Week 43: Flipper
Flexible and open-minded is the best mindset for short-term traders
This is Week 43
50in50 uses the case study method to go through one real-time trade in detail, about once per week. This Substack is targeted at traders with 0 to 5 years of experience, but I hope that pros will find it valuable too. For a full description of what this is (and who I am), see here.
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Update on previous trades
Week 37: XOM put spread is quiet but losing as China reflation helps oil.
Week 38: Sell vol in MSTR has been good so far.
Week 39: Sell 2-month USDJPY and buy 6-month USDJPY. This has been a good idea so far. USDJPY is unchanged.
Week 40 and 41: Took profit on long TSLA. Missed a huge move after earnings, but that’s going to happen sometimes when you reduce risk ahead of a major event. The original take profit of $159 traded the day after I squared up.
Week 42: Ford a bit higher since we went short, but they cut prices this morning, which is positive reinforcement for the thesis and will hopefully cap the stock.
Flipper
Before we get started, here’s a nice introductory quote from Alex Barrow of MacroOps as he dissects what makes Stan Druckenmiller so successful:
When you study Druckenmiller you get the sense that he was built in a laboratory, deep in a jungle somewhere, where he was put together piece by piece to create the perfect trader. Every character trait that makes up a good speculator, Druck possesses in spades… things like:
Mental flexibility
Independent thinking
Extreme competitiveness
Tireless inquisitiveness
Deep self-awareness
Today, I’m going to talk about that first bullet point. Mental flexibility.
When I worked at various banks, we often went to visit the largest hedge funds in the world, because they were our clients. Generally, I would meet with senior portfolio managers (PMs), the guys who were one step below the founder. A question I liked to ask these PMs when I was in my 30s was:
“Why do you think —blank— is such a successful trader?”
This would be in reference to the big name on the fund, one of the most famous traders in the world in almost every case. The answer was always strikingly similar. Something like:
“He’s flexible. He’s not married to one view. We have our morning meeting and he gets on there and tells everyone all the reasons he’s short corn futures or whatever and then at the end of the day I look at the position report and see he’s flipped! He’s long corn and confident it’s going higher. I ask him why and he’ll say something like ‘I changed my mind.’ And then he’ll go through all the reasons he flipped. And he’ll make money on the short, and the long.”
This is the epitome of excellent short-term trading. And it’s also why you should never trade someone else’s view.
Trade your own view. If you trade someone else’s idea, you will inevitably do everything wrong. You will stop out at the wrong levels because your conviction will not be high when the trade goes against you. Also, if you are trading someone else’s view, you might not know when their view changes. Frequently you will hear someone moaning about someone else’s idea they followed and then have insult added to injury as they find out the original trader exited long ago or even flipped her position.
Successful traders do their own work and come to their own conclusions.
Intellectual flexibility is important because it’s the ultimate antidote to many forms of bias. Confirmation and extrapolation bias tend to be more problematic for those with rigid views, for example.
Rigid intellectual approaches are just as bad as rigid views. You don’t want to be a reflexive contrarian nor do you want to follow every trend. You want to have an open-minded approach that invites new information and debate and ultimately seeks the correct answer, not a conclusion that fits to a particular trading strategy.
Intellectual flexibility keeps you from sticking to the same technique or tactics all the time. In some markets, breakout trading works, and in some, it doesn’t. If you’re just a breakout trader, you’re going to bleed and leak during all low-vol periods. Better to be a trader that seeks to do what will make money, not a trader that has a rigid preference for a single approach.
Intellectual flexibility and adaptation to the current regime are the essence of excellent trading.
“A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do. He may as well concern himself with his shadow on the wall. Speak what you think now in hard words, and to-morrow speak what to-morrow thinks in hard words again, though it contradict every thing you said to-day. — 'Ah, so you shall be sure to be misunderstood.' — Is it so bad, then, to be misunderstood? Pythagoras was misunderstood, and Socrates, and Jesus, and Luther, and Copernicus, and Galileo, and Newton, and every pure and wise spirit that ever took flesh. To be great is to be misunderstood.”
Strong opinions, weakly held
“Strong opinions, weakly held”, is a framework for thinking developed by technology forecaster and Stanford Scholar Paul Saffo. Here is his description of how to think:
Allow your intuition to guide you to a conclusion, no matter how imperfect — this is the “strong opinion” part. Then – and this is the “weakly held” part – prove yourself wrong. Engage in creative doubt. Look for information that doesn’t fit, or indicators that point in an entirely different direction. Eventually your intuition will kick in and a new hypothesis will emerge out of the rubble, ready to be ruthlessly torn apart once again. You will be surprised by how quickly the sequence of faulty forecasts will deliver you to a useful result.
There is a risk to this framework: You become an erratic, overtrading lunatic as you change your mind every 14 seconds. Your changes of mind must be triggered not by the direction of the prevailing winds outside or by the vagaries of your mood on any given day. Your changes of mind must be driven by facts. As new information comes in, you revise your view and when the new bullish information has overwhelmed the old bearish information, you flip.
Like I said, it’s a fine line. You can be too rigid. Or you can be an overtrading flip-flopper. You need to find the middle ground.
