My First Attempt at Trading – The Mistakes Continue

In my previous post I shared a little bit about my very first investment in the share market, how it all went pair shaped and managed to cost me 80% of my initial investment over the space of 2 years. Now, that was by no means my only investing mistake during that time. Not by  along shot.

I now had a taste for what “playing the share market” was like and although my major investment in ARE was steadily losing value I was thoroughly enjoying the excitement that came with watching the daily fluctuation of the shares I had purchased. On top of that, banter regarding hot stocks and the markets in general was commonplace among my peers and there was no shortage of mates hitting me up about the next stock that was gonna go “bunta”.

It was probably a combination of my new found fascination with the share market and the constant chatter from all my buddies that initially got me interested in trading. Now for those of you that are oblivious to the differences between investing versus trading, a quick run down:

  • The term Investing typically refers to a “buy and hold” strategy where you purchase shares in a company with the goal of holding for a long period of time. In my case this means holding for at least 6 months and more like a year or longer.
  • Trading on the other hand usually refers to buying and selling shares in a company over short time periods i.e less than a month or so. For me, I usually hold a stock for anywhere between a few minutes to a couple of weeks.

Now before I get into things, I should be honest here – I never actually decided to consciously have a go at trading. There was never any plan, no criteria I set myself before entering or exiting a trade, no long term trading goals or trading philosophy. I’d simply had taste of how a stock could move 10’s if not 100’s of percent in a day and if I’m honest, I pretty much started buying “hot stocks” under the assumption that I could buy and sell quickly for big gains with very little effort.  Sounds too good to be true right? I wish I’d stopped to ponder that thought…

On top of that my investment in ARE had given me a experience with the dangers of holding a stock long term. I was sure I could reduce my exposure to losses by buying and selling breakout stocks quickly whilst they had momentum, rather than hold and risk a momentum swing moving against me in the long term.

The first trading stock I stumbled into was Inca Minerals (ICG), a copper explorer with its main prospect in the Peruvian Andes. For those with a geological inclination Inca were targeting a potentially huge porphyry copper deposit. Porphyry deposits are typically massive and highly sought after – the largest and most profitable copper mines in the world are porphyry’s so there was significant hype surrounding the stock.

Beginner Investing Mistakes Mining Speculative Stocks

Bulk sample from a porphyry. Porphyry deposits are low grade but huge in volume.

I came across ICG whilst reading the popular Australian online share market forum Hot Copper. The forum has a day trading thread in which posters regularly post (*cough*, ramp, *cough*) throughout the day about stocks in which price is moving rapidly enough to enable them to be traded, that is both brought and sold, in a single day for a profit. Typically, the stocks being discussed move at least ~5% a day but more often than not the stocks getting the most air time were the ones that were running hard – we’re talking 10’s of percent or more and some even 100’s of percent in a single day.

ICG was one of those stocks. It had been forming a solid base around the mid to high two cent range for the past 6 months before breaking out with volume on the 29th of January, 2013. I initially got the heads up on the Hot Copper Day Trading thread and started to watch closely. I would constantly refresh my trading screen to watch the price action unfold. I was a little nervous to enter, but I kept watching and waiting for a good time to buy.

You see I had witnessed a typical trading pattern which often played out in a lot of these spec stocks by now – the typical Wolf of Wall Street style”pump and dump”. Basically, a stock price would rise rapidly before falling back to near or even below where it started from, often equally as rapidly. This type of price action is very typical with speculative stocks, particularly in sectors of the market which are either starting to decline, as mining was at the start of 2013, or during bear markets where any decent news is sold into by stale holders which are underwater and looking for any opportunity to get out.

I had read about the textbook charting trade entry patterns I should look for – price increasing with increasing volume. All the signs were there (as far as I could tell) that this thing was gaining moment. After watching from the sidelines for the first couple of days of decent rises I finally decided to dip my toes in and purchase some ICG stock on the 1st of February 2013 with an initial purchase of $1500 at 5.4 cents. ICG went on to close at 5.8 cents that day meaning I had managed an unrealized (i.e. on paper) gain of 7.4% in the space of a couple of hours.

I ended up selling the next trading day at 7.4 cents for a one day profit of $515 (34.3%). As you can imagine I was pretty stoked with myself and my confidence levels were certainly on the rise.

My second day of trading ICG was a particularly high volume, volatile day with price swing back and forth dramatically. To give you an idea, if you look at the chart displayed below you can see that ICG hit a low of 5.9 cents before rising to close at a high of 9.2 cents, a gain of 56% in a single day. I ended up making two trades on this day, firstly buying at 7.6 cents and selling at 8.2 cents for a 7.8% gain, and buying at 8.4 cents and selling for 8.8 cents for for a 4.7% gain. This meant I had made a further 12.5% on top of the 34.3% from my overnight trade.

