The Feeling Of Underperformance And How To Deal With It
A reflection on a market moving event
In the aftermath, you always feel like you can do better.
Last week served up a major market-moving catalyst with the China stimulus package, and my initial emotion was to feel like I underperformed. I made money, but there was so much out there.
The natural thoughts that fill the mind:
I failed to grasp the magnitude of the event
I should have sized it bigger
I could have held a core
I didn’t maximise the trade
Perhaps you had similar feelings. Maybe this is what makes us “performers”, never settling and always wanting more from our execution.
However, how rational are these thoughts?
It was not so long ago that I was writing about doing it tough. I felt under enormous pressure. I cut back to basics. Fast forward to today, and now my brain is telling me I should have made more and captured this new leg higher in a multi-day hold!
To address these impulses, in this week’s newsletter, I focus on hindsight bias. I give a detailed trade review of this China stimulus trade from my perspective and the limits to my knowledge and skills.
To channel my inner Tay Tay:
I cry a lot but I am so productive…its an art
Be Rational
Hindsight bias is the tendency, after the fact, to see the outcome as having been inevitable.
Trading is a probabilistic game. You are going to win some, and you will lose a lot more. Yet almost all discretionary traders will outweigh the odds of a particular setup working after the result is known.
This is human nature.
The media headlines on Wednesday morning will read: “Australian resources SURGE on MAJOR China stimulus!!” The reality is Fortescue closed +1.75% on the day. This is hardly proof of a major rip-roaring Bullish event.
A more rational approach would be to ask the following questions:
Do I have a playbook or strategy for this trade?
If so, was I right in my assessment of the Expected Value1?
Did I execute?
These questions remove hindsight AND identify the areas that need to be worked on. Is your emotion based on your failure to execute rules within your identified system? Or are you just venting based on hindsight?
Focus on the process. Focus on what you can control.
Now let’s go deeper into this particular trade with the benefit of this background.
The Trade Opportunities
The week can be broadly broken down into a few main trades and ideas:
China monetary stimulus breaking news and trend trade 24/9/24.
Did this warrant an Overnight position trade?
China fiscal stimulus breaking news 26/9/24.
Did this warrant an Overnight position trade?
Saudi oil production breaking news 26/9/24.
Did this warrant an Overnight position trade?
Major takeaways:
I have no defined playbook to capture a higher timeframe multi-day move. This would be a Daily swing strategy, similar to the Nikkei bounce trade. This is a major area of improvement going forth.
The most powerful trades are at market extremes when the crowd is positioned one way.
Lower your risk to make more money. This means focusing on the backside of the move and going with the new trend change.
Trade 1: China Monetary Stimulus
Overview:
This trade is all about recognising the MARKET's reaction to a news event. After some initial digestion, China indices went from strength to strength in the afternoon session. This positive sentiment spilled over to the Australian Resources sector for a strong move into the close.
The market may have expected the news but it was treated as a de-risking event. Positioning in the resources sector is extremely bearish. This was the catalyst for players to move.
Trade name:
Breaking news and a trend trade into the close
Catalyst:
PBOC holds a special press briefing scheduled at 11 am AEST. This is to give regulators the chance to "shed light on their policy stance".
It was widely expected there would be a cut to the 7-day reverse repo rate and the reserve requirement ratio.
China announces a suite of monetary stimulus measures that include:
RRR cut of 50bps
20bps cut in 7-day reverse repo rates
Mentions RRR can be cut another 25-50bps by year-end
1yr MLF rate cut 30bps
Lower existing mortgage rate
China allows funds and brokers to tap PBOC funding to buy stocks (500B YUAN) and is considering setting up a stock stabilisation fund
Taken together, this seemed powerful and more than market expectations.
This comes on the back of the recent FED 50bps cut. Global central banks moving together in a first major act.
Variables:
Asian markets are the first players to be able to act.
Current sentiment is extremely bearish towards Chinese markets and Resources stocks. Names are trading at the low end of their Daily range
The reality is the initial market reaction was not extreme. There was a spike of +1.5% in the iron ore futures but this quickly faded. The China market was only up 1.5% early on. It took time for the market to vote and digest. By the 1.30 pm close of the first session, Chinese commodity markets and indices had recovered to close at intraday highs. It was the 3 pm resumption that saw the KEY confirmation. By this time, the China CSI 300 was up 4%
Expectations coming into the meeting:
Execution Options:
This trade really can be broken down into parts
Breaking news
Trend trade into the close once Asian indices started to rally in the afternoon session.
