Category: Investing

What You Should Know About GameStop

Every brokerage firm in the US has capital requirements. These requirements are relative to the size of the accounts.
For example, if all the account holders at a brokerage firm have a total of one million dollars, than there might be a capital requirement of say 20% or $200,000. This means the brokerage firm must have $200,000 on hand sitting in an account some place (with the clearing house). The brokerage firm must have the money to back up any losses that occur for whatever reason. In between all of these brokers and various exchanges is a clearing house. The largest one in the USA is the Depository Trust & Clearing Corporation. A simplified overview of a clearing house is given below.

So let’s say I am the only account holder with brokerage firm A, and I have a million dollars sitting in the account ready to trade. The broker firm has $200K as required. Now I decide to go long bitcoin. On the other side of that long is the short. The short is with brokerage firm B. I think bitcoin is going higher, he thinks it’s going lower. At the end of each day, settlement takes place. If bitcoin is up, money is taken from the short sellers account and deposited into my account. Let us say that I have leveraged myself such that a 10% downward move in bitcoin, I get the margin call. For a 20% downward move, my account is zero. Now on Saturday, the US treasury announces a whole bunch of regulations to crack down on bitcoin. Sunday night futures start to trade and bitcoin is down 90%. In other words, my account actually reads a negative number of -$500K. My broker calls me and says, “hey, you owe us $500K”. A few problems arise. First, I might not have $500K. Second, I may say “see you in court”. Third, I may pay it but will be very slow to write that check. At the end of the day, the clearing house does not give a damn about what happened between me and the broker. They want the money to deposit into the short sellers account. This is maintain market integrity. Imagine being the short seller in this case. You were correct but the mechanisms in place behind the scene were not robust enough. Therefore, you did not get paid what you were owed. Stories like this are bad for business. Likewise, the same thing could occur on the long side. Bitcoin gaps up by 500%. Money from the short sellers account needs to be deposited into my account. How do you think I would feel if those profits could not be deposited into my account?
Robin Hood is a relatively small brokerage firm. I have read somewhere that 50% of Robin Hood accounts owned GameStop. I have no idea if this is true but let us say it is true. This means that the total account holders at Robin Hood increased substantially. In other words, Robin Hood had two choices: put more money in their account to meet capital requirements and/or limit trading.
Here is Robin Hoods statement:

As a brokerage firm, we have many financial requirements, including SEC net capital obligations and clearinghouse deposits. Some of these requirements fluctuate based on volatility in the markets and can be substantial in the current environment. These requirements exist to protect investors and the markets and we take our responsibilities to comply with them seriously, including through the measures we have taken today.

What happened was obvious. Robin Hood was bumping up against its capital requirements. It was not a conspiracy between Wall Street and the brokerage firm. Yes some hedge funds lost money. Losers do what all losers do- complain  about how unfair it is.

Wall Street VS Main Street?
Here is something that is missing from this entire discussion. The funds that made an enormous amount of money from these Reddit short squeezes. GameStop disclosed Thursday that one of it largest shareholders was MUST Asset Management. It sold its entire stake, 3.3 million shares, that it had bought sometime before March 19, 2020. And if it sold those shares at Wednesday’s closing price, it made about $1.1 billion in gains. AMC’s second-largest holder, private equity firm Silver Lake, disclosed that it sold its entire stake of 44 million shares for $713 million at an average price of $16 and 5 cents each. The users at WallStreetBets (WSB) do not give a damn about bankrupting some unknown hedge fund. They want to get rich quickly. I went to WSB the other day and all I see is a whole bunch of people dumping their life savings into GameStop and AMC. They are now down big. Worse, it is very cult like. They are emotional committed. They will not sell until they are forced to sell. Anyone trading on the advise from a forum is doomed to fail. Anyone trading with the idea of “revenge” is doomed to fail.

Is Silver Next?
I have no idea what they are planning next but I have heard they want to target Silver. I do not spend enough time on the forum to know if this is true but let us say this is true. Anyone talking about short squeezing silver to take down the big hedge funds has no idea what they are talking about. There is something called the COT that gets published. It actually shows the net positions of the market participants.

The red line shows that the hedge funds are net long silver. This is typically in all commodity markets. The large traders (hedge funds) tend to follow the trend of the market. The commercial hedgers take the opposite position.
The same stupidity cropped up a few years ago with JP Morgan and their supposedly ‘naked’ short position in silver. People had online campaigns to bring down JP Morgan by running up the price of Silver. As if some $20 million dollar lose would affect JP Morgan. That is what they tip the shoeshine boy.
Do your own research. Make your own decisions. Take responsibility for your actions. Every losing trader in the world blames someone else for their loses. Any talk about ‘manipulation’ of the market is pointless unless you know the manipulators.

The US Bull Market Goes On

There are websites and analysis that constantly warn about the coming US bear market. They have been wrong for over a decade. It is one thing to be wrong. It happens. It is another thing to argue with the market.

10 Year Note- How Support Becomes Resistance

My largest futures position is being short the 10 year.
It completed a H&S top a few trading days back which I shorted here. Below is a close up of the right shoulder.

