The importance of setting goals

This article is not intended to being just another boring article about setting goals. The aim of this article is to share some of my knowledge and expeirnce on how I use goal setting to my advantage.

The research about goal setting is popularised by Locke in 1968 (LOCKE, E. Toward a Theory of Task Motivation and Incentives. Organ. Behav. Hum. Perform, 3, p. 157-189)

He argued that setting goals effects the individual’s performance in 4 main ways:

  • focuses attention

  • mobilises effort in proportion to the demands of the task

  • enhances persistence

  • encourages the individual to develop new strategies for achieving their goals

Similarly, another research (click here to read the paper) shows that those who clearly decide on their goals and/or write their goals down accomplish significantly more than those who do not decide or write down their goals.

Goal setting for me is not just about identifying what my achievement will be, but more importantly identifying  a clear plan on how to get there. I like taking a complex problem, analyse it and then slice it into digestible chunks. This means that I have an overall GOAL but also interim goals to get there. This in my opinion is extremely important. Many people set big goals for themselves and then get demotivated as the task is too big to achieve. Setting big goals is great and important but you should also plan how to get there and have interim goal to achieve this, get motivated and conquer the overall goal.

I use this methodology daily in my private life and also business life. In business, I have multiple business interest. I have a Venture Capital organisation that have number of identified goals for this month, this year and in the next few years (overall goal is sliced into smaller goals as described above), similarly I have an international  Property Development business where I have number of models such as: build to sell, build to rent, buy to rent or buy to sell. In each model, there are number of set golas needs to be achieved so I can decide to move to the bigger position or re-evaluate the business for efficiency and consistency and modify my own goals.

In trading it is the similar story. I have weekly, monthly and yearly targets that I set as my own goals. If the goals are not reached after a certain amount of time, then I keep re-evaluate and set a different path to achieve the same outcome. Don’t forget there are thousands of ways to climb the same mountain – If there is a will, there is a way.

In my personal life, I set goals to learn new skills. Each year, I set a goal to achieve something non-business related. Some of  these goals can be as small as learning how to play poker (2009 goal) or bigger goals such as getting a Private Pilots License (PPL – achieved in 2012), etc.

When we are setting goals, the important thing is having achievable goals and not to have too many goals at once (this will affect your focus) and making sure that you have identified measurable outcomes. You need to know when your goal is successfully achieved. If you for example say this month I will become better in trading, there is no measurable outcome in this. What does ‘better’ mean? It means you wont loose money? does it mean you will make money? If so how much more than normal? Think about this before setting any goal.

If you are new to goal setting, I strongly suggest writing them down somewhere so you can go and check your progress. Once you get used to goal setting, you will probably not need to write them down anymore as they will become part of your everyday life and keep you in the direction of your set goals. Once you start to achieve your goals, this will become almost a habit and will push you to set more goals in your life hence more achievements to follow…

I hope this is helpful. If you like the article or if you have any comments, please let me know on twitter (@monacotrader) – I am interested in your feedback and your achievements using the methodology above.

Have a nice weekend.

MT

 

 

Trading Psychology – FOMO (Fear of Missing Out)

There are number of ‘Fears’ that a trader will experience in his/her career. The most important three fears that often manifests themselves are: Fearing of Missing Out (FOMO), Fear of Loosing Money (FOLM) and Fear of Being Wrong (FOBW). In this article, I will specifically focus on FOMO, what it is, how it can affect your trading and how to prevent it (as much as you can).

Fear of Missing Out (FOMO):

Fear of Missing Out is a well researched psychology topic that is not only true for trading but also for every day life. Most scams (and well scripted marketing) work due to recipients’ FOMO ‘triggers’.

If you want to understand FOMO better, I strongly suggest reading two research paper by Kernis (2003) and Ellion (2007). They argue that self-determination theory (SDT) a macro-theory of human motivation provides a useful perspective for framing an empirically based understanding of FoMO. According to SDT effective self-regulation and psychological moods are based on the satisfaction of three basic psychological needs:

  • competence – the capacity to effectively act on the world,

  • autonomy – self-authorship or personal initiative, and

  • relatedness – closeness or connectedness with others.

