Could-have-beens

Oh, you think that’s bad?  How about we re-analyze the same trades over and over?

Suppose I had actually traded last quarter the way I was supposed to, with a loss on Jan 26 and then a gain on Mar 03.  So then I would have been flat at the point when Silicon Valley Bank was going belly up — how was the stupid rabbit supposed to know which buttons to boop on Mar 08?

(On the actual Mar 08, I was only too aware that the market was about to drop.  I was thinking to myself that day, “If I weren’t already -220% short, I should be going to -100% here.”  But it seems unreliable to depend on having a feeling at a profitable time.  Isn’t there a better way to trade?)

Suppose the stupid rabbit is really stupid and just does his regular thing every day, ignoring the news.  Being ever the contrarian, he would have been *buying* stock during the Mar 08‥Mar 24 downswing.   Of his 12 purchases, the ones on days 1, 2, 3, and 5 would have been for higher than his closing price on Mar 31.  Stupid rabbit!  Buying high, selling low!

My trades are not all the same size, although I haven’t yet found a good way to represent that on these stock charts.  For contrarian trading, I commit 10% of capital on each of days 1, 2, and 3; then 20% for 4, 5, and 6; then 30% for 7-8-9, and then I spend 40% of my money on each of the last three days, leading to a total of 300% (or 3× leverage on my margin account).  This would have me committing 40% of available capital at the open on Mar 24, when the market price had recently fallen 10% but I was still buying.  These later purchases at lower prices swamp the poorly-priced early trades, leading to overall profit.  It’s just that easy!

For even more fun, I could have traded this chart long and short simultaneously, scalping the market both coming and going.  To do this, I would have put on a short trade Mar 08 and taken it off Mar 21 for a +5.1% gain (as imagined in my previous post), at the same time as this long trade-sequence on Mar 08‥Mar 31 for an additional +6.6% profit.  The trades open and close at different times so they both gain, but during the overlap period they are opposite bets that will later both turn out to be winners.  Something something laws of thermodynamics?

Still, in my game-as-played I made +9.5%, while this more rule-conformant alternative analysis would have yielded at most +8.8% profit for the same period, or more likely +3.7% as shown on the chart above.

Where is this profit coming from?  Liquidity.  During the March swoon, other traders were selling in a panic and needed a willing counterparty.  Back in January, others were buying in a panic and I was their counterparty (too willing, as it turned out).  I get paid for acting as the counterparty for panicked traders.  This is called, “playing the house side”.