Some setups retest the support level. Above, you see the former support now became resistance. Depending on the risk/reward, I will make my position larger at the retest. A break to the upside of 138, invalidates the H&S top and knocks me out of the position. At the 137.5 retest mark, I had a low risk high reward setup. I doubled my short position at this point.
Now here is an important observation. I will be very aggressive in moving my stops down to a breakeven point. Why? Because any attempt to retest this resistance line again would indicate that the pattern is not going to play out. Any type of lingering around the breakout point is a sign to bail out. Constant retest of the breakout point is another sign to bail. Adhering to this has saved me hundreds of thousands of trading dollars over the years. Most recent was the long Yen trade. The key to this game is risk management. Your trading plan is almost irrelevant.

Year in Review

I always think in terms of $100,000 blocks. For each trade, I never risk more than 1% of my capital. That is how all my trading is conducted.
I had my 100K trading blocks go from 100K to 160K last year. In the beginning of the year, I had a series of losers.  The markets were choppy. This cost me nearly 40K per 100K block. As my account size decreases, so does my risk. This is called the Ritchie Rule.

Risk management, risk management  and more risk management.

Six Flags

I have sold more than half of my long position in Six Flags.

Its break of the 34.8 level makes me uncomfortable. I still own a lot of shares.

The Life of a Breakout Trader

I trade on break outs. When you trade on breakouts you run the risk of going long at a top or short at a bottom. I also risk a very small percentage of my capital on any trade. This means a lot of stop outs. I am reading a book by another break out trader in the Cocoa market that follows very similar rules of trades and risk management as I do. Here is what his account looked like.

Imagine getting stopped out 17 times in a row for a loss of $16,750. Would you have the discipline to continue? This is what breakout trading is all about. Lots of small losses and very few large winners. I can attest to the fact that this happens.  Losing streaks like this will come. A good trade is a trade where you follow your rules and employ proper risk management. A good trade is not necessarily a winning trade. The novice thinks in terms of right or wrong and winners or losers. Seven out of my ten trades are losers. I consider them all good trades though.

Six Flags Update

It is retesting its break out at the 35 level.
A daily closing below the 34.8 level will invalid the rectangle pattern. If this bull market is going to continue, it should bounce off this level right here.

Review of a Losing Trade

It is just as important to review winners as losers. So I will go through my recent losing trade with gold.
Gold appeared to be forming a H&S bottom which corresponded to a channel breakout.

After years of watching this market, I realized it was going to break higher. I did that with my post, Golds is Going to Breakout. The next two trading days, it slowly edged higher. I added more longs to this position.
Then on Sunday night, it did a break away gap on high volume.

This was another bullish indicator. My analysis appeared correct. However, gold began to act funny around the 1960 level. I made a post about it here. First, it had a huge up day with its break out. Then it stalled. The candle formation was suspicious to me. So I unloaded half of my long position right at 1949. Within hours gold dumped hard on very high volume. This was a sign that it was not going to follow through. At this point, I should have immediately moved up my stops at 1865 to the 1890 level with all my other stops. I should have been aggressive with my stops. But I sat there. Had I moved up my stops to 1890, I would have gotten stopped out and my P/L for this trade would have been a break even trade. In other words, I would not have lost money nor won any money on this trade.
Friday was carnage day.

The gold market ran my stops at the 1865 level.
This trade fit my plan perfectly. I would take it again and again. Losing trades will come. This is part of the business. All I can do is trade my plan. What the market does after that is out of my control.  My only failure was the inability to be more aggressive with my stops. Any trading below 1890 invalided the pattern. I knew this. But there my stops sat at 1865.
The most important lesson to be learned about trading futures is risk management. If you ever read a book about futures trading and it does not dedicate a chapter to risk management, toss it. Above all else, preserve your capital. There are some lessons I have to relearn again and again.

Some Costly Trading Errors

Here are a few of them.
1- Not predefining your risk.
2- Not cutting losses.
3-Not systematically taking profits.
4-The need to be “right”.

Your need to be “right” and being a profitable trader are enemies. People often ask, “Have you ever been wrong”. This is about as silly as asking a professional boxer if he has ever been punched in the face. Getting stopped out and being “wrong” is part of the business.
The question is not, “have you ever been wrong?”
The questions is, “how does being wrong affect you executing your plan?”
Novice traders often feel after a losing trade that the market is out to get them. Or the market owes them something. They seek revenge on a given market. These are the worst emotions to have while trading. They throw out there trading plan and become reckless. It is important to remember that the market is neutral. It does not care about your feelings.

Review of A Winning Trade

Whenever I review my trading profits at the end of the year, I always find the same thing. 80% of my profits come from 20% of my trades. I always go back and review the big winners. I do not review my big losers. That is because they do not exist. Long ago I wrote down all of my trading rules. The number one rule is this:
Never risk more than 2% of capital on any trade. EVER! Less than 1% is preferable. 1/2% is best.
This means I never have big losers to review. Lots of little losers. One of my biggest wins last year was going long the New Zealand dollar. I went long on November 11th. The original post is here.
First, the daily chart shows a H&S failure pattern.

This breakout corresponded to a H&S bottom on the weekly chart.

Daily pattern breakouts that correspond to weekly pattern breakouts are the best trades to make.
A winning trade becomes profitable right away. A winning trade trends right to its target and never looks back.