.”
The funny thing is, in my own anecdotal observation, I’ve found shorts to be much more knowledgeable about the companies they investigate than longs. It takes a lot of due diligence to dig up the dirt that people like Carson Block do.
Of coure, nobody loves to shit on shorts more than billionaire-now-turned-man-of-the-people Elon Musk. Musk, despite being a smart guy, also has a huge amount of Dunning-Kruger in him (his pontifications on COVID were one example) and says some really stupid things…like this comment on shorts.
Never mind the fact that people buy houses and cars (including Teslas) with money they don’t own (they borrow it from the bank). Also never mind the fact that most people buy Tesla’s stock with money they don’t own, since they’re using margin accounts.
The irony of this tweet is that Elon wouldn’t be nearly as rich as he is without shorts. @team3dstocks on Twitter explains this very nicely:
With the Fed and its constant QE and printing money, low interest rates, and massive influx of retail into the markets, you have an environment where every dip will get bought and the markets will just continue to climb. You will have constant speculation and ignorance of risk. The quality of the companies are completely irrelevant. For example, the evidence is absolutely overwhelming that GSX Techedu is a complete fraud. But that hasn’t stopped the markets from bidding it up to $150/share, and wiping out shorts in the process.
In fact, I usually never do long-term shorts for the above reasons. My one attempt at a long-term short was on GSX back in June of 2020. I got killed on it, and it was mainly responsible for the drawdown you see in my trading accounts in late summer of 2020.
The other problem with long-term shorts is they can get crowded on the short side. Funds take long-term short positions when a company is in bad shape. It’s the reason why short interest on GME was so high. It becomes pretty obvious to many that the company is in bad shape, so you can end up with a lot of shorts on the trade. Adding fuel to the fire is when well-known short-biased entities like Citron (Andrew Left) or Muddy Waters (Carson Block) publicize their short positions and their evidence against the companies they’re short. This invites a lot more shorts (including retail shorts) to join the trade. This can make the short side VERY crowded.
And here’s the additional problem. When you advertise your short position, you’re inviting people to trade against you. This includes other big funds. And with the various factors I mentioned earlier that favor stocks going up, and a highly crowded short, you’ve now got the ripe conditions for a major short squeeze.
This is what happened to GSX Techedu last year. Many short-selling firms published their criticisms of the company when it was trading in the 30’s and 40’s. It proceeded to then more than triple in price in a matter of weeks, hitting $150/share, and blowing out the positions of some of those firms in the process. And what happened to GME this past week is what happened to GSX Techedu, except it was like GSX on steroids given that the short interest was much higher, you had the WSB army and way more retail piling in, and you had the options gamma squeeze on top of it.
After all this happened, I predicted that you’d see short-selling firms to no longer advertise their short positions, as to not crowd their own trades. In fact, I texted my friend and business partner Chad Landers on January 27th and said this:
I called it, because Andrew Left announced on Friday that he will no longer be publishing short reports.
The market has a way of closing the gap. When someone finds an inefficiency in the market to be exploited, the market eventually adjusts. It’s why most public trading strategies stop working. When everyone starts following a strategy, the trades get crowded and they no longer work because everyone’s trying to buy and sell at the same time. The same is going to be true with the WSB army. The strategy of finding heavily shorted distressed companies and inducing a squeeze won’t work for very long. Funds will stop taking long-term short positions, or adjust the way they do their short positions. Well-known short-sellers will stop advertising their short positions. Big funds will find ways to take the other side of the WSB strategy and shut it down.
It’s the reason why I’ll never tell people my exact strategies, how I choose entries and exits, etc. I don’t want to crowd my own trades and ruin my edge. Sure, I’ll teach people the concepts my trades are based around, but I’ll never give the specifics. It’s why you want to be wary of any trading service that teaches you an exact strategy. If the strategy works so well, why are they giving it away and potentially ruining its edge? The best trading education sites give you concepts, and you need to develop your own specifics from those concepts. @shortdapos on Twitter also recently talked about this:
It’s also the reason why I won’t manage or trade other people’s money. It would crowd my own trades. Plus, becoming a fund manager puts me under a different set of regulations and required licensure.
