When Shake and I were rookie traders, we worked side by side, with enough cockiness to make Tucker Max blush (aka we had no clue what was going on). We’d have morning meetings with our boss Chaz, who looked more like a hunter from the midwest than the savage intraday scalper he truly was. I remember one of his “lessons” on conviction where he made over $100k on an Apple earnings call in 30 minutes.
We were taught to never take stock into earnings. It’s just too risky as it’s generally a coin flip how the stock will react. We’re not saying it’s a good or bad strategy, just recognizing the fact it’s a dangerous one, and one we typically stay away from.
So Chaz buys 2000 shares of AAPL around 3:58 right before the market closes. To clarify, this is the “Old Apple” we’re talking about, before the 7-1 stock split when it traded around $650. Back then it traded much like AMZN does today, not for the weak-hearted. All the young traders were going nuts with excitement, I remember Shake looking at me saying, “This guy is a fucking psychopath!” Apple was coming off a couple down quarters and had not been an easy stock to trade. For some reason, Chaz knew it was going to feast.
All the traders at our desk were anxiously waiting for Apple to report (always 30 minutes after the close), but Chaz is cool as a cucumber. He’s sitting there twirling his drumsticks between his fingers calmly asking us how our day went. I couldn’t understand it. If he’s wrong this stock is dropping a quick $50 and he’s out One Hundred Thousand Dollars and he’s asking me about my day?!
4:30pm rolls around and of course, Apple CRUSHES earnings. The stock jumps the fastest 40 dollars I’d ever seen and is continuing to fly higher. Chaz is sitting there laughing and selling stock, dwindling his position and twirling his drumsticks. Just before the market closed we had been bragging about our “comma day” (+$1,000) and he just made a hundred of those in a heartbeat. I’ll never forget it.
So yes, Chaz was a pro when it came down to the executions. His trading style was contrarian, playing off crowd psychology techniques where he was always going the opposite way of ‘news trades’ based on Crowd Psychology alone. For example, some news about stock XYZ is announced over the loudspeaker and you see it uptick slightly. He is the guy offering to get short into this pop because he feels people were overreacting to the news quickly, and the stock will eventually come back down to earth. This is one of the most difficult strategies in trading because you can have a position go against you forever. Since he’s basing his entry on tape reading and crowd theory, he has no real stop-loss level and by the time he’d finally have to call something a loss, it would be an expensive one. Talk about a stressful way to trade! However, he was very successful with this very difficult to master strategy as he began trading in the early 90’s.
Being on the street for over two decades, you could sense his paranoia from a mile away. He put tape over his iPhone so the TSA couldn’t spy on him. His favorite question to ask us, when we would blurt out some ridiculous trade idea was, “Who’s Fucked?”
What do you mean, “Who’s Fucked?” He was going back to the Crowd Psychology theories that he so fondly and endearingly spoke about. He was pretty much saying who is in trouble right now, shorts or longs? Who was in pain and who was likely going to buy, sell or short this stock. So let’s look at our current favorite dog stock to see Who’s Fucked: GoPro (Twitter came in a very close second).
So take a moment and think to yourself “Who’s Fucked?”
We’ll give you some options: long term holders, anyone long, anyone short, anyone who bought prior to today.
So in the simplest sense, if you bought GPRO in the last 2 years and still have it, there is a very good chance you are losing money in this trade. Virtually 99.9% of long investors are fucked (it’s currently about 15 cents off all time lows). On the flip side virtually anyone short this stock is making money if they are still holding it.
This idea is a very simple way to get an understanding of a stock’s climate, sure was there a ton of people who bought at $40 and sold at $90 or vice versa, however we don't care about people not in the stock. We care about who’s in and their feelings. Are the investors in GPRO super pumped about this $9 special down 90% from highs? Fuck no, they're shaking in their boots, so do you think they’re going back up the dump truck (their wallets) and buy more? Probably not unless they like to add to losers- a top rookie mistake.
Now if you remember Mr X, one of the best traders Shake and I ever met, shorted 10,000 shares of GPRO at $91 vs $100 and he still had it when GPRO was at $40 last year. That's a $500,000 trade on $80,000 risk. Mr X is not fucked in this situation, if he still has it, he's up almost $800,000!
This is why we do our best to avoid weak names, if all the people holding a particular stock are under water, we don't want to jump onto a sinking ship because it's “such” a good deal. Good deals become great deals then become a shit show in time. But wait guys! What if I buy GPRO down here at $9 with $9 risk if it goes bankrupt and it turns around and is trading at $90 in a few years? Talk about risk reward, it sounds great in theory, however if you do some research on turnaround plays then you will see that they take years if not decades to turn around, and unless you have the patience of the Dalai Lama, most people do not have the patience to wait a year let alone a decade.
So let's ask ourselves this question again, “Who’s Fucked?”
Are long investors or shorts fucked?
The obvious answer is the latter and this has been the same theme for the past 5 years. If you bought the SPY at any point and still have it, you’re looking at some green on your screen. Just reading that sentence if you were imagining it, you subconsciously probably smiled. Now the typical trader holds their losers and sells their winners earlier. A mold we try to break as fast as possible. With that being said, if you had GPRO and SPY which do you think would be the smarter buy? The stock that has lost 90% of it’s value and has continued to take out lows, or the overall market that has been rallying since 2008? There is no right or wrong answer with trading because it all depends on your outlook, risk tolerance, and execution. The new trader would buy the “deal” or the “loser” because it “has” to turnaround, while the intelligent investor will buy the leader and sell higher.
When you look at any stock, always look at the daily chart and ask yourself “Who's Fucked?” Is it the guys swinging long, swinging short, holding long term, day traders etc. Now obviously you cannot know for certain who these imaginary people are, but the principle is simple. If most people who are long are fucked, long is probably not the smartest choice.
Do you have balls?
In the Chart Reading chat, post 3 examples where anyone who is long is fucked, and post 3 examples where anyone who is short is fucked and mention who is fucked in each example.
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