Today’s retail investor is a social animal. We are following each other on social media (twitter, facebook, instagram, etc.) and also bombarded by emails and other media channels. We are being sold ideas and concepts every single minute of the trading hours (and pre-trading and after-hours). What we are really trying to do is to feed the three psychological needs above and/or try to get confirmation (and comparison).

We follow each other, we hear news that this is the must have stock (or the stock that needs to be shorted immediately). We see so many people are doing the same thing and we feel left out (the feeling is: everyone will make big bucks and if I am not doing anything! I will simply loose out on a great trade!) or worse,  in some circumstances, you might be already in the trade but you start doubling your position (just because everyone else is doing the same) and pay the price later. We all know that if everyone is doing the same thing, the trade becomes crowded and thinks start to turn for the worse…

Realization and Action

As traders, we need to realise something very important as early as possible  in our trading career. We simply can’t catch every stock move and we can’t trade stocks every minute of every day. This is a fact! If you can accept this fact then you have ultimately accepted that you will miss some trades (this is perfectly OK!). The real rule to be successful in trading is to have a working strategy. Everyone trades differently, no two traders trade exactly the same way so your strategy will be different then my strategy however there might be similarities that puts us on the same set (i.e. short trader, long trader, momo trader, stock trader, fx trader and so on..). Don’t feel like an outsider or feel being wrong just because you are trading differently to someone else or to a group of people. Don’t forget there is money to be made  in so many different ways from the same stock.

All traders struggle with FOMO time to time. If someone is saying they don’t struggle, they are simply lying to you. Trading experience of course helps with this immensely. My simple rules that help me to stay in check are:

  • The Action Plan: Always have a plan before entering in a trade. Ask yourself what is your edge for entering in this trade. You need to KNOW why you are entering, what size you will be using,  when you will be exiting and what you will do if the trade goes against you. You are not going into this trade just because some guru or a friend thinks it is a good idea. KNOW your trade and KNOW what you want from it EVERY SINGLE TIME YOU TRADE!

  • Be Disciplined: As you now have an action plan, the truth is executing that action plan is more difficult than to have an action plan in the first place. This requires discipline and determination. Don’t forget that HFT algo that you are trading against doesn’t have emotions and will follow rules to the letter. You should try to do the same (as much as you can).

  • Learn to be happy with your achievement: We all want to make a killing from a trade. Reality is trading is extremely difficult. Once you have executed your plan effectively, either you made a profit or a loss. Either way, you have done what was necessary for the trade and successfully filtered out the noise – well done on that. Even though it was a loss, you cut it on time as per your action plan. This is great news. If your trading strategy is profitable, in the long term you will make serious money from trading. As you are following your rules, you WILL be consistent and you will achieve consistency in trading.

I hope this helps. Have a nice weekend.

MT

 

 

 

 

Why I am short KBIO (KaloBios Pharma)

If you are even an amateur trader, you might have heard about KBIO stock back in September where it went from 2.08 to over $5 in 2 days and then back to 1.8s within days…

Now the funny thing is On Saturday 14th November (3 days ago)  Kalabios announced that it would liquidate its assets as it could no longer continue operations with the current cash on hand. In addition, the company stated that they would not be able to obtain the proper funding in the amount of time allotted, to continue with other drugs in the pipeline. The whole downward spiral started with two different trials failed to produce meaningful results.

Also for those who will remember, back in 2014 Kalabios had announced that its Asthma drug, KB003, had failed a phase 2 study. That was a bad setback, but things got worse the next year when the company announced that its phase 2 drug in patients with Cystic Fibrosis had also failed. Both of these failures really hit the company hard but it seemed like it was going to recover with enough pump until this new liquidation announcement.

In short, the lack of money really took this down, as the company chose to liquidate instead of attempt to find funding for the company. Did theytake the easy way out? That’s hard to say for sure, but one thing for sure is that investors have been left holding the bag. The company in charge of this liquidation effort is known as The Brenner Group. They will start the process immidately.

Since the announcement, we are seeing almost a comical move on the stock. Instead of crashing it is actually going up. This is mainly due to pumpers setup a good sub 1 to over 1 play in the last two days and used SSR (short sale restriction)  to their advantage.

What do I expect from this stock? Yes you know it. Back to under $1 in a few sessions or maybe sooner. Started my ss position today and happy to add more if it keeps poping higher. Fundamentals always win at the end.