THE MARKET IS RIGGED … AGAINST SHORT SELLERS
All of the people bitching about how the market is supposedly rigged by short sellers (despite the evidence showing the opposite as I pointed out earlier) don’t realize how difficult short selling is and how the rules and market structure strongly favor the long side. I already mentioned the various factors that work against long-term shorts earlier.
There’s even more factors working against both long-term and short shorts.
For example, when you’re short, you have to pay short interest on your position. This short interest can be very high…sometimes 100% or more annually of your position size, making long-term shorts unprofitable.
Some stocks (like many of the ones I trade) are hard-to-borrow. That means you need special brokers like Cobra Trading, Vision Financial, or Centerpoint Securities to be able to locate shares. You also pay a per-share fee to locate these shares. Sometimes the fee can be substantial. For example, to short GME, I paid $1.73 per share just to locate shares (my commissions, by comparison, are only 0.005 per share). You also have to locate these shares ahead of time to reserve them. So if you pay for them and don’t use them, you don’t get that money back. It also adds to your loss if you happen to get stopped out on a trade. Some brokers, like Centerpoint or Tradezero, charge you extra to hold the short overnight…as much as 5 times your original borrow cost. So if I had shorted GME at Tradezero, I would’ve paid $8.60 per share just to hold the short overnight.
Borrows are first-come, first-serve (some brokers like Interactive Brokers don’t even let you reserve ahead of time…you just try to short and either the borrows are there or they aren’t, and they’re usually gone by the time you want them). It’s why I have to wake up at 4 AM each day to do locates. I’m on the west coast, and I’m competing with traders on the east coast for borrows who are up at 6-7 AM. Now, the fees and early wake time are worth it to me…I make way more money than what I pay in the fees (GME dropped over $200 per share from my $350 short entry, so the $1.73 per share borrow fee was no big deal).
On top of all this there’s the uptick rule. If a stock falls by 10% or more during the trading day, the uptick rule comes into effect. This means you can’t short the stock by simply hitting the bid. You can only short on the ask (i.e., you have to put in your order at the ask or higher, and wait for the price to come to you to fill your short). So you can have a stock that skyrockets 300% within days, and drops a mere 10%, and the uptick rule goes into effect, which is pretty ridiculous.
The bottom line is that shorts are an imaginary bogeyman…
…and the hatred for hedge funds taking short positions, and for shorts in general, is ridiculous.
Scapegoating a single supposed villain (hedge funds taking short positions in this case) has a powerful emotional impact on people. It’s why it’s so easy for people to believe Gary Taubes when he points to carbs as the cause of obesity. Unfortunately, in both cases, the fingers are pointing at things that aren’t even villains. This leads to unfortunate outcomes. In the nutrition world, it leads to unsustainable dietary practices and an irrational fear of carbohydrates. In the finance world, it leads to people making threats to the children of fund managers.
The fingers are pointing at things that aren’t even villains
That’s not the say there aren’t some bad apples in the hedge fund industry. There are. For example, Rajat Gupta was a hedge fund manager who was sentenced to prison for fraud and insider trading. That’s also not to say that there aren’t games that go in the markets, particularly on the day trading side. High-frequency trading algorithms, order spoofing, and other games are ever present. These games don’t matter as much if you have longer time horizons, though. And, ironically, all the WSBers and retail traders who piled in trying to “bring down the suits” helped the suits who like to play these games.
Really, there was so much irony and contradictions in this situation it’s both amusing but also sad when you consider the consequences of it.
If these big baddie hedge funds are so good at manipulating the market, why is it that they’ve mostly underperformed the market in recent years? If they could manipulate the market so easy, they’d be dramatically overperforming it.
You also have to consider that there are hundreds of hedge funds, all competing with each other. They’re all trying to beat the market and attract more investors. It’s not like they’re all conspiring with each other. It’s pretty tough to manipulate the market when you have hundreds of other funds competing against you.
