Shorting HKD — A Trade Breakdown

Let’s do a post I rarely do — I’m going to break down a “routine trade”. There’s nothing special about this trade — no glitches, no halts, no special sauce about it. Broadly speaking, there’s hundreds of these trades every single year. There is a stock trading up to extremes (one may use the word “parabolic” to describe it) and the play is to short it, expecting a correction.

I don’t really post a whole lot about short selling even though it has become about 90% of what I do day to day to make money. Yeah I’m one of those guys. I short those thin, volatile names of questionable fundamental value. That awful thing up 169% pre-market with zero liquidity that halts 23 times intraday, yeah I’m trading that because I’m addicted to pain. I have a hate/hate relationship with shorting small caps. Most of the time I hate it for boring reasons–these stocks trade nonsensically and there’s little intellectual value in analyzing them. I’m just in it for the money and for that, I tolerate all the risks (of which there are SO MANY). But occasionally, in my most special of moments… I absolutely fucking detest this shit.

The whole playbook is out there on shorting small caps. There’s a fundamental approach. There’s a technical approach. There’s a quantitative approach. There’s a situational/news-based approach. It’s been done and if you honestly believe you have anything new about your approach–I am here to tell you NO, you don’t. None of this is interesting or novel anymore. Shorting over-extended stocks, the majority of which are small caps, is just something that I happen to be good at, for whatever god forsaken reason. I am honestly ultra jealous of traders who are able to consistently trade large caps, crypto, forex, futures, or bonds and they never, ever decide to touch this satanic diarrhea trash. It’s the worst and the discourse out is entirely 100% toxic and vapid. Don’t ever look up any of these tickers on Twitter, it’s just proper self-care for your brain. People will ask me what I do for a living and after saying “I trade stocks”, I’m already ahead of them on redirect. Oh, you sell pet insurance for a living? Wonderful–tell me more!

You’ll never see me identify with short selling online. I hate those people even more than the stocks. I judge anyone with “short” or “bear” in their twitter handle/bio. I just imagine their stupid little face smiling while they hit the bid with 1000 shares, sharing nice little top tick charts on social media with caption: I LOVE HITTING THE BID WITH SIZE, LOLZ XD, THANKS FOR PLAYING. Bro, that’s cringe. You’re not special and shorting stocks isn’t a personality. Shut the fuck up and just make the money. 

Anyway, that’s just to give you context on why I purposefully have avoided any strategy posts for most of this blog’s lifetime. I genuinely want you to read about my trade with absolute disgust and then lose any remaining urge to short small caps as a trading strategy.

The TRADE: Shorting HKD
So I’m looking at this HKD. I know it’s some Chinese scam stock that once went over $2000 and some of my prop friends lost six figure amounts on it. Whatever. Now it’s a $10 stock after a massive terminal decline but it’s up about 70% pre-market ($17). There’s no recent news. I have no unique thoughts about this stock. It’s just another one of many. I don’t know what the perfect levels are, I don’t know about their cash levels–I’ll check and then I forget it within 2 minutes. I don’t write down any notes, I stopped doing that a year ago. I just know I’m going to short it. There are three parts to this trade.

Part 1: Anticipating the morning low. There’s a template I often follow. Once these stocks spike and then give back that spike move quickly in the morning, it’s likely over. It’ll go back to where it came from, likely lower in the long-term. That’s the simple version. So I just piled in around $18 average. My sizing is awful. I end up risking 2-3x the amount I have been risking on similar plays and I have been trying to stay consistent in my position sizing. One of my leaks is when I chase a bad price, I often feel tempted to try to find some short term scalps to “repair my average”. I’m not trying to add permanent risk but I am trying to take some quick moves to even out the initial bad price. I ask myself, what are the odds it just doesn’t actually make an opening low but bottoms almost exactly at its opening price like that. Well it does and there’s zero movement to let me out of my size, it’s a completely unforgiving grind back up to the highs. I stop out at the highs and I lose $38,000. It’s the most I have lost in several months and it doesn’t seem like an appropriate number. There are “good loss numbers” and I pride myself as an artist of “good loss numbers”. Well, this ain’t it. It doesn’t sit well with me. It wipes out too many of the good trades I have made lately. And I didn’t even like this trade that much, how did this even happen? I am also trading three other stocks at the moment so I am forced to compartmentalize my pain for the time being.

Part 2: Second stab. When you trade these parabolic setups, one option a trader may consider is to take multiple attempts after an initial stop out. The logic is that as the stock climbs higher, the mean reversion opportunity becomes “juicier”. You can make your money back and we all want to do that, right? Obviously… this logic can be taken to extremes and lead to emotional over-trading. 

I remember ten years ago, we were trading with another prop firm temporarily during the aftermath of Hurricane Sandy. A few of us were partnered with this veteran dot-com era trader, Mike, who planned to trade AAPL. Mike is the type of guy who wants to buy a breakout, get in the money asap and set a break even stop–that kind of “don’t turn winners into losers” momentum trader. Super consistent, hates drawdown. Early on, Mike is buying AAPL in the hole down early. He’s down $8,000 early morning as it bleeds further than he expects, he pukes it out and you can see the anguish on his face. Omigod, why did I do that? You know he ain’t used to losing. An hour later, AAPL finds a bid and he takes his a second shot at a bounce trade with double the size to make it back and flip his pnl to green. His face? Palpable relief. THANK GOD. Mike poses this question to us young ones “you have this tough choice: do I go back to the volatile stock to make it back?” It seems like a simple question but let it sit with you for a bit. It is an eternal question. 