Have a nice evening.

MT

Update: Since the post KBIO went back to 1.70s level (from 2.40s and I did not cover waiting for lowers) and today AH it went from 2 to cirrently 18s! The news that Martin Shkreli buying shares started a short squeeze wave. I managed to escape with just over -$50K but not to worried because of my AVXL win of nearly 4 times that amount in the previous week. This teaches us NEVER to say NEVER in trading. Anything is possible, anytime!

Introduction to Options Trading – an easy to follow guide

Apart from buying or shorting stocks, there are other ways of trading the underlying securities. A good trader is the one that expands his/her tool set. I will be describing options trading in this article. I will try to keep it as simple as possible so especially the new traders can benefit from it and start using it.

Options Basics

As the name suggest, an ‘option’ is a defined contract that grants the trader to buy or sell an underlying asset at a specific price on or before a certain date.

There are two types of options:

  • Call Option: This is the option to consider if you think the price of the security will be going up.
  • Put Option: This is the option to consider if you think the price of the security will be going down.

Please note that the standard stock options and ETF options expire on the third Friday of the month (hence the volume increase in the markets at this specific date). There are also around 80 stocks in the stock market that their options expire every week on Friday. These are referred as ‘weekly options’.

In options trading, the prices are quoted as per share amount. The minimum contract is always for 100 shares. So in example: if the option price is quoted at $5 the actual cost would be $5 x 100 shares = $500 (not including trading commissions).

Option contract example:

XYZ February 10 Call at $2.20

Lets analyse the option contract above:

XYZ: this is the underlying stook (100 shares / option)

February: this is the expiration month (3rd Friday of the month, the contract will expire)

10: strike (exercise) price – so if the contract is exercised, the price for share you will pay is $10.

Call: this is the type of option. It can be either call (when you long) or put option (when you short). In this example we have a call option (so we are going long) and this enables us to buy the shares at the given price (in this particular example at $10).

2.20: this is the ‘premium’ you will pay to be able to buy this stock at the given price of $10. So the premium you will be paying will be $2.20 x 100 shares = $220 for 100 stocks for this example.

Long call strategy

  • This is a bullish strategy with a expectation of higher price of the stock at the expiration date. So if you buy the stock at $10, the expectation is it will be higher at the expiration date of contract (i.e $13)
  • The good news is with this option contract, your maximum loss is limited to the premium paid for the option contract. That is it.
  • Theoretically the maximum gain is unlimited. So the price of the stock can go higher and higher. In real life, of course there will be a limit on how high the stock will go, but can be a very profitable trace for you (if it goes higher).

Let’s look at another example so everyone gets what I mean above:

Let’s say we are bullish on ABC corp and the stock is trading at $34.50 and we think it will go to $40 within the next 45 days before the expiration of an option contract. So in short, the stock is currently trading at $34.50 and our price target for the stock is $40 (within the next 45 days).

when we look at our trading system, theoretically, we shall see some option pricing listed similar to below:

ABC corp @ 34.50

image

Looking at the prices on our system, in this example, the premium for January $30 call is trading at a high premium, $40 call has no value but the best paying option for going long seems like January $35 call. So I can do the following option trade:

BUY 1 January 35 Call @ 1.25

Now let’s have a quick look at our break even point and profit\loss:image

as it can seen on the table below, any price $35 or below, there is no value in this option contract. The maximum loss will occur is only $1.25 (nothing more). But anything above $35 plus the premium we paid (35 + 1.25 = 36.25 is our breakeven point) is a profit.

The good news about option contracts is, you do not need to wait to sell (or cover) your position until after the expiration is reached. You can buy or sell anytime, if the price is going towards the direction you wanted in the first place then you can have a profitable exit within days (and sometimes even hours).

If you take the example above and reverse (if you are bearish instead of bullish and you think the price will go down) then you can go for the PUT option (instead of call option). The trade mechanics and profit/loss calculations will be identical.

Advantages and disadvantages of options trading

Advantages

  • Leverage: if you are a disciplined trader, you can use the advantage of leveraging with options
  • Risk/reward: depending on the strategy, some option strategy will enable traders to have theoretical unlimited upside with defined and limited  loss
  • Strategy plays: some strategies will allow traders to take advantage of volatility and time decay type of plays
  • Low capital requirements: you can do so much more with $1000 in options then with simply trading stocks with the same amount.