However, you certainly can manipulate the market when you’ve got a message board filled with millions of retail traders who will chase anything that moves.
MARKET MANIPULATION … BY WSB, NOT THE SHORTIES
It’s ironic that all the people decrying “manipulation” are in fact engaging in manipulation. As I wrote recently in this FB post, GME and AMC are giant message board pump and dumps. I’ve seen many of these in my years of trading, but this one is just on a much more massive scale. It’s just a game of musical chairs, but at some point the music stops, and retail is always the one left without a chair to sit in (the retail that decided not to take profits). And people on WSB forums were encouraging people not to sell/take profits (“Hold the Line!”), which was just asking them to become bagholders. The only little guys who didn’t get screwed on this were the ones who decided to take profits while they still had them.
The fact is that the demand generated for GME was completely artificial. Yes, WSB/retail might have lit the fire that caused the short squeeze, but the squeeze is done now. But everyone kept trying to keep the demand going by constantly telling everyone to “hold the line” or buy more. The difference with this pump and dump and others is that it’s just out in the open. But it’s a pump and dump, nonetheless.
As I wrote in that FB post, trading is all about supply/demand imbalances. GME skyrocketed because WSB decided to artificially create demand/pump a highly shorted stock, which then created further demand through forcing long-term shorts to cover and also generate a gamma squeeze through the options. This is what happens when one side of the trade is crowded. In this case, the short side was crowded (a huge % of the float was short GME), and demand then drastically outweighed supply.
However, what happens when the long side of the trade becomes crowded? Eventually, demand starts to dry up. As the price goes higher, you’ll get less and less people willing to buy, and the early shorts are already gone so there’s no covering shorts to fuel the price higher. Now the trade is crowded on the long side, which is then a recipe for a massive panic sell. You don’t want to be on the wrong side of a crowded trade. For the same reason you don’t want to be short like everyone else (Citron learned this the hard way), you don’t want to be long like everyone else.
Trading is a zero sum game. For someone to win, someone else will lose.
Trading is a zero sum game. For someone to win, someone else will lose. And you only win if you take your profits. Retail kept crowding the long-side of the trade, and they got the opposite of the short squeeze and ended up holding the bag.
AND THE WINNER IS…
One major false aspect of this entire narrative is that somehow the little guy finally stuck it to the big guy. But as Jamie Powell writes, high-frequency trading firms, market makers, investment banks, and yes, hedge funds, are reaping big profits right now. Here’s an excerpt:
And as @pitdesi tweeted, Silver Lake was at risk of losing most of the $600 million in debt they put into GameStop in 2018. So WSB actually helped the suits by helping them to get out with a $113 million profit.
So, the suits won…and they won big. And they won big because of all the little guys piling into the market and chasing trash. And, as usual, the little guys were left holding the bag.
All these “little guys” think they’ve won because a few funds with big short positions blew up. They don’t realize way more big boys have won than lost on this. And all these WSBers urging everyone to “hold the line” just caused everyone to become bagholders.
Do you really think your little 1 share buy orders would be enough to overcome the big boys, even if there are a lot of you?
One of the guys at Gravity Analytica showed a snapshot of the time-and-sales for GME on Monday 2/1. Lots of tiny buys, followed by a huge sell, overwhelming all of the tiny buys.
The people with the bigger pockets were just selling into all of you buying into misleading WSB information on GME.
The bottom line is this…WSB pumped a stock hard, sucked in a lot of retail and Wall Street benefited big from the stock pump.
The bottom line is this…WSB pumped a stock hard, sucked in a lot of retail and Wall Street benefited big from the stock pump.
IT’S NOT ME (THE MARKET)…IT’S YOU
Quit claiming the market is rigged against you. It’s not. It’s just that most retail traders have terrible habits that make it seem like the market is rigged against them.
