Technology advances, but human nature stays the same. It’s cliched by now, but it’s never been more true.

We all remember Gordon Gekko, cinema’s epic representation of the 1980s Wall Street titan. Gekko is a slimy master of the universe, an unscrupulous speculator with morals as flexible as the tape he trades. “Greed…is good.”

Less remembered is the the 90s equivalent of Wall Street, the movie Boiler Room. The protagonist signs on at a brokerage house (J.T. Marlin) alongside a bunch of cocky, smooth-talking Turks who seem to be making a lot more money than they deserve by pushing mysterious investments hard-sale style through aggressive cold calling and practiced coercion. It’s a standard pump-and-dump scheme. The salesmen recruit the capital of their unsuspecting clients and deploy the money into the stocks of bogus companies, thereby ratcheting up the share price. The large stakeholders – the top brass at J.T. Marlin and their pals – sell at the top of the run-up right before the shares swoon.

The pump and dump is a tired classic in the annals of market manipulation, and it’s little different from petty thievery. You’re taking the money from the fools you convince to buy. This happens all the time. In some cases, it’s egregious fraud, like the scheme in Boiler Room. In other cases, it’s almost morally defensible. Take Jonathan Lebed, a kid who, at 15 years old, became the first minor to ever face proceedings for stock-market fraud. Michael Lewis wrote a great piece, from which I quote:

[Lebed] had used the Internet to promote stocks from his bedroom in the northern New Jersey suburb of Cedar Grove. Armed only with accounts at A.O.L. and E*Trade, the kid had bought stock and then, ‘using multiple fictitious names,’ posted hundreds of messages on Yahoo Finance message boards recommending that stock to others. He had done this 11 times between September 1999 and February 2000, the S.E.C. said, each time triggering chaos in the stock market. The average daily trading volume of the small companies he dealt in was about 60,000 shares; on the days he posted his messages, volume soared to more than a million shares. More to the point, he had made money…The kid’s take from six months of trading had been nearly $800,000.

While it seems like the kid should be reprimanded, Lebed comes to his own defense quite well:

People who trade stocks, trade based on what they feel will move and they can trade for profit. Nobody makes investment decisions based on reading financial filings. Whether a company is making millions or losing millions, it has no impact on the price of the stock. Whether it is analysts, brokers, advisors, Internet traders, or the companies, everybody is manipulating the market. If it wasn’t for everybody manipulating the market, there wouldn’t be a stock market at all.

Very. Scary. Stuff. My friend Boris may have said it best: “I don’t even know what it means when a stock goes up anymore.”

I just finished a summer gig working for StockTwits, a start-up, Twitter-based, social-media client built to facilitate stock and financial chatter and distribute finance-related content. The question StockTwits users answer is “What are you trading?” in 140 characters. Simply, it’s a service to talk about and talk up your positions. Twitter will probably be defunct before the bureaucrats at the S.E.C. get their pants on, but the new technology provides a very real danger of facilitating exactly what Lebed did on message boards and, more generally, what J.T. Marlin does in Boiler Room.

A recent feud on the interweb between Mahalo founder Jason Calcanis and StockTwits head Howard Lindzon touched on the subject. Calcanis said it feels like tweeting trades on StockTwits is pumping positions. Lindzon lashed back on his blog, saying:  “I look forward to the time when a tweet from someone on Stocktwits can move a stock. They will have earned the respect of enough legitimate people to be followed.”

I agree and disagree. Pumpers do have to earn respect to be effective (or else be really clever). But since when does earning respect from others and the following of the masses absolve one from moral lapse? Sometimes it doesn’t. If I’m a pro at technical analysis and I make money through trades demonstrated in real time, it’s conceivable that I could garner a substantial following on Twitter, whereupon I might notice that, gosh, when I buy the stock of a small capitalization company and tweet my trade to my following, I get a bit of an extra boost. Volume up. Price up. Sell. Profit. Money.

