The “What If” Game
I love reading about the best traders of the past. I specifically enjoy hearing the individual trades and how they handled the emotional toll. Hearing about the wins is cool, but I am much more interested in hearing about how the greats handled the bad times, the cold streaks. We want to get bigger and better every year. There are two sides of the coin when getting bigger, and it's having to deal with bigger losses. Not only bigger losses, bigger PnL swings and a greater daily emotional toll.
I was reading More Money Than God, a book recounting the history of hedge funds, the major players, and the game changing trades they made since their inception 70 years ago. Two of the great traders of our time featured in the book are Stanley Druckenmiller and George Soros. Together they had one of the greatest trades ever when they ‘broke the British pound’ in 1992 and famously made over $1 billion in a few days. The notable aspect of the story was Druckenmiller walking into Soros’ office explaining the trade, saying, “I want to increase the short position $1.5 billion.”
Hearing this, Soros got visibly upset. “That doesn’t make any sense. If the news story was accurate and there was almost no downside, why just build steadily? Why not jump straight to $15 billion? Go for the jugular,” in what has become one of the most infamous trade prospect conversations in stock market history. They were able to get up to $10 billion short the following day and the Bank of England raised rates, but the Pound didn’t budge as the Bank of England was running out of cash reserves. The pound then flushed and they made over $1B on their $10B short in a few days.
A few years earlier, after Black Monday in 1987 where the S&P dropped 22% in a single session, Druckenmiller and Soros parlayed and thought the market was set to bounce. Druck was trading much smaller size, was able to load up on the days after black monday and sold into strength. He was pumped. He knew Soros was doing the same thing and gave him a call, but was shocked to hear the somber tone in his voice. Because Soros was trading so much more size than Druck, he couldn’t easily get out of his positions and turned a huge winner into a huge loser. The part that really stuck out to me was Druck bringing these fresh ideas to Soros, with Soros simply replying, “I’m still licking my wounds,” indicating he needs a few days to put on risk after the mental turmoil he put himself through the past week.
This was the most important part of the book for me as someone who aspires to trade that level of wealth one day. We’re all going through it. The biggest traders don’t have some magic temperament where they don’t feel the wins and losses. They go through the same mental hula hoops we do, they just get better at recovering and seeing the big picture over time.
To put Druck’s greatness into perspective, he is the only fund manager in history to go “30 for 30.” 30 years averaging a 30% year without ever having a down year. The math on this is like turning $10,000 into $26,199,957 in that time. He is arguably the greatest fund manager in history. They write books about the $1B they made in 1992. Let’s fast forward 7 years to 1999 when every new trader is making money hand over fist trading the internet bubble. Druck is getting frustrated because he knows valuations are out of whack and this sort of vertical price action can’t last forever. He begins shorting the market, but it keeps going, and he has two young managers in their early 20’s who continue killing it long the internet bubble. He is so frustrated at this point, flips long, buys $2B worth of equities about 30 minutes before the entire market tops. He lost $600 million in a few days time. Remember, they’re writing books about this guy making $1B in the most legendary trade just 5 years earlier, and now he’s just taking a big loss and losing $600 million in a few days time. He was so hurt by these losses that HE STRAIGHT UP QUIT TRADING. He went to Africa for 6 months, closed down his fund, and came back refreshed. The greatest trader of the last 100 years was so hurt by losses he took in a single week that he QUIT. He was down 15% for the year, ended up coming back in November and going on a crazy run that ended with him being up 10% on the year that adds to the lore of greatness that is Stanley Druckenmiller. But there was a one-week span that made the GOAT scream “UNCLE.” We want to get bigger and better every year. But we have to know the PnL gyrations that will come from getting bigger.
Since the election, I’ve been on the best run of my career. Over $400k in gains in 3 months time. I am actively trying to get bigger and better trading the same setups over and over again while market conditions permit that sort of trading in a bull market.
As the market continues to look constructively better this year, I had begun adding exposure for the next run. The market has been consolidating for 2 months and both the SPY and QQQ are set to breakout, this is the time to push it for me just like I had been pushing it since the market bottomed in October ‘23.