If the market is rigged against the little guy, how is it that I’m able to show the trading performance that I do? Here’s my returns on my day and swing trading accounts since January 2019.
How can I, an exercise/nutrition scientist who took on day trading as a hobby (which I’ve now turned into a profession), do this if the market is supposedly rigged against me? I’m just a little guy. I’m not some big baddie hedge fund.
My friend and business partner Chad Landers is more of a buy-and-hold long-term investor. He’s been out-performing the bull market for the past 10 years, averaging around 26% per year. How can he, a personal trainer with his own gym, do this if the market is supposedly rigged against him?
You want to know why we’re able to do these things?
It’s because we don’t behave like the typical retail trader or investor.
You want to know why I do most of my trading in the small cap market?
It’s because the small cap market is dominated by retail traders, and retail traders have really bad habits. My trading strategies are built around taking advantage of those bad habits. And because retail traders have had the same bad habits since the dawn of online trading (and will continue to do so…GME/AMC are the poster children for these bad habits), it allows me to consistently make money in a variety of market conditions. Sure, there’s some limits to my scalability of my returns with the small cap market, but I don’t care. I still haven’t come close to those limits yet.
Retail traders have really bad habits…GMC/AMC are the poster children for these bad habits
Retail traders LOVE to chase trash, no matter how high. They will chase stocks that are up 1000% within days with no thought of the risk they’re taking. They get major FOMO and want to get in because everyone else is. They think the move is just going to keep going higher and higher. Judging by my FB feed, there were a lot of retail newbie traders buying GME in the 300’s, despite it having already run 1500% in a matter of a few weeks. These people were just asking to become bag holders.
That’s not to say that GME couldn’t have gone higher from the 300’s-400’s. However, the probability of it going higher was rapidly vanishing.
That’s another problem that retail traders have. They don’t think in terms of probabilities. They only think in terms of the reward and not the risk. They have poor assessments of risk-reward setups. The downside risk of GME was EXTREMELY high. Retail kept buying GME in the 300’s thinking “gamma squeeze!”, despite the fact that the squeeze was over. They were late to the party.
Retail also often show a poor understanding of market information. For example, they justified buying in the 300’s, exclaiming “there’s still 150% of the float that’s short!!!!” But they failed to realize that public reports of short interest like you find on Yahoo are only updated a few times per month. As Gravity Analytica pointed out:
Retail traders often don’t take profits when they have them. This is evident by all the WSBers wanting to “hold the line” despite some probably being up nicely on their positions. They treated their trade like a long-term investment, watching their unrealized profits whither away as they became bagholders. Peter Robbins recently described what’s most likely going to happen here.
Retail traders get emotionally tied to their trades or investments. This clouds judgement. The response by so many retailers to the warnings we gave about GME or AMC was predictable. They claimed we were just short and trying to bash the stock to bring it down. They ignored all the warning signs because they were emotionally caught up in the “we’re going to bring down the suits” war, which was a completely false narrative to begin with.
I made this mistake with my GSX trade last year. I got emotionally tied to the short position (“Its a fraud!!! You hear me? FRAAAUUUUUUDDDDDD!!!!”), and so I kept trying re-short it as it went higher, despite it not being a part of my usual strategies. I eventually and wisely gave up on it. It’s another reason why I won’t do long-term shorts…it’s too easy to get emotionally tied to the trade.
The funny thing about the responses I or other experienced traders would get regarding GME is that any trade I do take on GME is just another trade to me. I’m not emotionally tied to my trades and their outcomes. 60% of my trades are winners and 40% are losers, and I generally don’t hold my trades longer than a day or two. Whether I win or lose on any GME trade I would take, I don’t care. It’s just one among many trades that I’ll take. I make money over the long run because I win more often than I lose, and the size of those winners exceeds the size of the losers. I’m thinking like the casino, not the gambler. If you want to make money trading the markets, you have to learn to think like the blackjack dealer at the casino. The dealer doesn’t win every hand, but statistically over time, the casino wins more often than it loses, and takes the money away from the gamblers. The retail traders are the gamblers in this scenario. They’ll win some, but over time they’re the bagholders because they’re acting like gamblers and not the casino.
