“Don’t answer the phone, we’re calling in for Dan.”
Dan, “Hello? HHHH, who trades HHHH? What the …”
I don’t even know how to describe Dan. He was kinda like the mascot of the trading desk I worked on as a market maker. To this day I have no idea what his actual job was.
Dan was a large, ruddy Irishman. Always with a joke to crack or story to tell about the good old days of trading.
Dan had a funny way of pronouncing his “H’s” which made everyone laugh. So someone sitting on the trading desk would call in to the desk. Dan would answer, and they would tell him they were looking for the HHHH trader.
I can still see him yelling “AACH, AACH, AACH, AACH. WHO TRADES HHHH?” Dan would bellow it through the trading room, even though there was no HHHH symbol assigned to any stock at that time.
This fact made the other traders in the room laugh even harder.
The whole trading floor would erupt in laughter as Dan got no answer and mumbled something under his breath. That one never got old.
The Misunderstood Market Maker
Today, when I tell people I worked as a market maker, they generally have no idea what I’m talking about. They usually equate it to their broker.
Nothing against brokers, but not even close.
If I happen to be talking to someone who trades stocks, they know the market maker as the guy who manipulates stocks.
That’s generally BS from traders who don’t know what they’re doing and are looking to blame someone else for their failure. You see it a lot in places like StockTwits.com.
Are there crooked market makers? Sure, I saw some when I worked in market regulation. But, no more than there are crooked lawyers, doctors and plumbers.
Do market makers have an advantage over you in trading? Absolutely. It’s the reward for providing liquidity in the market. In return for liquidity, they get to:
- See order flow, which means they see the big picture better than a trader, and
- Trade against order flow. It’s kind of like having a right of first refusal on all trades that flow through their desk. They can take a position, based on what they see in the big picture, or just execute your order in the market.
Market Makers Don’t Lose
As a market maker it is really hard to lose money over the long term. And a market maker who knows warrant trading, forget it.
It was a great place to work, because everyone was making more and more money each day. This was during the dotcom boom, and money was flowing everywhere.
Days like this past Tuesday, when the markets were down several percentage points…didn’t matter. Market makers on my desk were making money.
As market makers we usually didn’t hold overnight positions, and if we did they were very small.
So whichever way the market went, up or down, it just didn’t matter. It was a bunch of fun loving, joking guys (and one woman) having a ball and making money.
The system we were in was set up for us to win. Probably around 90% of the time.
Your System Will Impact Your Trading and Your Quality of Life
Have you had a chance to read Thinking, Fast and Slow by Daniel Kahneman? If not, read it.
First, there are some short exercises in the book that will blow your mind. You read through the exercise and then Kahneman tells you exactly how you did.
Where you breezed through one exercise and, where your brain slowed you down in another. Even though it seemed like the exact same exercise. Both creepy and very cool.
But second, Kahneman makes it very clear how difficult it is to make important decisions (like trading) and how the process itself, of making decisions, can tax your body.
Being wrong takes its toll on your body
Strain on the body increases with wrong decisions. One of the reasons a “trade” often turns into an “investment” when you’re wrong in your initial trade, is your unwillingness to admit you’re wrong.
Admitting you’re wrong causes not only mental stress but actual physical manifestations in your body. Your brain tries to protect you from this. It’s just the way we’re built.
…and physical state impacts decision making
Some of the data is astonishing, and as Kahneman puts it, “disturbing”.
For example, there is a study of parole officers who hear cases and decide if inmates will be paroled. The “default” answer is no. Only 35% of inmates in the study were paroled.
They track the parole officers during the day. One time frame they look at is from breakfast to lunch. Parolees whose cases are examined just after breakfast have a MUCH higher rate of success than those that are examined just before lunch.
Something as small as getting hungry, and I don’t mean starving hungry, just normal hungry between breakfast and lunch, has a major impact on how they do their jobs.
These are not one off decisions either. This is their everyday job. But as their bodies demand more attention, their minds fall back on the default setting, which is no parole.
The other studies in the book are just as fascinating, and have just as much import for your trading and investing.
Are you always at peak performance mode when investing or trading? Me neither.
What about days, or months, like the whole month of October last year, when the market looks like a train wreck.
Are you constantly in great physical condition, all is A+ with the family (or boyfriend/girlfriend), and your job is going better than ever? So you’re set up to easily handle any portfolio or trading stress?
Of course not. It’s never like that.
A Known Imperfect Trade is Better Than a “Perfect” Trade
Once I left my job as a market maker the 90% correct trading system was gone.
What did that mean?
More stress in trading, because I wasn’t right 90% of the time anymore. But what else did that mean?
More stress at home, more stress about finances, and more wrong decisions due to not operating at peak performance.
The cliche “vicious circle”. Stress begets stress and decision making, in all aspects of life, is hindered by, well, seemingly EVERYTHING. Not just being hungry for lunch, like a parole officer.
So, when people ask me why I trade warrants the way I do…the beach ball trade, the percentage hedge, seeking mispriced warrants (PHUNW), finding patterns….the answer is both simple and complex.
I’m not going after the perfect trade, the I KNOW I”M RIGHT trade (more on this in another post). I’m going after the high percentage AND low risk trade. The trade with a catalyst.