Money perverts and corrupts. Win or lose, rich or poor, money shapes us even as we earn it and spend it and lose it. Respect from others can be abused for personal gain. At StockTwits, we’ve been banning and blocking scores of users who seem to be doing exactly this. There are the telltale signs: repeated focus on micro-cap companies or lightly traded stocks; repetitive, unnecessary enthusiasm for a position; and clear use of dual accounts. But there are also the covert tactics. Some users create many fictitious names (like Lebed did) and claim to enter positions, increasing the interest in the pump-and-dump darling of the man behind the avatar. Twitter is viral, so it’s not hard to be relentlessly self-promotional without being discovered until it’s too late. I’ve been sniffing these scammers out all summer, and they only get smarter.

Many times, the pump and dump works. And often, it’s a fraud being perpetrated by a talented trader who has earned the respect and following of legitimate people but then steps over to the dark side of easy money. Who needs technical analysis when you can just take money from the dopes who follow you in?

Other times it’s unintentional. Brian Shannon from Alphatrends is a great trader and a technical analysis pro, and he certainly has the capacity to enact a pump-and-dump scheme at will for his own enrichment. He has nearly 9,000 followers on Twitter, and he runs an awesome premium trading product. I’ve noticed that when Brian enters a position and tweets his entry, people follow him in blindly. He’s so good that great traders like Doug from Wall Street Mediaswear by the follow-Brian-blindly gambit. (Doug is also one of Covestor’s seminal crew of investment managers.)

I’ve seen this on the StockTwits stream and on my platform concurrently. On June 11th, Brian tweeted an entry – “bot $PLLL 222” – and I thought to myself, hell, if Brian is in maybe I should get in also. But it was too late. I noticed three or four other user’s tweets after Brian’s saying things like “long $PLLL 2.25” and “bought $PLLL 2.27” – and this was all happening in real time, and it was backed up by the tape. One of Brian’s followers lamented that he didn’t enter at $2.25 when he had the chance — so sudden was the spike, he lost the opportunity. The volume in Parallel Petroleum Corporation surged and the share price jumped. From the numbers, it appeared that everyone who was buying shares in this tiny, rinky dink energy company was on StockTwits. Seven minutes after his initial post, Brian tweeted that he sold part of $PLLL at 2.29. Not a bad way to make a few bucks. 3% profit. You do the math.

This is a memorable case I refer to for its demonstrative effect, not to criticize Brian. I’m familiar with Brian’s trading and I use his premium service, and I’m convinced that his morals are beyond reproach and his intent is pure. I am sure the PLLL trade was one he pursued for other reasons. It was a speculative play that he didn’t even mention to his premium subscribers. Also, at day’s end, he was still holding a position in the stock. Moreover, Brian focuses almost exclusively on heavily-traded stocks of mid- large-cap companies. His premium members are rarely (if ever) given an entry instruction on a micro-cap stock that a bunch of rogue, tweet-tastic traders could move. (Save the heavy lifting for the Goldman machines, kiddos.)

Brian’s innocence notwithstanding, it’s easy to see how a person, having built up a following and demonstrated speculative skill, could engineer a quick, easy pump-and-dump scheme for a great profit.

I suspect that the more savvy and sinister pumpers utilize many different Twitter accounts and build followings through the most covert methods. They claim to trade larger cap stocks too, as if to take the dogs off the scent. They don’t pump and dump every time. They show their followers a profit, sometimes, before sticking them really deep on a centi-million-dollar market-cap crap-trap. They work in groups. Bulls On Wall Street is a lame StockTwits alternative that was just recently launched by a cadre of pennystock pumping, speculator-deviants whom StockTwits banned for their market-milking machinations.

So Jason Calcanis may have a point. In some cases, tweeting a trade is pumping (both intentional and unintentional) and in other cases it’s clearly not. When Howard mentions that he’s bought a bucketful of Wal-Mart shares, that’s not pumping. When the crew from Bulls on Wall Street put their stamp on a stock, cavet emptor people. The internet is supposed to make everything transparent. But the “transparency” afforded by emerging technology can be harnessed for evil ends. Transparency can muddy as well as enlighten.

It’s fundamentally about human nature. In a way, we’re all pumpers. We’re always grinding, always chasing that trade. Always on the lookout for The. Big. Score. We’re all looking out for our own self-interest. We want money and we want it right now. We want in, baby. Let’s trade.