They’ll win some, but over time they’re the bagholders because they’re acting like gamblers and not the casino
Now, I’m not saying I’m a total robot. I still feel emotions when I trade, and they’ve occasionally impacted by trading judgement. But I’m much closer to trading like a robot than when I first started out, and I trade much better because of it. You want to stop giving money to the big guy? Then you need to stop trading like other retail traders who trade on emotion.
When retail traders lose, they’ll blame the supposedly rigged market on their losses. Barstool’s Dave Portnoy said he lost $700K on GME and AMC, and then proceeded to blame Robin Hood’s CEO Vlad Tenev for his losses. My response:
Look, I get it. When you first start trading and you’re struggling, it can be tempting to want to blame anything else other than yourself. When I first started, I would often blame the pattern day trader rule on my lack of success. I constantly felt like my hands were tied by it. I bitched about the rule and even sent letters to the SEC and FINRA. Why should these big organizations restrict my trading! It wasn’t fair! The market was rigged against me!
But all the bitching and moaning about it wasn’t going to change anything. The rule has now been in place for 20 years. It’s not going anywhere. So you have to find a way to work around it. What I did was open accounts with three different brokers. That way, I got at least 9 day trades per week rather than 3.
The PDT is now a distant memory for me since my account sizes are well beyond it. I still think it’s a bullshit rule, but it doesn’t matter what I think. You’ve got to work with the environment you’ve been given. You can bitch and moan about hedge funds or shorts or whatever supposed market evil is out there, but those aren’t the reasons why you’re not making money in the markets. You’re not making money in the markets because of YOU.
You can bitch and moan about hedge funds or shorts or whatever supposed market evil is out there, but those aren’t the reasons why you’re not making money in the markets. You aren’t making money in the markets because of YOU
Retail often jump into trades with no plan and no exit strategy. I’ve gotten messages from people asking me what they should do with their GME or AMC positions. My question to them is, “Did you have an exit strategy before you entered the trade?” Hope is not an exit strategy.
Hope is not an exit strategy
THE HARDEST EASIEST WAY TO MAKE MONEY
Another reason retail traders usually lose because they’re trying to get rich quick. They think trading will be easy money. Here’s a text exchange between Chad Landers and I:
Nothing oozes this “easy money” mentality more than this TikTok Investor dude:
Or this couple:
Of course, these people will be in for rude awakenings if they haven’t already. Trading is the hardest easiest way to make money. The only easy part is pressing the buttons. The hard part is actually making money over time. And when you tell people that it’s really hard, they don’t want to hear it.
Another reason the retail traders lose to the suits over time is because they chase whatever happens to be the hot trend, and usually by the time a lot of them get in, it’s too late. I was seeing a bunch of people of people on my FB feed talking about how they were buying some GME shares and how they want to screw the suits. Keep in mind most of the people in my FB feed aren’t traders but rather fitness professionals. Nate Michaud of InvestorsUnderground mentioned that close family members of his were forming scary opinions regarding GME. The wild conspiracy theories that WSB was promoting and that people were starting to believe were getting out of hand.
The WSB crowd has gotten completely detached from reality.
I got a PM from someone claiming GME is going to $1,000. The delusion is strong.
These are huge red flags. Usually when everyone and his grandma are getting in on the action, and you’ve got a cult-like mentality surrounding a stock and people becoming detached from reality, it’s a sign that the party is coming to an end, if not having ended already. This happened with Bitcoin back in late 2017/early 2018. I remember my FB feed being loaded with fitness professionals talking about bitcoin…FITNESS PROFESSIONALS. Everyone and his dog now were in it (maybe that’s why we now have dogcoin, err, I mean dogecoin?), people had formed cult-like beliefs surrounding Bitcoin, the trade had become super-crowded, and it had a spectacular crash during that time.