As with many aspects of trading, if you collect detailed data about your trades, you will quickly find out whether you are appropriately flexible. First, look at all the positions you took in the past year in every market. Are there markets where your ratio of long to short is heavily skewed? If you went long TSLA 14 times last year and short 3 times, you are probably biased. You are either biased to like the company, or you are biased to mean reversion and buying dips and kept trying to pick a bottom all the way down.
If you trade intraday, do you ever take the opposite position in the same market in the same day? If you do, does the flipper make money? These are the kinds of questions you should be asking as you collect more and more data about your trading. Very often your trading data will tell you many things you already knew. But it will also tell you a few snippets that can be revelatory and game-changing for your P&L.
Short TSLA
I spent Week 40 and Week 41 talking about long TSLA, and why it made sense to add to the position. It was a perfect confluence of a historically oversold setup right at the turn of the year when tax loss selling was destined to abate. The stock has since rallied from $113 to $179 despite weaker-than-expected deliveries and massive price cuts.
Now, the stock is overbought, and approaching major overhead resistance just as the broad market has exploded higher, wiping out bearish sentiment at the turn of the year and installing a consensus soft landing, everything-gonna-be-alright narrative.
Meanwhile, TSLAs margins are contracting, competition in the EV market has exploded, the Musk factor has become a negative for the brand as its left-leaning consumer base becomes more aggravated by Musk’s alt-right dog whistles on Twitter, Musk refuses to hire a new CEO for Twitter (so far, anyway), etc.
This is to say, not all is rainbows and lollipops for Tesla. Many of the reasons the stock collapsed in 2022 are still valid and the competitive landscape is getting worse, not better.
Furthermore, my view on macro in 2023 is that we will see more mean reversion and questioning of narratives as the market is in an extremely confused and probabilistic mode as players weigh the five main outcomes for the US economy.
No landing
Soft landing
Recession lite
Hard landing
Crash landing
I am not a big believer in using valuation to trade stocks (in fact, I think it’s mostly useless) but I include this recent TSLA valuation framework from the valuation GOAT for your reading pleasure.
Here’s the chart:
TSLA hourly chart with RSI and distance from 100-hour moving average
Quite a lot to chew on here.
TSLA is approaching massive horizontal line resistance at 200/206. You can read more about horizontal lines in 50in50: Week 25. In this case, the $206 major support from May/June 2022 becomes major resistance and the $200 level (which was support in October 2022, then resistance (twice) in November and December 2022) is also major resistance. Two major resistance points within six bucks of one another is meaningful.
Hourly RSI is above 80. This is not ALL THAT uncommon as you can see this is about the 10th time it’s happened in the past year. Still, the risk of a pullback is higher here than it would be normally.
TSLA is trading 32.5% above its 100-hour MA (see bottom panel of chart). In the epic selloff, we got to 27% below the 100-hour and you can see anything more than 20% is epic.
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So to summarize:
Massive short squeeze off record oversold levels in late December.
Tax loss selling ends and the macro story flips from a consensus recession view in December to a consensus soft landing view in January.
Every most-hated asset has ripped (crypto, TSLA, MSTR, CVNA, etc.)
TSLA is now extremely overbought.
Massive overhead resistance at $200/$206 gives us an easy risk management trigger and stop loss level.
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So, 50in50 goes short TSLA here (178) with a stop loss at 221 (enough to give a bit of room for a false break of 200/206). The target is major support in the 110/120 area so the take profit is 117.77. Risking 43 to make 68. Note these are levels when I’m writing this thing.
NOTE: As I finish writing this; TSLA just dumped on the open and it’s trading at170.50. I will always mark the entry point to market when I hit send and that is the price I will use for P&L tracking. Obviously selling at 170.50 is not as good as selling at 178. If I were doing this trade in real life I would probalby wait and sell into 175/178 on a rally but for the purpose of tracking this exercise, 50in50 goes short when I hit send to keep things simple.
I thought about trying to thread the needle by selling closer to $200, but with all the central bank meetings and nonfarm payrolls this week, I think the risk is that risky assets reprice lower and so I would rather just put the trade on here.
The biggest risks to this trade are:
Musk hires a new CEO for Twitter.
The Fed is dovish.
NFP and AHE come in on the weak, but not too weak side and Goldilocks takes the market higher.
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Conclusion
The best traders in the world are flexible. They are not always long certain currencies or short other markets or religiously married to specific assets. They do whatever they think is going to make money and they are able to override confirmation bias, extrapolation bias, FOMO, and other trader kryptonite as they rationally assess future probabilities.
I loved TSLA at 113 in December and I hate it at 178 in January. This is perfectly rational. If you love Elon Musk, or hate Elon Musk, don’t trade TSLA stock. Always be open to trading any security from the long or short side. If you can’t, take that security off your list of permitted products.
That concludes Week 43. Thank you for reading!
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Trade at your own risk. Be smart. Have fun. Call your mom.
DISCLAIMER: Nothing in “50 Trades in 50 Weeks” is investment advice. Do your own research and consult your personal financial advisor. I’m putting out free thoughts for people who want to learn. This is an educational Substack. Trade your own view! I may be long or short stocks or other securities mentioned in this piece, and those positions could be in the same or opposite direction to the views expressed herein. I am a short-term trader and my views change all the time.
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Thanks Brent another great piece, intellectual flexibility is underrated in a world of “asset allocation committees”!
Brilliant as always Brent - Working through all of these after finishing your book - thank you for taking the time to write them as I have found them immensely helpful.