The introductory scene from Boiler Room is instructive here. The sentiment shared is one attractive to me and many others:

The $87 Million lottery winner, that kid actor that just made 20 million on his last movie, that internet stock that shot through the roof, you could have made millions if you had just gotten in early, and that’s exactly what I wanted to do: get in. I didn’t want to be an innovator any more. I just wanted to make the quick and easy buck. I just wanted in. The Notorious BIG said it best: ‘Either you’re slingin’ crack-rock, or you’ve got a wicked jump-shot.’ Nobody wants to work for it anymore. There’s no honor in taking that after school job at Mickey Dee’s…honor’s in the dollar, kid. So I went the white boy way of slinging crack-rock: I became a stock broker.

We just want in. But don’t forget, how you get there matters. A man is only as good as his last trade. You’re good or bad, honest or dishonest, noble or ignoble. Are you willing to trade character for cash, morals for money, principles for power? Those are the most important trades or non-trades we make in this life. Believe that.

Time is the justice that examines all offenders. –Shakespeare

With an impossibly busy July and August ahead of me, I’m starting to weigh the pros and cons of shoring up my long-term positions with my trading capital.

Two things happened this week. For a hot second Wednesday, all of my long-term investments flashed green simultaneously. [So brief was this moment that before I could take a screenshot of my platform, one switched red.] I won’t go into specifics, but my portfolio has been bear biased since April 9th. My short-term trading has also been choppy. I haven’t had any bad drawdowns, but I’ve been down a bit after commissions.

I think the reason is that I haven’t been focusing as much on trading. I’ve had a lot on my plate. Not putting in your all — taking the time the night before to look at charts, get ready for trading, and sit tight monitoring positions — will levy a toll.

I find myself winging it on some trades, not having done the proper thinking about entries, stops, and position size. I made a recklessly speculative play on United Natural Gas Fund (UNG) after it briefly stopped trading on Tuesday, sending traders scrambling. I minded my stop and then made some back on the other side, so it wasn’t terrible, but still — that’s the kind of thing in which I shouldn’t be involved.

Trading takes time, when learning especially. If you don’t put in the time, you’re headed to the poorhouse. There’s no substitute for the hours staring at the tape. That tape-time must be supplemented with a voracious diet of reading, educating oneself, processing. There is so much to learn that it’s possible (and some say advisable) to spend as much time reading about trading, listening to the old speculators whose market one inherits, as one does actually trading.

The expenditure by which one makes money trading — the spending of one’s time — is also the biggest opportunity cost of trading. Opportunity costs — we are told in Econ 101 — are the costs you incur by not doing something else. Here, the opportunity cost of trading is the time I’d spend doing other things. The opportunity cost of doing those other things is the money I’d make trading minus the profits I’d reap letting my money sit in longer-term positions.

Time is the ultimate paradox — in trading and in life. You can get more money, but you never get more time. Time is free, but it’s priceless. You can spend it, but you can’t buy it. You can use it, but you can’t own it. Once you’ve spent it or used it, you cannot get it back. In a sense, time is the ultimately liquid capital — the only cash you have Right. Now. Yesterday is a defunct futures trade, and tomorrow is a negotiable forward contract. Lost time is never found again, and found time is immediately lost.

Time is of the essence, sure, but isn’t the decision of how to spend that time more essential? It’s said that time heals all things, but what about the afflictions from misuse of that time?

I must think carefully here. I have limited capital with which to enter the trades of daily life. Do I invest that capital in law school applications, my senior thesis proposal, LSAT preparation, emails with friends, vacations to Alaska? Do I put my actual money in market-neutral positions, thereby saving myself from the screen between 9:30 and 4:00?

This is tough. Stay tuned for the final judgment call — it’ll be made on the margin.

“The line between madness and masochism was already hazy; the time had come to pull back…to retire, hunker down, back off and “cop out,” as it were. In every gig like this, there comes a time to either cut your losses or consolidate your winnings—whichever fits.” –Hunter S. Thompson, Fear and Loathing in Las Vegas

As a new trader, I think it’s important to learn a lesson every session. Even on the profitable days, one can always find takeaways. But most importantly, one has to apply the lessons learned. Here are two short lessons from the beginning of this week.

