Reporting season review

Previous problem patterns. Implementing solutions

"ask yourself at every moment, 'is that necessary?'"

Marcus Aurelius

If you do the same thing over and over, expect to get the same results.

As a trader, reporting season always seemed to be that one big opportunity to be capitalized upon. Catalysts aplenty, big intraday moves, and huge volatility. What's not to love? However, as each year went by, the reality for me was very different. Outsized losses, overtrading, missed opportunities, and ultimately burnout were the results. I would feel totally jaded come the end of the month. It was the same pattern repeatedly with little to show for my "hard work".

If I could summarise the major problems, they were:

• Overtrading and being involved in too many names

• Biases leading to poor discipline and missed stops

• Feeling overwhelmed resulting in shallow work and poor planning

• No quantified strategy but instead trading discretionary patterns on untested assumptions

• Big gaps creating less edge and more slippage

• Repeated losses on the short side

• Missing moves generating frustration and chasing

Can you relate to this? Despite perception, I too have experienced my share of irritation, hardships, and beats. If you believe trading comes naturally to me, then please think again. Here are my war wounds laid bare during previous earnings seasons:

Feb 22:

August 22:

The last event was harrowing. Something had to change if I was going to benefit from earnings season going forth. I had to review my trading until I knew the source of my underperformance.

The answer I kept coming back to was to FILTER. Reduce inputs. Simplify. Know what to ignore and what not to do. Explore my weaknesses. This became the first and most important job.

What is the big problem you are facing?

As I touched upon in my last post "the mental game", trading accentuates our psychological shortcomings and emotional makeup. This is particularly the case during Reporting season with so much volatility and big intraday moves testing our resolve. The only way to deal with these situations is to fully confront and understand the real problem you are facing. I was forced to do this seeing my real results. They slapped me in the face. I knew I could make money outside of these months BUT something would just fall apart during this time. It is not comfortable going over these losses but to be successful you have to acknowledge one's mistakes.  Learn from each moment. It is these negative outcomes that propel you forward.

I don't know your problem patterns but I am almost certain there will be some overlap with my major shortcomings cited above. As Dan Koe says, problems are the limits on your mind. Once you fully recognize them, you need an actionable way to overcome them. Problem-> reflection -> feedback with data -> solution -> implement.

This is why I encourage writing so much. Journaling in whatever form is a way to ask these tough questions. Where am I standing in my own way? What are the small steps I need to take to move forward towards the big thing?

Given my past earnings experiences, I spent time analysing mistakes, data and then building new playbooks. I shared a plan on Twitter which summarised these key points:

• Volatility doesn't equal opportunity: define playbooks with a clear edge instead of chasing stocks that are moving on untested assumptions. Does the market truly care about your 5-minute range breakout pattern?

• Identify the early themes: the market may reward one sector; it may punish misses or it may look through. Use the information from the early patterns to set the tone.

• Buy strong stocks: I want to follow re-raters with higher EPS revisions. I want to short de-raters with EPS downgrades. These are time-tested principles. Only a few choice names appear and they get blessed.

• Doing less is doing more: maximize one or two really good trades with size and execution instead of trying to be across multiple names. When it is busy, be conscious of this rule. Check in. Write. Accept I will miss things and that's ok.

• Preparation: the quality of results will reflect the level of preparation. Use tools to filter. Automate. Don't let anything disrupt planning and focus.

• Be ruthless with stops as price action is the truth: there is no time for an FA bias with the size of flows being put to work. Cut. One fk up can undo it all.

How astute! No, it was just a build-up of all my experiences to date. It took time in the making. I still made mistakes but finally, I was able to better execute. I tried to fully implement and focus on this plan throughout February.

Implementing solutions:

What follows are my observations from the month and how I went about implementing said solutions. What did I learn and what did I do well?

The reality is this current market is strong and conditions have improved. Global indices trading at all-time highs will do that. This was a very different backdrop from the previous two years. My job as a discretionary trader is to pick up on these nuances. Taking a decent loss shorting BPT early in the month was one of the best things that could have happened to me. It was the key intel I needed to be careful shorting Day 1. From here on in, I saw strength AND follow-through in subsequent retail stocks on reporting day. There were no new disasters and the market rewarded them. This was the guidance I needed to go with. We saw the same ideas play out in Tech names. Once the tone was set, I used this strength to my advantage by increasing subsequent exposure. I felt more comfortable increasing the number of my positions and getting a bit bigger. My strategies were working, there were EPS revisions higher, so I doubled down. It is all about understanding what the market IS doing. This backdrop will be a key filter for me going forth. Use the tells.