Disadvantages

  • Lower liquidity: very low volumes of trading unless they are very popular underlying stocks. For smaller traders this is not much of a problem if they are only trading 10, 20 option contracts. But if you are trading over 100 contracts then it might be difficult to get out of the trade when you want with low liquidity.
  • Higher spreads / commissions: options tend to have higher spreads because of lack of liquidity as mentioned above. Options commissions are also generally higher than simply trading stocks.
  • Options are not available for all stocks: This is one of the biggest disadvantages. Not all penny stocks have options available to them.

I hope this gives you a good idea of what options are, how to do an option trade and the main benefits & disadvantages of options trading. If you like this and found it useful then please like it or comment on Twitter so I know, and according to that I will have a part 2 write up where I will discuss best option trading strategies and how to benefit from them.

Have a nice Sunday.

MT

If you have finished reading this, you can read PART 2 HERE.

 

Why I am short Anavex Life Sciences Corp (AVXL)

Anavex Life Sciences Corp., a biopharmaceutical company, is currently engaged in the discovery (and in the future maybe development) of drugs for the treatment of Alzheimer’s disease, central nervous system diseases, and pain and various cancers. Its lead drug candidates include ANAVEX 2-73 and ANAVEX PLUS, a combination of ANAVEX 2-73 with donepezil (Aricept), which is in a Phase IIa clinical trial for the treatment of Alzheimer’s disease. The company’s product candidates also include ANAVEX 3-71, a drug candidate that is effective in very small doses against the major Alzheimer’s hallmarks in transgenic (3xTg-AD) mice via sigma-1 receptor activation and M1 muscarinic allosteric modulation; ANAVEX 1-41, a sigma-1 agonist for neuroprotective application; and ANAVEX 1037, ANAVEX 1079, and ANAVEX 1519 for the treatment of pain and various cancers. Anavex Life Sciences Corp. was founded in 2006 and is a US Company (headquarters in New York).

The company currently have ONLY 4 FULL-TIME STAFF. You haven’t read it wrong! It has 30.1M shares outstanding with over 28.5M shares currently floating. With today’s valuation the market cap is over $377 Million (you haven’t read that wrong either!).

Looking at the SEC filing, Mr. Christopher Missling is company’s President and also Chief Executive Officer and also Treasurer and also Company Secretary and also the Director (the man with many talents I guess!)

As a discovery stage pharma it has no revenues and its current EBITD is -$3.78M with net income available to common is -$11.4M. High burn rate with additional funding required in every stage.

One of the biggest criticism against AVXL is the company is using cherry-picked historical study of Aricept as a control biomarker. The data is extremely misleading and will (might) create problem during next phase applications. More on this can be found on the net. The stock promoters are currently doing an excellent job, almost creating a cult-like following. From experience, this never ends well.

The company has just reached an agreement with Lincoln Park Capital Fund, LLC for the sale of up to $50M of common stock over a 36-month period. The company also issued 179,598 shares to Lincoln as a commitment fee. Net proceeds will try to fund the clinical development of ANAVEX 2-73, its potential treatment for Alzheimer’s disease. Lincoln Park Capital Fund is not a stranger fund to AVXL. On 30th December 2010, Lincoln Park Capital Fund invest $1M and then 8th July 2013, Lincoln Park Capital fund once again invested a further $2.6M in a private placement and a $10M further financing commitment. As the company couldn’t deliver the expected results, they haven’t received the further investments. The latest investments is part of their ongoing deal and the company is now giving away more stock then originally agreed in the first place – Lincoln is not a new investor in the park, they are just looking forward to come out of it profitably and with the recent stock prices, they might manage to do this as well.

In the last 4 sessions, the stock managed to climb from 8.75 to almost 12.75 today. This itself doesn’t mean that it needs to come back down but such a climb without supporting fundamentals is simply wrong (at least to me!). I have started my short position at around 12.25 region and added further around 12.50s. I am currently building a short swing position so happy to add more short if the stock ends up with further gains in the short term. However, my expectation is a big red day is imminent sooner than some think…

MT