Monday: THQI

Early Monday, I went long 1000 shares of THQ Inc. (THQI) at $7.24. The stock had sold off earlier before the buyers regained control. As it crossed north of the daily VWAP, I bought. I watched it flounder for a little, but I had things to do and it was my only position. I put a sell stop in at $7.10 and a sell limit at $7.44. When my platform chimed, “Order Filled,” my heart sank because I thought I’d hit my stop. I didn’t. I’d hit my limit and was out with a nice gain for my most profitable day in several sessions.

Had I sat there watching it, I know I’d have been tempted to take profits too soon. When I’m up a nice dollar amount, I’m always tempted to sell early and call it a day. In the long run, though, that’s probably not smart. If you’re risking 14 pennies and aiming for a dime, chances are, unless your technical analysis is spot on and entries perfect, you’re going to lose money. Sometimes one’s biggest enemy is oneself.

The best traders are adept at placing orders and knowing when and how much to move them. I’m pretty terrible at this so far. I either move my stop up too much, wanting to protect profits, thereby choking a trade before it’s ready; or I give the stock too much room, either losing paper profits or racking up bigger losses than necessary. I think much of this is just emotion. I’m never happy unless I time everything perfectly, but that’s an unfair standard. The idea is to take the emotion out of trading. That’s what placement of order can do for you.

Tuesday: WWW

On Tuesday, I failed to guard my emotions properly and keep to my stops and my sense. I bought 450 shares of Wolverine World Wide (WWW) at $22.32 after a pullback and then a surge. It dropped on impact, crossing south of the daily VWAP. My stop was set at $22.07. I watched it nearly stop out but then show a bit of strength. Self-talk is like this: I almost got stopped out there; but some buyers are showing up; so it’ll probably rebound; don’t want to get stopped out on a bad tick before missing the rally. That’s just hope talking. The sellers were in control and the wider markets looked to be dropping.

I moved my stop down to $21.97 on the potentially valid but ultimately false theory that $22 could provide support, as whole numbers often do, helping the stock to correct higher. Had I not been watching this position, I’d have been stopped out for a loss at $22.07 instead of $21.97, saving myself a dime or $45.

[Had my hope been stronger and I put my stop two cents lower, I may have come out with profits. The low of the day was $21.96. That's like karma or something.]

I’m not at all saying one shouldn’t watch. I’m saying that one has to first are foremost guard against oneself. If I placed a stop before money was won or lost, I probably did it for a reason. I should have applied the lesson of Monday and trusted that my first instincts and analysis upon entering the trade were probably sound. That operating assumption must be kept in mind.

In my last post I wrote about commissions eating away at returns – a problem more dramatic for traders with a small capitalization. What is the solution?

One thing you can do is try to switch to a cheaper broker. I pay $9.99 per equity trade right now with TradeStation, but having met my 30 trade monthly quota for June, the fee will drop to $6.99 for July. As far as I know, $7 per trade for a full service brokerage with a desktop platform and real-time data is as good as it gets. Anyone serious about making money as a trader won’t tolerate a cheapo brokerage.

Another thing you can do is increase position size or use leverage. After finding consistency, a trader with a $30k account can make some pretty sizable trades. Assuming 4 to 1 margin – or buying power of $120k – a day trader can take on four or five positions of $10k each without being reckless.

I am currently trying to find consistency in my day trades so that I am comfortable with positions in excess of $6k or so, which is a typical position size for me. If every tick against you causes heart murmurs, the position size is probably too large.

The shorter answer is that there is no real solution. On top of $10k, $14 is still 0.14% — that profit is your breakeven. My situation is really bad. On top of $5k, $20 is 0.4%. If I made a single $5k roundtrip trade per day for a whole year, I would have to return nearly 100% just to keep my $5k.

If I planned to make 20% annual returns on my capital or less, I wouldn’t be trading. I aim to make that on my intermediate-term and long-term investments. Trading only makes sense if you can return – after accounting for commissions — more than you would from just letting the money sit somewhere.

