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MrTopStep gives futures traders a view from within. From the floor of the CME to trading screens, experienced professional traders offer their observations, insight and knowledge to help you improve your mastery of the markets.
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  • Trading Primer: THE MOONSHINE TRADE 0 comments
    Oct 22, 2011 5:17 PM | about stocks: AVNX
    I had a visitor many years back who brought me a gift of a mason jar filled with moonshine. Believe it or not this gift taught me an important lesson that would stay with me for the rest of my life. 

    Presented in an antique blue mason jar with crumpled foil for a lid, the liquid inside smelled vile.  The first whiff took my breath and I knew without a doubt it was going to hurt on the way down.  Southern manners dictated I at least take a sip so as not to offend my guest.  As we prepared the shots a true feeling of dread came over me - the moonshine was cloudy.  I had butterflies in my stomach as we toasted our friendship and tossed back the shot - two minutes later I felt like I'd been kicked in the head by a horse. Now, I know you're wondering what in the world this has to do with trading but stay with me here...

    Common sense told me not to drink cloudy moonshine, but common sense left the party early.  I knew it didn't look right, I knew it didn't smell right and I knew the whole situation was not going to work out well but I still did it.  Why?  Because all the other guests were doing it too.

    I got caught up in the psychology of the crowd.

    Have you ever watched a stock in the extended trade that Jim Cramer is featuring on his show?  The second he gives it a "buy, buy, buy" the price jumps up as listeners pile in.  This is known as the Cramer effect, and historically the price falls on the third day.  Why?  Because on day 1 the smart people were buying, day 2 the semi smart people were buying and day 3 the not so smart people were buying.  Stay with me here. 

    I believe that patterns are actionable so I decided to try to game the Cramer effect.  The featured stock was AVNX, a little penny stock that was in the fiber to the door business.  I had my platform up and ready to go - the name had no sooner left his lips when the price jumped up more than double.  I was a little peeved that I would have to pay up to play - so I sat and watched it for a bit.  The price continued to rise into the extended hours close but I just couldn't pull the trigger as I'd been taught not to chase price.  Looking back this was day 1.

    The next morning AVNX made the highest volume trading and the biggest % gain boards.  Price doubled again and I was pretty bummed that it didn't pull back and let me in. Again, my mentor taught me to never chase price. I decided I would buy the next pull back no matter how slight so I could just get in.  This was day 2.

    The next morning AVNX opened strong - the little penny stock was now worth $6 bucks and climbing.  About 10am, price started to pull back so I took my initial tranche - 1/3 of my intended position.  Price continued to fall so I bought another 1/3.  All afternoon the price drifted down on higher volume so I scanned the web for news and stumbled across a well known site that just added AVNX to their breakout stock list. This was a Friday.

    On one hand I just knew AVNX was going to pop again because once it went over $5 institutions previously restricted due to price could trade it as well.  On the other hand I'd been taught never to buy on the third day, never to open a position on Friday, and NEVER chase price.  I felt a little guilty as I bought my final tranche.

    Monday AVNX opened on a half price sale after weekend news of a lost contract.    I went from feeling guilty to flat out mad.  Who was I mad at?  Myself.  Why?  Because I'd violated my trading rules in favor of going with the crowd.  The price continued to fall and by the end of the day I sustained the single biggest drawdown my portfolio has ever seen.  I felt the familiar feeling of being kicked in the head and I decided to go out for a cocktail..bringing back memories of the moonshine...and giving this trading error a name.  You guessed it -  the moonshine trade.

    You see, in each instance I knew better than to do what I did.  It didn't look right and it didn't feel right but I did it anyways.  It was the same error simply presented in a different form.

    Lessons are repeated until they are learned.

    Are you making moonshine trades?

    Suz



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