Candlestick chart of ICG showing price action during my first few trades.

Candlestick chart of ICG showing price action during my first few trades.

I was starting to think that this trading business was the way to go. I mean I’d just banked 46.8% in the space of a day and a half. I’d entered into my first 3 trades and all of them had turned a positive result. The problem was, I was starting to get ahead of myself – thinking that I knew what I was doing when in reality my trading success was little more than beginners luck.

I continued to attempt to trade ICG over the coming few weeks, however this time without quite as much luck. My next three trades all resulted in small loses ranging from a few percent to 20%. It was a good reality check to realize that this whole trading thing wasn’t quite as easy as the first few days of trading ICG had seemed, but I was still up overall and feeling good. Furthermore ICG was still getting positive press on the online forums with every man and his dog suggesting she was ready to go for another rapid run. This was largely in anticipating of the release of results from the recent drilling program which were due any day now.

I made my final trading purchase of ICG on the 18th of February. It was a classic FOMO (Fear Of Missing Out) decision as the stock gaped up on open and I didn’t want to miss out on this thing breaking away topside. There was the usual talk of the “leaky ship” and that dthe drilling results were in and insiders were getting in, big time. However, over the coming few days the price continued to drift lower. Did I sell – no. Did I have a set stop loss to limit the amount I could lose – no.

FOMO

I held on, blindly hoping the ICG share price would go up again over the course of a week or so. The day before I finally sold out saw a weak rally – price rose moderately but on next to no volume. To my untrained eye the rise was a good thing and after days of down or sideways price action seeing a green number in my portfolio was a welcome change, however hindsight shows this would have been the perfect time to get out and cut my losses.

The following day the stock gaped down big time – something that even a stop loss wouldn’t have protected me from. The dramatic drop was caused by the release of some very poor drilling results – turned out the first up holes had drilled through nothing but barren rock. To give you an idea, ICG closed at 10.5 cents on the 26th of February and opened at 6.5 cents on the 27th before hitting a low of 4.9 cents – a potential maximum overnight loss of over 50%. It then continued to drift downwards towards it’s pre-pump price level of mid to high 2 cents over the following weeks.

I actually had pretty solid reasons for believing that the drilling results were going to be good – The company was low on cash but had avoided raising capital during the recent pump, suggesting an anticipation of higher prices to come. Furthermore, one of the main directors had voluntarily offered to place his newly acquired performance shares in escrow for a long period of time meaning he was unable to sell them, thus sending a strong signal to the market that he had very high hopes. The company had also released photos of the recently drilled core with what looked like some very decent hits containing copper bearing minerals. All these factors indicated to me that the company legitimately thought it was onto an absolute winner.

I was on a boys snowboarding trip in Japan when the announcement was released and contrary to my luck with ARE I was actually on my phone at the time. Thankfully being a geologist I was able to briefly skim the announcement and realize that the results were terrible. I’m glad I had the foresight to see this and I sold out very close to the open at 6.9 cents for a total loss of 45% on that particular trade. I definitely had a brief mental struggle as to whether I should hold out for a bounce, or even turn the trade into a long term hold in anticipation of better results further down the track, but I’m glad I decided to sell.

I haven’t traded ICG since.

In the end I made a total of 14 trades in ICG over the space of 27 days. After getting off to a flying start with my first three trades I ended up down 45% at the end of it all. I was probably at about break even before the big gap down and to be honest, if the results had been positive as expected I would have been in for some big gains. Furthermore, although I wasn’t using stop losses, even if I had been, the big gap down meant that I probably wouldn’t have been any better off anyway as the price would have gaped below my conditional order.

Daily candlestick chart showing ICG price action during February 2013 while I was trading the stock.

So there you have it – my first go at trading explained in 2000 words. There were a few bright moments but ultimately ended in me losing a hefty proportion of my initial investment. I’m definitely better off for the experience and I learnt a lot about what can go right, but more importantly what can go wrong and the speed at which a share price can move. Experiencing that big gap down and the losses that came with it was a really valuable experience for me.

The biggest lessons I learned was that big fundamental news, i.e. the drilling results, can really throw a spanner in the works. In this case I knew the risks involved and chose to play the game anyway so I have no one to blame but myself. Cutting my loss quick and fast when this kind of negative fundamental news arrived saved me from incurring significant further losses.

Lastly, my decision to sell at 6.9 cents, rather than turn my trade into a long term hold was a good one. The stock has since continued it’s downward trajectory, hitting a low of 1.1 cents and is currently trading at 1.9 cents. They are still exploring the same prospect and could still hit the mother lode but the opportunity cost of having my capital tied up long term in a losing trade wouldn’t have been the best use of my funds as I have since gone on to make some very decent gains since – more on this to come.

Happy trading,

The Nude Investor