Whether I can make 40 or 50 or 100 percent annual returns on base capital is what I hope to find out. Do I have what it takes? I don’t know. Maybe not. But so far things look promising. Last week I reaped post-commission profits roughly equal to 1.25% of my total portfolio capitalization on positions representing a tiny fraction of my available buying power. If I can do that 50 weeks a year, that’s over 60%. Trading is enjoyable but hard work – it takes lots of time and causes lots of stress. It’s probably not something I will continue to do if I can’t make money.

It’s true, commissions are killing me. I placed 28 total trades in the first three days of this week alone. At ten bucks a pop, that’s $280 straight to the broker. As I found out on Tuesday morning, choppy markets can cut into you. I traded the shares of Granite Construction (GVA) quite well – I shorted it twice successfully — but I was barely in the green after commissions. I didn’t have a good read on the market, and early trading was choppy, so I took profits when I could.

Had I doubled or tripled the size of my position in these trades, I would have raked in dime. But I’m not confident doing that at this point. Once I’m comfortable and think I’m capable, I’ll increase my position size, maybe use a bit of margin, and my breakeven point will be more easily attainable. In the long run, the hope is to have a larger capitalization – an obvious advantage. I will either save or raise capital independently, or look to a bank, fund, or proprietary trading firm.

The point is that one can’t stray from risk management principles no matter how small or large the portfolio. Just look at Long Term Capital Management and Lehman Brothers. The risk principles are different, but the lesson is the same: don’t take on too much risk in an effort to make outsized or financially significant returns. A savvy speculator may get away with it for a long time — like I did last fall — but catastrophe awaits.

The amount of true risk must be measured and analyzed. I don’t have evidence to prove it, but I imagine most small cap traders don’t slowly bleed from commission fees or from taking too many small losses, they blow up either from one huge loss or many sizable losses. The title of this post is an oxymoron. Sure, people get rich trading pennystocks, but people also lose their shirts. Adherence to risk management principles pursuant to technical analysis is more difficult when trading low-priced or volatile stocks.

The other day on StockTwits TV, someone said that traders should have firm stops on positions and strict stops on daily losses. That makes sense to me. One day last week I made two bad trades early, got stopped out, and my daily loss stood at something like $350. I should have walked away, hit the gym or the beach, and lived to trade another day. Instead, I made more aggressive trades that I wouldn’t have otherwise. They ended up being sound trades, and I ended the day down 24 cents after racking up some $140 in commissions. What if things hadn’t gone my way and I ended the day down a grand? That would have been tough to recover from. Sometimes the best trade is no trade. Slowly learning that fact…

When I first started trading last fall, I was dealing almost exclusively with cheap stocks of small cap companies. I had no idea about risk management, and my account value fluctuated madly. What happened is that — in my fearlessness and ignorance — I made some awesome, incredibly lucrative trades. When I didn’t see a quick profit, I was keen on “averaging down” or on buying more shares as the price declined. Sure enough, I got bouncebacks — and with them, massive profits on huge piles of shares. Of course, I could have been wiped out, but I wasn’t thinking about that so much. I was like Lehman Brothers — overleveraged and overconfident.

Now that I’m trying to do more than spin the roulette wheel, I’m focusing on risk management and steady, predictable daily returns. As I wrote in my last post, it’s my operating hypothesis that smart traders will identify winners, which will garner outsized profits, among the many losers. The real challenge is letting the losers go before the losses become outsized. Not cutting losers is what wipes people out, blows ‘em up — that and large unhedged bets or use of leverage.

Risk management is even harder with a small account. As Dr. Brett Steenbarger details on his blog, a trader with a $30k account has a much tougher time seeing financially meaningful results. An annual return of 20% on assets would bring $6000, a good sum but nothing to live on. But that same trader — assuming 20 trades per week for 50 weeks per year at $7 per trade — would incur $7000 in commision fees. He or she has to make more than 20% returns just to break even.

Another example: a 3% profit on a position size representing 10% of portfolio capitalization — or a $3000 position — is a paltry $90. Roundtrip commissions can cut into that profit as much as 20%. And then, I’m only left with $75 bucks, wow, that’ll cover my dinner and scotch tonight. A 3% trade is a good one on a large cap stock, but the small portfolio incentivizes one to take larger positions or trade cheaper, more volatile stocks. Meaningful returns are tough to come by for the underfunded trader.

