I wish I could go back in time and avoid this mistake

The trading mistake I deeply regret doing

Today I want to talk about a period through which many traders go through. Many of us experience lack of progress or that we are at the top of the learning curve after a few years in the business and we feel like we have to go on the next stage in our trading careers. I have had the same experience several times in my career and went through complete transformations before realizing the mistake I did.

No , the mistake was not that I tried to grow, it was that I wanted to do it in the wrong way.

Before I begin with this week’s Back To School story I would like to give

fx:macro

a tap on the back for the excellent work he is doing every week for all of us.

fx:macro

is written by an experienced trader as a comprehensive preparation for the week ahead. It features a review of central banks and macro releases as well as a broad look at different asset classes and indicators to get to a complete macro picture.

When I was a younger trader and certainly less wiser I used to think that the assets I trade are boring, hard to scale and were limiting my growth.

Back in my early days I was mostly trading preferred stocks. Some of you might be familiar with them. They are fixed income instruments residing lower on the capital structure of a company, just below Subordinated debt and above Common Stock. They are famous for their low liquidity and high borrow fees.

I was eager to further grow as a trader and move to the playground where the big boys play. I wanted to trade common stocks of large caps, I wanted to trade futures and everything else that had abundant liquidity and an endless selection of volatile instruments. For traders, liquidity and volatility are key for outsized profits. So I started looking at equities and futures trying to find a pattern that works for me. As I had my focus elsewhere, I stopped trading my bread and butter strategies in the preferred stocks universe and completely dedicated myself to the world full of noise.

I tried technical trading, opening and closing auction, VWAP trading, mean reversion plays, sympathy plays , you name it. The common denominator between all of them? None of them worked FOR ME. I ended up with a few month’s worth of losses, no income as my bread and butter strategy was left on the sidelines and a lot of frustration.

So I resorted to trading my beloved preferred stocks again.

Life coming back at you hard 1 : Trader 0

As time passed I began consistently making money again. I wanted to keep growing but this time I wanted to try something not so volatile, something that made a lot more sense to me. So I added CEFs to my trading arsenal. They are significantly easier to trade as CEFs can have a pretty straight forward sense of what is over or undervalued. This makes it easier to identify where the value is unlike common stocks where the irrationality can certainly stay present for longer and the noise and whipsaws are abundant.

What is a CEF? It is short for closed-end fund.

This is Investopedia’s definition: “A closed-end fund is a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange but no new shares will be created and no new money will flow into the fund.” Because CEFs keep their number of outstanding sharing relatively fixed (they do the occasional rights offerings) , they can trade at a premium or discount to NAV. At times this creates a lot of opportunities, if you know how to use that information and most importantly figure out why a CEF is trading at current premium/discount to NAV.

Adding CEFs increased the number of opportunities that I could take advantage of and my overall portfolio exposure grew. With time I began feeling comfortable with the extra exposure I had from the CEFs and Preferred Stocks combined and got used to the larger exposure and PnL swings. I was again at a stage where I wanted to further grow my career. This time I decided to try my luck with options. I said to myself, they offer limited risk , I can make a home run every once in a while and can certainly trade as much size as I want.

REPEATING THE SAME MISTAKE TWICE:

I started experimenting with options , making every possible mistake you can possibly think of. Shorting premium, buying OTM short dated expirations (at a time when the reddit army was not a factor) , buying LEAPS when I was trading in a 1 week horizon. The strategies by themselves can be profitable but I didn’t know how to do it. I was doing experiments again by leaving aside my bread and butter strategies for the sake of growth. Yet again I experienced losses and a lack of income for several months but this time I had made a conscious decision to do it. I said to myself that this is an ‘investment’ in my future. It was an investment BUT not the right type of investment. Obviously things didn’t work out with the options trading at the time due to the exact same reasons. Changed the asset class, needed brand new domain knowledge, needed experience and time while foregoing my bread and butter strategies. Yet again I lost time and money and resorted to what I knew best - preferred stocks and Closed-end funds.

Life coming back at you hard 2 : Trader 0

The culprit was never the desire to grow but the way I chose to do it. Changing the domains you operate in overnight is not the wisest decision. There is no bravery in foregoing something that brings consistent income in hopes of one day winning the lottery with your newfound knowledge in the new domain. It certainly is possible to do it, but not in a few months. You may do it in a year and a half, maybe 2 years, but if you spend that time working on expanding the knowledge in your domain , to improving your strategies and adding new trade variations, you will grow exponentially because you are building over a foundation you already have. You don’t need to start over and build a brand new foundation. I deeply regret committing the same mistake several times. I wanted to grow but I didn’t know how. I wasted a lot time.

In the past 4-5 years I had mostly focused on trading fixed-income. It turns out scalability is no issue for the fixed income markets. I can do primary market trades in preferred stocks, corporate bonds, sovereigns, EM and perpetual/AT1s, I can do pairs, identify cheap/expensive bonds , cross capital arbitrage, special situations, carry trades. The fixed-income world is so scalable that hundreds of millions of dollars can be managed at any given time without issues when you add to the equation corporate credit and the possibility to do the different capital structure tiers. And that is ONLY if you focus in the US. If you expand your horizon to European and Emerging Markets, then the opportunities grow exponentially. You will get dizzy.

Thinking retrospectively, learning about options and futures was not entirely useless to me and the tuition fee I paid was not in vain. I learned the basics like how to trade them and what they could be useful for, however the way I did it was not thought out well and cost a lot of money and most importantly time. Don’t get me wrong, learning about new asset classes is not a crime, on the contrary it can help you immensely, but doing it the way I did it, by leaving everything else behind, is the WRONG approach. If I can send across a simple message with this story is that you can learn the basic concepts of other asset classes by thinking about how you can use them in conjunction with your current trading style and trading patterns. This will force you to learn about the things that are only applicable to you. Changing trading styles and patterns just for the sake of trying something new does not help, especially if you already have working strategies. That is where the big mistake lies. Jumping from one asset class to another without taking into consideration the time it requires to master it is a mistake. Spending 2-3 years mastering a trading style and then moving onto a new asset just for the sake of growth is a BIG MISTAKE. Spending 2 years to learn about fixed income and then another 2 years to learn about options does not equal to combined 4 years of trading knowledge in both domains. It means you stopped growing in the second year in both domains. In the past couple of years I turned into a strong proponent of getting better in one domain. Spending 4 years into a single asset class is exponentially better than spending 2 years in 2 different asset classes.

Trying to learn new things and grow is admirable and should be pursued by everyone, not just traders, but the way it is done should be considered. I will always myself a sports analogy.

Developing your football career for several years and then all of a sudden dropping it just because you spotted more opportunities in basketball is not the way to go. You may be good in sports but that doesn’t mean you will exceed in basketball right from the start. You need time. And my argument is that time is better spend on furthering your football career, on improving your skills on the football pitch. If you can use any insights from the basketball court or basketball training sessions do so but for the sake of becoming a better football player. For the sake of expanding on your domain knowledge, on growing your foundation.