The same thing happened with the housing market in 2007-2008. Everyone and her mom were getting into buying houses, flipping houses, taking out mortgages, etc. This is dramatized in the movie “The Big Short” in the scene where Michael Burry (played by Christian Slater) meets a stripper who has taken out mortgages on 5 houses and a condo. We can check out a chart of the Case-Shiller home price index to see what happened next.
You can see the chart going parabolic before it crashes down, exactly like the Bitcoin chart. FOMO is a big factor behind these parabolic charts. People hear about other people making money on something, and they want a piece of the action too. They don’t want to miss out, so they jump in, risk be damned. And when enough people with FOMO have piled in, well, it’s fairly predictable what eventually happens. And this is exactly what happened with GME.
WHAT GOES UP MUST COME DOWN
In fact, parabolic charts are a great warning sign of impending crashes, because such parabolic moves are unsustainable. As Nate Michaud of InvestorsUnderground writes, gravity eventually has to take over. Because it always does. It’s just basic supply/demand dynamics…something the retail crowd didn’t consider with GME or the other recent high flyers.
The parabolic move in GME is nothing new to the stock market. So many people are new to the markets right now that they think this is somehow unique. It’s not. These parabolic FOMO-driven short squeeze moves are common, especially in the small cap world. They’ve happened before many times, and the end result has always been the same. Here’s a sample:
Volkswagen had a famous massive short squeeze in 2008.
I could give dozens and dozens and dozens of more charts like this. They all end the same. Now, while the housing market and bitcoin did eventually recover after a number of YEARS, that’s the exception and not the rule. The vast majority of the time these parabolic stocks never recover back to their original high flying prices. Why? Because the demand was never real to begin with. Once the early shorts are squeezed out, there’s nothing to keep the party going. So if you bought GME in the 300’s and you’re holding because “you only lose if you sell”, well, good luck with that. “You only lose if you sell” is a bagholder mentality.
These parabolic moves aren’t anything new to we experienced traders. The only thing surprising to us is the number of parabolic moves that have been happening in recent weeks. I wrote a FB post about this recently, where I had posted 10 parabolic runners that had all gone just within a week…and that’s just a sample! Under normal market conditions, you might get a few parabolic runners per month. This is suggesting that it’s an all-out stock mania-frenzy out there right now, which is why we experienced traders have been warning people to be careful as we know how all of these end up turning out.
Of course, the extreme number of recent parabolic moves, while rare, isn’t completely unprecedented. The massive influx of retail traders into the market, with numerous stocks making parabolic moves, happened one other time before…in 1999. Here’s SentimentTrader’s tweet about of the cover of the October 11th, 1999 issue of Forbes magazine:
So, yeah, people are partying like it’s 1999.
But we experienced traders know how 1999 ended.
And this is another thing that retail does and why most end up being bagholders in the long run. They don’t even look at a chart of what they’re buying. They don’t ask the important question, “Is this sustainable? What happens if demand dries up?” Demand for a stock is not infinite. If you’re buying into these parabolic runners (like GME), you’re just playing a game of musical chairs. And the music will stop at some point. It’s a FIFO game of who can sell to the greater fool.
It’s a FIFO game of who can sell to the greater fool.
The fact is that many retail traders/investors have NO IDEA what they’re buying. In trading we have a phrase “know what you own.” Many people really don’t know what they own. They don’t read SEC filings, they aren’t familiar with a company’s financials, they don’t know how dilution works, etc. This isn’t only evident from GME…it’s been evident for all of the parabolic runners I showed you earlier. GNUS is a perfect example. All the experienced traders knew that GNUS was a big-time diluter and there would be a ton of warrant-holders exercising and cashing in on their warrants since the stock was up so much. This would have the effect of diluting the current stock owners and decreasing the stock price (since the supply was dramatically going up….remember it’s all about supply/demand). But the GNUS “true-believers” didn’t listen…they had bought in the 3’s, 4’s, and all the way to the 10’s and kept thinking it would come back when it collapsed. They got sucked up into the story like many retail traders do. They began to invest in the trash rather than trading it. They didn’t listen to the more experienced traders. The same thing happened with GME and AMC.