Here is the current construct of the QQQ. Seeing this chart, coming off an 8 week consolidation, breaking to new highs, I want to be long the best momentum names for the run as I always do. So, I was looking for the strongest charts with huge upside coming out of tight consolidations so I can grab huge size with a tight stop and capitalize. Below are some of the failed trades coming back at me.I lost $80k in these trades collectively.
RKLB strong rocket-themed name, moving averages tightly converged, turning previous resistance to new support and trying to break higher. This has been an A+ setup for me in my career. It looked great, then failed.
MNDY is a software name that gave a huge earnings move, controlled pullback to the 5ema with big buying at the 5ema. I got very long with a tight stop. You will see this same exact setup in a huge DDOG winner below. It failed.
PINS huge earnings move, pulls back to 5ema, I buy the 5ema retest and get very long off support, to the tune of 12,000 shares. It failed and needs to setup more. This is also the same setup as DDOG below.
AFRM was an earnings Opening Range Breakout (ORB). I bought 70 with a low of day 68.29 stop. I trimmed ⅓ of my position into strength as it extended higher away from the 5ema. But I was stopped out of the bulk of my position on a 10ema break on the daily chart below 74.
You will see below how I took nearly the identical trade in this name last quarter.
Back to back inside weeks for previous market leader VST. Holds all tightly converged moving averages, holds the area a couple days, fails.
Bought ZS front running a monthly consolidation breakout -- sold a chunk at the top end of the range but ended up failing a 10ema trail.
SHOP here gave a great entry if it wanted to lead the market. Strong earnings reaction top the top end of a bullflag’s range followed by a tight inside day. Bought 3200 shares through the inside day high at 122.50 with a tight stop at 120. Trimmed just 15% of my position into strength in the $128 area. The thought process of holding most was the market looked set to breakout and I wanted to be long size of one of the strongest names. I ended up getting stopped out of the bulk of my position Thursday at 124 on a downward break of the 10ema. Still a winner, but gave a lot back, which is fine because if I take this trade 100 times when market conditions are right, I will make a ton of money over my career.
Now let’s look at some of the winners from my $400k+ run. You will notice these are the exact same setups in very similar names.
TWLO bought a reversal at the tightly converged moving averages, gapped up on some good news and sold into it. Best 2 day trade ever at +89k. Sure the news was lucky, you get lucky in the best names with a market that’s responding.
DDOG first entry was off an inside day at support when the name was in a huge base. Scaled out into the crazy rip the next few days.
The 2nd trade is the one I want you to focus on. Buying off the 5ema for a momentum trade in a market leader. This worked out spectacularly in a few days time. This setup is extremely similar to the losses I took in MNDY and PINS. I am only taking this setup in a trending market, which it looked like we were set to hit with Wednesday’s new all time highs in the S&P/Nasdaq. We failed and so did MNDY/PINS. This setup makes tons of money over the long haul within the right environment.
AFRM on earnings last quarter gave a crazy breakout move within a stage 2 uptrend. Name continued higher for weeks allowing me to capture over 10x my risk in profits.
ONON tight consolidation and wedging action for a name within a strong uptrend. We get that breakout move and I’m quickly able to make 6x my risk in a few days time.
AVGO huge earnings rip, pulls back to support. Begins holding tightly converged moving averages off support. I buy 2000 shares at 229 with a $4 stop and sell it for an average of $16 dollars, or 4x my risk in a few days time.
VST the first time. Market had been under pressure but this name just flagged and flagged, putting in an inside day within a bullflag as the market is selling off. Market stops selling and this name takes off.
GEV same exact setup as VST above. Market selling, this is flagging. Buy the inside day and scale out into strength.
When we go on a tough run, it’s easy to play the “what if” game. What if my setups stop working? What if my edge is done? What if this drawdown is the beginning of a much larger drawdown?
The way to fight off these negative emotions is to take a bird’s eye view and stop playing the “what if” game. Like Soros in ‘87, we’re just licking our wounds right now. But we’ll be back and better than ever when our setups come back into play as they do every single year. The PnL gyrations are difficult to handle, but we’re in this game for life and we’ll be in the chair tomorrow. So don’t take the micro view and punish yourself over ‘all the bad’ in the last couple weeks. The market changed right in front of our eyes. You will notice the losses I took are the same setups as the huge wins I took. We’re playing the probability game. It’s our job to attack when conditions are right, whenever that may be.
