Tuesday, October 31, 2006

The Power of Greed

There is famous and gripping scene in The Exorcist where Father Karras is attempting to drive out the demon that has taken control of Megan. He is in the bedroom with her, takes the cross and begins chanting "The power of Christ compels you!" repeatedly.
Well, I have a personal demon as well, and his name is called Greed. Today, I had an intense battle with Greed and lost. Here is how it unfolded:

I mentioned yesterday that I would be looking to get out of my BIDU calls near today's HoD. Well, I did manage to get out near today's High - which occured when BIDU opened with a nice gap up. This morning's action was so fast paced that BIDU managed to fill the opening gap within a few minutes. Then, it looked like it was going to reverse back up and challenge the HoD. At least, that was what I wanted it to look like. It would be another couple of bucks to move back up to the highs, and that would mean a nice and juicy pop in the calls. So I got greedy and bought back into some of those same Dec 90 calls, but without waiting for any confirmation of the trend reversal. By trend reversal confirmation, I mean another green candlestick, and some volume to accompany the reversal. The volume did actually show up - but only for the selloff!
I've actually been getting better at following my rules lately:
1. honour my stops
2. keep my losses small.
3. Select well behaved stocks with clean looking charts and decent setups
4. Keep my position sizes smaller for stocks where I needed to take wider stops.

But in jumping back into the call options that I had sold just minutes earlier, I made two serious mistakes:

1. Entered a trade because I succumbed to the demon of Greed. The thought of making more money on these same calls clouded my judgement.
2. Did not wait for the the chart to tell me it was reversing the initial downtrend, instead I anticipated, and in the end, hoped for a trend reversal.

As it turns out, the selling became vicious after 10AM, so I was actually lucky to lose just the majority of the additional profits made from this morning's gap up.
Hindsight is 20/20, but it looks like the better move was to buy puts instead of calls, as indicated by this chart of BIDU Dec 90 Puts:

Never underestimate the power of Greed - all it took was a couple of minutes for Greed to work its power to cloud my judgement. I'm not sure if I can ever exorcise this demon of Greed out of me completely, so it is in my best interest to actively seek to further understand this destructive side of me, and study how it manifests itself in various subtle ways. I don't forsee any proactive, feel-good, quick fix, "looks good on paper" plan for dealing with the problem of greed. It's going to be more like a grind it out, slow and steady path to a higher degree of self-awareness in order to overcome greed.

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