Using Warrant Trading to Get Back to 90%, Simple and Complex
The simple answer is that I’m trying to get back to the 90% win rate I had as a market maker.
Who wouldn’t want a 90% win rate? That means trading is easy and I make more money.
But it’s not just wanting to have a higher win rate to make more money. That’s actually the secondary reason.
The complex, and more important, reason is I want to take trades with high win rates because I want to protect myself. I know from experience, the more losing trades I take, the less I want to trade.
Which leads to missing opportunities that would be great trades to take.
I bet you’ve been there too. In 2007-9 did you avoid opening your brokerage statements, or just stop checking your balance online? Did you sell near the bottom of a market correction and not get back in until the market had already rebounded?
I’m not knocking those who do this. Again, it’s who we are as humans. I’ve done the same thing myself.
But, here’s what I’ve learned. If I take fewer “risky” trades, and more high percentage trades, then I’ll be rewarded many times over.
I’ll find more trades to take because I remain “in the game.” And, because I’m not stressed about trading, I’ll live a better life.
I don’t care who tweeted what, or whether “my stock” had good earnings in a meaningless 3 month period, or whether the head of the Federal Reserve used the word “little” vs “tiny” vs “small”. (Shoot me please!)
If those things are impacting your portfolio, and subsequently impacting not only your finances, but your relationship with your family and friends, your work, and your physical well-being, you need to find another way.
Why I Teach Warrant Trading
That’s why I trade warrants, and do my best to teach others how to trade them as well. Because warrant trading gets me closer to my 90% win rate.
Now, am I always right in my warrant trading? Good lord, NO. (Though some particular trades, like the Beach Ball Trade, are pretty close.)
But, as I’ve shown Warrant Observer members, and even readers of this free blog (PHUNW), the trades I’ve shared are generally what I consider high percentage/low risk trades.
- January pick, Waitr warrants, WTRHW, up over 33% (warrants purchased in a sweetened offer by the company and no longer trade)
- February pick, THWWW, up 58% as of today. Warrant Observer members, you guys saw this, right? Jumped in the past few days
- March picks, HYYWF, traded up 65%, ORGIF, traded up 27%, and TGOWF, traded flat and then fell, you basically couldn’t have made money from the long side on this one (See told you, they don’t all go up)(All of these have now traded lower, and I think it’s another buying opportunity, but see my comments in the Warrant Observer newsletter)
- April picks, TWNKW, traded up 19% for Warrant Observer buyers, and 31% for buyers on my alert sent out to Warrant Watchlist members May 8th. (BTW, down today on a secondary offering, I covered my short in the common, which I sold instead of selling my warrants, when the warrants moved higher, and am ready to reshort…the percentage hedge.)
- Also in April, ROSEW, FLMNW, and BLNKW, each down $.10, and MGY.WS, down $.69 (For reasons stated in several emails and in the Warrant Observer newsletter, I still believe each of these will offer a chance to sell at a gain. And no, they’re not “investments”. I expect a profitable selling opportunity in less than 2 months.)
- All returns are from the closing price of each stock the day the Warrant Observer was sent to subscribers unless otherwise noted. The percentage return is the absolute highest price the warrant traded at from that closing price, and NO you would not have made this exact return unless you were a Trading God (and yes, I’m referencing Eminem’s Rap God).
I’ve gone much deeper in this post than I usually do, but I hope it gave you some of the substance behind the type of warrant trading I do. And, what I try to help others succeed at.
Most traders fail to make money, and it’s often not the system or style they trade that is the problem, but the impact it has on those trading it.
You can have a profitable system, but if your psyche doesn’t let you follow it, well, that’s the point of this whole post.
My hope for you, and for the Warranteers who are members of the Warrant Observer, is that you make money, yes, but also have fun doing so. Otherwise, you’ll likely not only fail at trading, but impose a high cost on other aspects of your life as well.
One Last Thing…
The focus of StockWarrantsHQ.com has obviously been on warrant trading.
But, I know that’s not the only thing you trade, no matter what I say 😉
So, I’ve started working with Dan, Jake, and the team over at TrendSpider to provide you with what I think is an absolutely killer charting tool. (I’ll have a lot more to tell you about it moving forward.)
While I haven’t talked about technical analysis much on this site, in addition to warrant trading, it’s one of my favorite ways to do high percentage trading.
I’ve put together and recorded several courses on technical analysis and candlestick charting. I’m a bit of a chart junky.
I’m in the middle of putting together a bunch of bonuses I’ll be giving to anyone who signs up for TrendSpider. Even if you just sign up for the free 7 day offer and never actually buy anything!!
I don’t know what all the bonuses will include, but there will definitely be videos on how to use the software. And, what some of my favorite indicators and chart settings are.
One benefit I do know right now, is that if you sign up through my link, (which you’ll need to do to get the bonuses), and enter the code SWHQ20, you’ll get 20% off the cost of using any plan TrendSpider offers for a year.
This is an affiliate link, and yes, I’ll get a small portion of the fee for pointing you to the service and providing the bonuses I’m putting together.
So, if you want to go ahead and try it out while I’m putting the bonuses together, check it out here. And make sure you enter the SWHQ20 code.
Shoot me an email at TrendSpiderBonus@gmail.com and let me know you’ve signed up, and I’ll make sure you get access to all of the bonuses as they become available.