Two golden trading rules – never trade while bored, and never at 3am

Trading stocks successfully calls for patience and self discipline. Something that Dominic Frisby recently ignored to his cost.


Successful trading takes patience and self-discipline
(Image credit: © 2018 Bloomberg Finance LP)

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They're already calling it Monday's Massacre.

At one point the Dow Jones had seen the biggest intraday decline (in terms of points) in its entire history.

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But everything is relative, of course. A 1,175 point drop is a big deal when the Dow is at 5,000. But from its current levels of around 25,000, Monday doesn't even rank in one of history's top 100 Dow drops.

I'm of the view that this is probably more of a storm in a teacup, than the beginning of the end.

And today I'm going to put my mouth where my money is.

Never trade when you're bored, or at 3am in the morning

For all the furore, the Dow is only down 0.4% this year. That's normal, though I admit normal is a rare thing in finance these days.

The FTSE 100 began the year at 7,600. As I write, it's 7,200. Its low was 6,900, though you would never have known that, because the low came at about three in the morning, during panicky after-hours trading in Asia, and you would have been asleep unless, like me, the siren sound of the bathroom calling sometimes wakes you up in the middle of the night.

But the relative outperformance of the Dow is negated as soon as you adjust for US dollar weakness.

So, by the time you've adjusted for everything, we're off a few percent. It's worrying, but it's not the end of the world. Yet.

Charlie Morris, by the way, of The Fleet Street Letter, has been calling this brilliantly. He raised the spectre of 1987 in his newsletter back in late autumn and has been returning to this theme ever since.

Charlie is no prophet of doom who makes his name by calling 17 of the last three bear markets. When Charlie's nervous, it pays to take heed. In his Newscape Fund, he had lowered the equity position from 70% to 15% in time for the debacle of the last week or so. That is seriously good fund management.

The problem with that Newscape fund, if there is one, is that it's available through very few brokers. That's something that, I'd say, urgently needs addressing by someone.

Anyway, last week I mentioned how, in my trading account, I had sold everything and gone short. The decision proved to be a good one, and I found myself on Monday, sitting in a caf with some time on my hands.

Boredom is the trader's worst enemy. I looked at my phone. I started pressing buttons. I looked at my quickly gotten gains.

"I don't want to give those back", I thought. "This is going to come back up as quickly as it's gone down." I broke all my trading rules and I covered.

When the siren call from the bathroom came at three the following morning, I broke another golden rule of trading, perhaps the most golden rule of all, which is: not to look at your phone in the middle of the night.

The Russell 2000 was another 50 points lower than where I'd covered my short.

There is no worse experience in trading and investing than horrendous losses. But the next worst is missing out. It's why something like bitcoin winds so many people up. They get cross at having missed out on the huge gains. (And now it's falling, they're crowing.)

But I got a dose of the "missing out" pox when I saw the gains I'd missed out on. I couldn't then get to sleep for another half hour, I was so cross with myself.

The golden rule is do not trade when you're bored. You make bad decisions.

I shorted the Vix and went long the US dollar and the Dow

There has been so little volatility in the US stockmarket it's only gone up that one of the biggest money-making trades of the last few years has been betting on falling volatility, or, as it's known in the trade, shorting the Vix (the Vix is the volatility index).

What tends to happen during market scares is that the Vix spikes up, only to come back down again soon after. As I'm of the view that this is probably a short-term hiccup the last time we got a correction like this was in 2011, when the Dow was at 10,700; we're almost two and half times that now I decided that the spike in the Vix was only temporary, and I wanted to bet it would fall.

So yesterday, I shorted the Vix.

I then texted guru Charlie Morris and asked if he thought that was a good idea: "Errr, no" came the reply.

I made some good intraday gains and covered (too early, of course) and sent him a gloating text. I also bought the Dow again yesterday so, trading-wise, I'm now net long. And so far so good.

Telling you my trades is not something I normally do, by the way. Usually, I'll make an argument as to where I think a particular asset is going and why. Thus today I'm putting my mouth where my money is.

Charlie's reasoning as to why we are at risk of another 1987 is sound. The crash of 1987 followed extraordinary rises in stockmarkets, which failed to take note when the bond market was warning, he argues.

My short-term outlook, however, is that the Dow rallies, and we get a lot of whipsawing over the coming few days and weeks. A rally to say 25,000 or so and I'll be out.

In other news, I also bought the dollar yesterday. I didn't buy it against any specific currency, I bought the US dollar index, which is the dollar against the currencies of its major trading partners.

That's not quite such a short-term trade. I think it's shaping up for a nice little rally. More on that another time. For now, let's see where it gets me.

But, just in case I forget:

  1. No trading when I'm bored.
  2. No looking at my phone in the middle of the night.
Dominic Frisby

Dominic Frisby (“mercurially witty” – the Spectator) is, we think, the world’s only financial writer and comedian. He is the author of the popular newsletter the Flying Frisby and is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. 

His books are Daylight Robbery - How Tax Changed our Past and Will Shape our Future; Bitcoin: the Future of Money? and Life After the State - Why We Don't Need Government. 

Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art. You can follow him on X @dominicfrisby