Which brings me to one of my lessons…
LISTEN TO THE EXPERIENCED TRADERS!
We know way more than you do. We’ve been at this game for a long time. Stop assuming every experienced trader that gives you a warning about a stock is just trying to “bash” it. We were telling you to take your profits on GME if you had them. We were also warning people about buying it when it was up in the 300’s. Yet you just kept yelling “DIAMOND HANDS” and trying to get everyone to hold.
I’m amazed at the amount of hate that Nate Michaud of InvestorsUnderground gets when he posts warnings about stocks. The fact is that he turns out to be right most of the time. He’s an expert at trading, and people should listen to experts more. It reminds me of all the countries (like the U.S.) that didn’t listen to the experts when it came to COVID. The countries that didn’t listen are the countries that have fared the worst.
By continuing to tell everyone to “hold the line” and also keep buying GME to “screw the suits”, WSB and others just crowded the long side of the trade. The fact is that the big short funds were already out. The people pushing the “us vs. them” narrative only created a situation for a massive panic sell and a lot of bagholders. Nate Michaud of InvestorsUnderground put it perfectly here:
The fact is, this entire “hold the line” thing had the exact opposite effect of what was intended.
Stop pretending like you did something noble … you sucked other retail into your game of musical chairs
So, if you encouraged other people to “hold the line”, stop pretending like you did something noble because you’re didn’t. You just sucked other retail into your game of musical chairs and increased the number of retail bagholders. There’s nothing noble about telling people to have “diamond hands” when a huge chunk of those people are probably college students who can’t afford to be buying stock in the first place.
My question for the people who were buying GME and/or AMC:
WHAT WERE YOU THINKING?
If you were up big on GMC or AMC and your profits are now gone, why the hell didn’t you take the profits when they were there?
If you bought GME and AMC near their peaks and now you’ve got big losses, why the hell were you chasing a stock that was up 1500% within a few days based on ARTIFICIALLY-PRODUCED demand?
Why were you buying AMC in the 17’s and higher when the big boys were exiting at 16?
Rule of thumb: don’t be buyin’ when the big boys are sellin’.
Don’t be buyin’ when the big boys are sellin’
And all of you that were betting on a further gamma squeeze…you failed to consider the after effects of it.
While all of you inexperienced traders were buying GME in the 300’s because you bought into the storyline, I, the experienced trader, was selling (I shorted at 350). I was also posting warnings, but again I got the usual response. Someone PMed me based on my posted warnings and said “We have you running scared.” That was a headscratcher to me because I wasn’t scared at all. GME was just another trade to me. I didn’t care about the story. All I cared about was the odds. And I knew the odds were strongly in my favor based my past experience. And I had risk management in place if the trade wasn’t going to work out (something retail traders often don’t have…proper risk management).
The fact is that people got greedy. People usually accuse Wall Street of greed, but this is a classic case of greed by the average Joe. And when everyone is being greedy, that’s when you should be fearful.
RETAIL TRADERS … ONLY HUMAN
Now, I’m not saying that retail traders are “dumb.” I hate the term “dumb money.” Even experienced traders can make poor trading decisions (Citron and Melvin Capital’s shorts obviously weren’t good decisions on a risk/reward basis). Every experienced trader has been a bagholder at some point in his or her career.
It’s just that retail traders are subject to human nature. Experienced successful traders have learned over time to overcome their human nature. Retail traders aren’t dumb…they’re just inexperienced.
TODAY’S LESSON, KIDS
Basically we have a massive pump and dump where retail pumped stock on other retail, Wall Street won big, most retail lost, and retail is celebrating.
You want to stop giving money to the big guy?
Then stop helping him out.
Stop doing the little guy stuff that the big guy takes advantage of.
Stop chasing trash stocks that have run parabolic.
Stop letting FOMO influence your trading or investment decisions.
Stop making trading or investment decisions based on what everyone else is doing.