Knowing my weaknesses, the most important mantra became doing less and doing it better. I slowed down. I wrote every day pre-open and at 11 am to cue the habit of self-reflection. I focused on the best playbooks for me. I used algorithms to manage existing positions so that I could better execute and focus on the new intraday opportunity. I also used automation for those slippery stocks so I didn't have to go in for the fight. This was extremely helpful in increasing my bandwidth to focus on the most meaningful. I fully encourage exploring all these tools to professionalise your trading and to decrease stress.

Despite my negative read on BPT and the early bearish Broker reports, the stock staged a huge rally from the early gap down. This reinforced the principle: price action is the truth. There is a myriad of reasons as to "why" a stock can move. Pre-positioning and flows mean stocks can go up despite bad news (SEK) and stocks can down despite good news (BXB). These are all out of my control. My job is to move the P/L curve from bottom left to top right. As such, I tried to cut ruthlessly if playing early. More importantly, once price action became clear in certain stocks, this was all I needed that the market had voted. I was happier to join these established moves later rather than earlier. In fact, I almost completely avoided trading early on Day 1 with so much price discovery going on. This is where I was losing money in the past. Sure there are going to be moments like WTC where they gap and trend beautifully. I just accept this now. The more common pattern is one of gap and range e.g. AGL, BLD, CGF, TWE etc.

Trading gaps is hard. The nature of reporting season means the market is more informed as there is more time to digest the news and there are more eyes. This is a competitive landscape. The bigger the gap, the less edge I have on the long side. I want to make my life easy.  Joining or fading these moves needs high-level scalping skills. This does not align with my true strengths. Furthermore, my business model is built around trying to capture bigger trends. Scalping around for quick moves is the antithesis of this. The patterns of IEL, SEK and AD8 for the first hour are all testament to how messy it can become. This leads to frustration. Ultimately, you have to ask yourself where you have an edge.

Given my desire to move away from the early battles, I focused on my best-defined playbooks. These have been backtested with clear rules. It took time and help from smarter men than me. I am not a quantitative trader but having this data is imperative to make better decisions. In particular, one of the most important variables to consider is exit management. I greatly improved here and executed my new rule over and over again. Sure there were a few bad beats but these were all offset and more so by the larger sample size.  In this way, I was trying to focus on the process versus the outcome. Defined rules are the true solution to overtrading. Several strategies contributed whether it was “Breaking news”, 2nd day plays, or momentum. I got lucky in one instance that I was sitting in my seat at just the right time but I believe you can create luck through hard work and persistence. In sum, I moved my exposure away from 100% concentration on Day 1 news to an area where it was less crowded. Shorts did work but they became a lot easier when the initial trap was over e.g. LLC, ASX, FBU and SEK on Day 2.

Feb 24:

Mistakes still lingering:

If you have learned anything from my writing by now, it is that one can never stop improving. You are never the finished article. Trading is a continuous performance feedback loop. The competitive edge actually comes from reflecting on the good AND the bad by putting in the work. I had my share of bad.

I am human and fallible. My mistakes are still there. These are the areas I just need to keep reducing.

1. Missed stops: my biggest losses all stemmed from having a bias on the news and not stopping when wrong. I did reduce this trade count to 4 but I still gave away > $15k in slippage. It is my stop because a break of it means in aggregate it will move against me. Thus it makes no sense to not cut everything. BPT was my blowout loss. Other hits included BXB on the long side and CBA on the short side. I was massively disadvantaged because my stop-loss automation was down for the entire month. The solution is simply to keep on the case with developers. Enter my stop via technology as an automatic process based on my max adverse risk for my playbook. Visualise the pattern I do not want to see in my pre-open work and accept the loss.

2. Overtrades: this is a hindsight tag but reflects where I am trading setups that are completely made up and non-playbook. The commonalities are fading against the initial gap of the news and not being planned. The solution is to implement a rule where I can only trade in the direction of the gap Day 1. Explore order functionality here. Furthermore, to stop impulsiveness where I have not planned, create a space between the trigger and action. I can only execute once I have filled out my grader or made a written down plan. This takes max 1 minute so plenty of time unless a true breaking news event.

Conclusions and improvements:

“So much of the distress we feel comes from reacting instinctually instead of acting with conscientious deliberation. So much of what we get wrong comes from the same place. We're reacting to shadows. We're taking as certainties impressions we have yet to test. We're not stopping to put on our glasses and really look.”

This is a great quote from Ryan Halliday that succinctly summarises the internal patterns that get triggered during the reporting season for the trader. Take stock of your problems and create clearly defined solutions. Outline what you have done well and what you can do better. There is opportunity out there but you just need to know where to find it for you.

The next stage in my review will be to test the liquidity profiles of my strategies to see if they can be scaled. I need to go over the data for my grading. Fixing my stop-loss software is a necessity. I have to further create further solutions for my Overtrading.

It never stops.

Thanks