It’s natural, then, for a small cap trader to be attracted to small cap stocks, in which they hope to find some serious alpha. Obviously, pennystocks are riskier. That’s well documented. Less understood is the idea that pennystocks make adherence to risk management guidelines and stop placement pursuant to technical analysis much more difficult. Here’s an example:

E*Trade Financial (ETFC) announced what’s essentially a standard debt restructuring before the market opened Wednesday. The stock got slammed on the news. I tend to think sell offs after restructuring announcements are way overdone and overcorrective. I don’t know if these are run-on-the-bank type sell offs — whereupon the announcement causes owners to anticipate the sell off, thereby worsening it — or what, but these kinds of announcements often cause irrational drops. If the company is set to go under, that’s a different story, but in tough times corporate debt burdens must be reworked.  I think I was wrong about E*Trade, and I was too busy and lazy to do extensive research. It’s also possible that I’m partial toward this type of trade, because one of my big early successes was a trade of exactly this type buying Apple (AAPL) stock.

ETFC gapped down at the open, and following the lead of my friend Doug, I bought a boatload of shares near $1.47. My friend Boris jumped in as well. [On a side note, trading is as inherently social as any other pastime or profession, be it watching sports or playing cricket. Hence the genius of StockTwits.]

For position size and stop losses, I look at true dollar risk — that is, how much money would be lost assuming stop is triggered — and technical indicators like potential support and resistance levels on multiple time frames, moving averages, daily VWAP, and others. I’ve heard a good rule is to never allow losses of more than 2% of portfolio capitalization on any day or swing trade. That sounds like too much, so I try to stick with a limit of 1.5%. Assuming a $30k portfolio, that’s $450 dollars.

Assume purchase of 4k shares of ETFC at $1.47 — cost basis is $5880. If I want to stick to my guns on my true risk limit of 1.5%, I can only give ETFC breathing room down to $1.37, which is my worst case stop representing a loss of $400 plus commissions. But ETFC had already fallen to $1.36 or so pre-market, a level it could easily see again before bouncing higher. Moreover, the daily chart suggests potential support around $1.20, a stop loss level that would give the stock ample room to fluctuate before recovering. But the true risk on a stop at $1.20 is unacceptably high — an order fill at that level would crush the portfolio and inflict losses from which it would be hard to recover.

Pennystock charts look similar to those of large caps, but each tick represents a much larger percentage of invested capital, and thus much larger profits and losses. The support and resistance levels often don’t help, because true risk is so high. Moreover, you’re bound to get stopped out and suffer countless small losses if you don’t give the stock some room to do its thing. This is what happened with ETFC. I bit the bullet and set my stop down at $1.32, a selling price that would have been really nasty. But I couldn’t justify a tighter stop, given that it looked to be hemmorhaging further in regular trading and also based on my assumption that it could see new lows before surging higher. That assumption was validated by the market.

It worked this time, but these problems, in general, are why I’m trying to avoid pennystocks. Trading last week was profitable — I had a bunch of small losers, a few moderate losers and winners, and a couple big winners — but a whiff on ETFC would have taken everything I worked so hard to gain. That’s not only bad for the portfolio, it’s bad for the psyche.

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Speaking of pennystocks, I had the opportunity to meet perhaps the most famous pennystocking guru of them all, Timothy Sykes, on Monday evening. Tim’s claim to fame is turning his bar mitzvah dividends into some $1.4 million while in college. Tim is a very nice guy in person, and his successes in trading and business are inspiring. Check out his website.

If you think luck isn’t a component of this game, you know a different market than I. Two orders filled by my broker Friday — one unlucky stop order, one rather favorable limit order — show that on a trade by trade basis, this is a game of luck and cents.

ICO

At the open Friday, I was long 2000 shares of International Coal Group (ICO), purchased at $3.60 average. The stock gapped lower, but then saw a nice rally on good volume to $3.70. Then it floundered, and volume was weak in ICO and in the wider markets — a symptom of summer Fridays.

But in the afternoon the markets rallied on news that Ahmadinejad was defeated in the Iranian presidential election (this turned out to be a false report). ICO failed to move with the indexes. That was a sign to get out. But having seen sizable profits at $3.70, I wanted at least one more bump higher. This was probably stupid. Anyways, I didn’t get my rally in regular trading, so I placed a GTC+ — good until cancelled including extended hours trading — limit sell order at $3.67, and I sat on my hands.