Overnight momentum hold
What did I do:
My first take was that the measures were expected by the market. I wanted to see a meaningful move higher in iron ore futures first before joining the trade. This meant I was happy to be late to an initial entry. We did see a spike of 2.5% out of the 11 am open so I bought FMG through 1790. The spike up through 1800 and subsequent turn lower was the first sign to take profits. This may have seemed scalpy BUT iron ore futures did not kick on as hoped. The whole complex began to fade right back to the open levels. This is NOT what you would expect at all if the news was truly meaningful. I had a small basket of stocks and cut them all. By 12.30 pm, iron ore futures had reset all gains.
However, by the 1.30 pm first close, iron ore futures recovered right back into the highs. Stocks were retesting their highs once more so I tried to re-buy on breakouts in FMG through 1800 BUT the seller continued to cap it.
By 3 pm, the China A50 futures were +4.5%. This was a strong sign that iron ore futures would resume strong which it did. They continued to trend into the close and I continued to lift FMG in my spots to no avail. Frustrating but this is all I can control.
Coming into the end of the day, BHP was +3% and RIO was +3.5%. Other names included MIN +6.5%, WHC +6%, and SFR +6%. The China property sector was +10%. This was all screaming strong across sectors and asset classes. This is the signal you want to see.
I now needed to decide on an Overnight position. This is a non-playbook but all these variables were lining up AND price action was confirming other than FMG. Unique situation and Australia is the first global resources market to act. This event needs TIME and PRICE to reverberate around the globe. Huge liquidity injection and the market is rallying.
I decided to put on a basket of stocks and hedge with index futures. I thought FMG was the choice candidate given it had lagged the sector with a clear intraday seller capping it. Other names I entered into my basket included MIN, PLS, and WHC given their Daily context, shortbase, and diversified commodity exposure.
The markets did follow through overnight with major Resources ETFs > 5% in the US. Underlying Australian stocks gapped higher meaningfully.
I sold out of my basket vwap first 20mins into the higher gaps on Wednesday morning for gains > 3% across each stock.
My risk was based on a $ position size per name across the whole basket that was hedged 1 for 1 with the index. I didn’t asses an adverse ATR impact or the individual volatility of each name which was perhaps naive. My beta versus the index was significant BUT I wanted to take on risk.
Better next time:
Sizing: I did not use a systematic approach but instead I got to a $ size per stock I was comfortable with. I did not hit my max overnight position limit. Holding Resources stocks overnight has been my biggest weakness year to date and I was conscious of this. I was not capped by liquidity given the underlying stocks. A better approach could have been to set a $ strategy stop loss e.g. $25k and then size the basket off an adverse 1ATR move. Need to define the strategy stop based on my assessment of the EV of this trade and its uniqueness.
Management of trade: I sold out ALL my positions vwap the first 20 minutes the next day. A better approach to maximise any new trend higher would have been to break the position into parcels. Sell 1/2 or a tranche into the early strength and then run the remaining balance with an extended target in mind with wider protective stops. This could have been back below open levels OR prior bar lows similar to my intraday system. Same patterns but on a higher Daily timeframe.
Tech solutions: I need to build up a chartbook of examples. I need to draft up a playbook for Evernote with specifics. The key was the Daily charts were setting up right side of the V and breaking prior bar highs from a tight structure. A separate account for these positions would greatly help so that I don’t succumb to intraday trading the positions.
Charts:
The price action of iron ore futures took time to confirm the news
FMG
Took my entries in my spots BUT the stock just wouldn’t break out intraday
Other names:
BHP
Trended much cleaner on each break. This is the strongest in the sector. Buy the leaders first and then work way down the food chain.
MIN
WHC
Trade 2: China Fiscal Stimulus
In the coming days, I will release another broad write-up of Trade 2 to the Members Chat. Fortunately, I built on the previous lessons in the week to size this one bigger and manage it better. Please subscribe to get access in the coming days:
Conclusion
You can't be a jack of all trades.
It takes time and focus to be able to build the skills across different strategies. These may not even suit your skillset or strengths. My initial feeling was that I had failed to capture a bigger multi-day move. The reality is- I am a short-term trader! How am I supposed to capitalise on all timeframes when I don’t have a system for it? There is so much that is outside of my control and knowledge with Overnight strategies.
I think the right answer is to lean on some advice I gained from a friend- be stoic to the outcome. Put the work in the good times just as you put the work in the bad times. No self-limiting beliefs.
The way you talk to yourself matters. Have compassion. It is the only way to deal with the highs and the lows of this game.
Thanks for reading.
EV is calculated: (win rate x average win) - (loss rate x average loss). You could use any multiple other metrics such as your “grading” of the catalyst and setup ahead of time.