The market can be very unforgiving at times. Well, not just at times, always. If you make a mistake, it will not hesitate to take your money. What follows is my realisation of how I made a fairly large mistake over the recent weeks.
It all started with the falling oil price. Sasol kept trading lower. I recognised a trend and took a short at R545.00, which I covered at R520.00. Job well done, except that it kept falling. Agony. After a brief attempt at a long, which burned me, I shorted it again at around R389.00, which again I profited on as I closed that one at R372.00. The stars were aligned, Oil was tanking, there was no hope, Sasol was going to R300.00... at least that is what my brain was saying. Naturally, as soon as it bounced (which I caught actually), I shorted again. This time at R382.50-ish.
Now ok, maybe some background is needed here. At the time I was watching the Oil price like a hawk and saw that it just could not get above $50 a barrel (Brent Crude) and figured that as long as it stays below $50, Sasol is dead in the water. I saw a lot of resistance at $50 as it kept trying to get above that level but could not manage to do it. My Sasol short started running against me, almost instantly actually, yet I remained convinced that it would tank because oil was going to $35 (in my mind that was obvious). I shorted more Sasol at R408.00.
What I didn't realise I was doing, was ignoring all the signs that the Oil price could turn - the most obvious being that Shale Gas projects were being put on hold or cancelled completely by many oil companies – and focusing on only those factors that confirmed my view that Oil, and Sasol, was dead. I had built up an internal bias and didn’t want to accept any other reality other than the one I had created in my own head. Another dead giveaway was that the volumes on Oil was picking up in a big, big way as it kept assaulting $50.
At this point I should say that I am very grateful that I had put ‘a daily close on the Oil price above $50’ as my stop loss for the Sasol short, because one fine Friday night, news broke that 93 oil rigs were canned and oil shot up 7% to close at $52.99. Monday morning came and I came out the gates storming! Buying Sasol like a mad man. Eventually I covered my entire short at an average price of R434.36. The whole exercise had destroyed just under 2.5% of capital.
So what went wrong? Well, I had felt that I had missed out on the short of the century. One that I called, but never really traded as I should have. Taking small profits here and there but not really milking it as I so clearly could have. Then when the picture started changing and the ‘green shoots’ started showing, at the very depths of my subconscious, I was blocking these signs to confirm my own view.
In retrospect this is all fairly obvious, but at the time it is incredibly difficult to recognise. Next time I will more vigilant though. Some lessons are hard on you, but all of them are necessary. Managing these internal biases is definitely one of the things that goes on my list of things to improve on.
@TraderPetri
4 February 2015
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