Stop chasing the latest hot trend in the markets.
Stop thinking just about your potential rewards and start thinking about your risk as well. Start practicing proper risk management.
Stop gambling. Try to learn to become more like the casino rather than its patrons.
Stop thinking you’re going to get rich quick.
Stop blaming a rigged market or outside forces on your losses.
Stop buying into false narratives surrounding certain stocks. Dig deeper. And don’t just look for what you want to hear.
Stop looking for evidence that just confirms your biases. Know what you own.
Stop buying into conspiracy theories surrounding stocks. Make sure your trade ideas are grounded in reality.
Stop getting your information from message boards like WSB, where misinformation runs rampant (no, there’s no such thing as ladder attacks).
Stop treating short-term trades like long-term investments.
Stop using “free-commission” brokers that sell your order flow to the big guy.
Stop “holding the line” if you’re sitting on nice profits. Stop being greedy.
Stop entering trades without an exit strategy. Hope isn’t an exit strategy.
Stop being the greater fool.
Disclosure: I am a full-time day trader who makes trades mostly from the short side. While I did have short positions in GME and AMC during the process of writing this, I no longer held positions at the time of publication. I’ve been a member of InvestorsUnderground since its inception, and I receive an affiliate commission if people sign up with their services through affiliate links on my site. I am a member of Gravity Analytica, but have no affiliate relationship with them.
Too many people treat trades as investments.
They’ll buy some trash stock with momentum and on hype, not knowing what they own.
They might have some quick short term profits, but they ignore the warning signs and keep holding.
Eventually their unrealized gains disappear, yet they still bag hold believing it will “come back.”
The serial diluter $GNUS was a perfect example of this last year. It rocketed from $1 to $10 on cartoon network hype.
People bought at 3, 4, 5, 6+ believing the hype. They held, not knowing what they owned and not taking profits.
It’s now back close to 1.
Trade the trash…don’t invest in it.
I’ve now hit over 6000% return on my capital since I started tracking it in January of 2019.
Are you letting winners run? A common mistake traders make is holding losers too long and not letting winners run.
Here’s stats from my trades since early October. My holding time for winners is approximately 3 times as long as for my losers, as it should be. Stats via Edgewonk.
Today I officially hit a 1000% cumulative return on my trading capital for 2020.
I’m also closing in on a 4000% cumulative return on my capital since January of 2019.
I did this while generally risking only 2% of my capital per trade.
Check out the newest article on this site: Fibonacci versus Krieger-acci
Check out the newest article on this site: Experience Matters In This Game.
“The market can stay irrational longer than you can stay solvent.”John Maynard Keynes
Here’s a couple examples. Hertz Global declared bankruptcy on May 26th. causing the stock to plunge to 40 cents.
Bankruptcy usually means that common shareholders get nothing. The stock becomes worthless and is eventually delisted.
Yet today Hertz has rocketed to over $3 …. above where it was before it declared bankruptcy.
Part of this is likely a “Robin Hood” effect. There’s been record numbers of account openings among many brokers including Robin Hood, and people have been piling into any stock that moves. Robin Hooders indiscriminately buy anything that looks cheap or is moving. I don’t use Robin Hood, but I’ve heard that when you log on it will show you the most popular stocks…which likely just leads to people piling into them without understanding what they’re buying.
Second example. GSX has been accused of massive fraud by multiple reputable firms, with very good evidence. Evidence continues to be uncovered. Yet the stock has climbed from around $30 (around when the fraud was exposed publicly) to over $40. It is likely that there is an SEC investigation going on (SEC doesn’t announce that it is doing investigations) and there’s a high probability that the stock will be halted and collapse just like the recent fraud exposure of Luckin Coffee (LK). But people just keep buying it.
These conditions create great shorting opportunities as these moves aren’t sustainable and eventually collapse. However, you need to pick your spots carefully and make sure you’ve got good risk management and appropriate position sizing. Otherwise you’ll find yourself run over by the herd.