To my delight, the order was filled in after hours trading, during which ICO rallied to $3.68. I walked away with a nice chunk of change. Lucky for me. On Monday ICO gapped lower; had I held, I would have surrendered my profit and thrice that sum in losses. Sure, I may have moved my stop higher premarket, but it still would’ve been ugly.

HOLX

In early trading Friday morning, I bought 400 shares of Hologic Inc (HOLX). The stock had been on a nice tear for a month or so, and the 30 minute chart showed recent strength. It was comfortably above its 10 and 20 day exponential moving averages, which were increasing.  Moreover, it didn’t look overextended relative to the wider markets because it still had plenty of room under its 200 day moving average. It also had a recent tendency to gap lower and then rally with volume.

In hindsight, I see that my entry sucked. I should have waited until about 10:45, when it thrust higher on big volume.

Regardless, I watched the gap down at the open, then saw it print a nice green candle, cross back over its VWAP, and I jumped in at $14.08. I set my stop at $13.80, effectively risking $0.28/share plus commissions. It was a quick ride. I was stopped out at $13.80, which turned out to be the low of the day. The stock rallied thereafter. Had my stop been set at $13.79, I’d have closed the position at roughly break even. What terrible chance.

Like I said, this is often a game of cents. Massive sums of money can hang on a puny cent in equity trading. In currency trading, the margins are even tinier — $.0001 can mean hundreds or even thousands of dollars. It’s also one of sense. In trading, one can’t let an experience like the one I had with HOLX influence the ironclad placement of stop losses.

When entering a trade, it’s important to know what you’re risking, and it’s just as important to stick with those risks and not let them become outsized. I’m telling this to myself as much as to anyone else.

Smart traders will always find winners, the profits from which they can let run. But even the smartest among us are under the spell of dark forces like ego, pride, stubborness, and greed. Better to put in that order and look away than to refuse to take losses or to get greedy with gains.

Over the weekend, I thought about the sham election in Iran — in which the inflammatory, holocaust-denying dictator incumbent, Mahmoud Ahmadinejad, was “reelected” with 68% of the vote — and the potential of Iranian political instability to move global markets. I couldn’t decide whether it would be impactful or not.

This is why it’s crucial for traders and investors to read. Victor Niederhoffer, whose book The Education of a Speculator I’m reading, provided an answer:

On Wednesday, January 9, 1991, I was in fat city: I was long bonds and the S&Ps, and short crude oil. Each position was up 50 percent on my margin. Secretary of State James Baker had scheduled a meeting with the Iraqi foreign minister, Tariq Aziz. The meeting had already lasted 8 hours. Better close your positions out, my partners suggested. This is one of our best profits ever, and anything can happen. “Oh, no, they must be dotting the i’s and crossing the t’s on the final settlement,” I said. After all, considerable progress had already been made regarding the terms of Iraq’s withdrawal from Kuwait. Surely neither party would wish a showdown. But then, at exactly 2:30 p.m., Secretary Baker called a press conference. “Regrettably,” he began, but reporters were already stampeding for the telephones. No settelement had been reached. Within 2 minutes, the Dow plummeted 80 points, bonds were down 1.5 points, and oil was up $3 a barrel. One word from Baker brought a $5 million swing in my equity. The lesson: Political events are often unpredictable, especially when an election is forthcoming or the stock market is on a tear. [Emphasis added.]

That last clause — “especially when an election is forthcoming or the stock market is on a tear” — could not more aptly describe the situation last week. Victor Niederhoffer, a compelling figure I’ve written about before, is a guy famous for blowing up. His spectacular failures are reason enough to read him carefully — and to heed his warnings.

If inspired, I’ll post a more extensive review later.

Though I already have a blog for general commentary, I created this blog to accommodate my thoughts and opinions on a relatively new interest — financial markets and securities trading. Because this is a niche topic, I wanted to have a separate space. Comments welcome on my regular blog or on this one.

I also write market-related posts over on the StockTwits blog. Feel free to check those out as well.