You can guess where this is going. I go back to the volatile stock. There’s a chance, I can’t put a probability on it, but a chance that HKD can have an afternoon melt. Around noon, the stock peaks at $37 then starts to show weakness and break under $30. I short it at $30… and I wait. There’s a promising dip to $26 but it rebounds. An hour passes and it’s back to my average. Two hours pass and the stock continues to trade in a $26-31 range. I am starting to feel my spinchter tighten. I am burying my head in the sand with 30 open tabs–cooking videos, billiard videos, twitter doomscrolling, NBA reddit shitposting, anything to distract myself from thinking about my loss amount if stopped out for a second time. I try to trade the range with a fraction of my position but it’s unproductive. Three hours pass and all of sudden, we’re 30 minutes until closing bell and the price action still leaves me wanting more. Needing more. There’s a quick dip to $26 again, with volume coming in. I calculate the price I need to recover my initial morning loss: $21 will do it. End of day rug pull possibility incoming? Totally doable for a piece of shit scam stock like HKD.

I haven’t been emotional lately but internally I am screaming. 

ONE TIME, JUST FUCKING DO IT. 

HKD spends less than a minute trading around $26 before rebounding back to $30… this is where, if I have my head on straight, I would KNOW…it’s time to get out. That was the moment of truth. The proverbial river card came out and you didn’t hit it, so fold the hand already. You don’t need to take it to your full stop (about $34 for me) anymore. Taking a bigger hit at this point really puts my back against the wall. Just get out.

It trades to $32 right as the market closes. I am not out and it feels wrong. I don’t know what’s going through my mind. Maybe I’m in denial of what has occurred today and its exacerbated by total exhaustion–the mental drain of staring at stock quotes for hours on end, hoping and wishing and praying for a collapse so I can break even on an annoying loss. I starting doing one of the no-no’s of trading, which is to make up narratives about market making games happening in my stock position.

They just did that quick little bullshit move to make intraday shorts cover. It’ll go back down and gap down, that’s why I’m still in. If I miss the gap down move, I won’t make it back.

The stock tests $32 but it trades back to $28-29. I’m legitimately entertaining the possibility of holding size overnight on a super volatile scam China stock that once traded from $4 to $2500 in a month. It closed strong and I have zero price average cushion. I’m seriously messed up. I have problems. It’s 5pm and I am hawking the chart on every tick. It’s now 7pm. I am overthinking it. As long as it’s not over $32, I’m ok. I’ll wake up at 4am to manage it, no problem. It’ll fade away in these tougher post-market conditions and I’m going to stay in because it’s what strong willed traders do. I get out of the house for a trip to Trader Joe’s because my wife wants to buy some fruit. I am constantly checking the position on my phone.

The price is now creeping back up slowly, from $28 to 30. Just noise I hope. It’s so easy to manipulate stocks late in the afterhours, they are just painting the tape to scare me. Right? Right.  Don’t be a wimp, stay the course.

7:35. I have checked out of TJ’s with our bag of oranges. HKD is at $31. This is not good. Some semblance of sanity is kicking in. I acknowledge that those prior thoughts about shaking out the weak intraday shorts–well, that’s not looking like a solid thesis anymore. I don’t even trade like that anyway–the thing where you obnoxiously come up with complicated narratives to make yourself seem like the strong hand or smart money. Only total jackasses do that. I am acknowledging imminent defeat.

7:55 We are 5 minutes away from the afterhours close. The stock trades above $32. I cover. I lose an additional $10,000 and my realized loss on HKD now sits around $48,000. I have made 6 other trades in all of 2023 and all of them are wins. This one loss wipes out 90% of those gains. A thoughtless position sizing error on a trade I didn’t even like that much, just another sausage churn of a million other small cap sausages, erased all my hard earned work for the week. Feels bad, man.

I don’t know if I have the spirit or confidence to trade this HKD tomorrow, regardless of what happens. I may have to let the volatile stock go and take my medicine. 

I try to sleep and it’s terrible. I have recurrent nightmares of HKD trading at $21 early pre-market, my break even price. I’m devastated because I don’t have the position anymore. I should have just held it, what a goddamn scam!

Part 3: It’s Friday. I wake up at 4:12 am. I don’t even need an alarm, my mind just instinctively knows the pertinence of today’s 4am pre-market open. I see HKD at $42, five points above the prior day high. There was no way I could get out without massive slippage if using yesterday’s levels as stops. Well… at least I’m not down another $50,000 at 4am. At least I’m not that big of a fuckup. I try to get more sleep. I don’t have the will or wherewithal to trade this early.

It’s 5:12am. I bought myself another hour of choppy, inconsistent sleep. I check my phone and see HKD at $55. Wow, okay, I see you HKD–you woke up feeling violent today. I check the chart and see it actually peaked at $68 at 4:44am. At least I’m not down another $150,000 at 4:44am. At least I’m not that big of a fuck up! Who the hell is trading this so early? It must be margin calls, the short-positioned traders who are somehow dumber than me. I still can’t entertain the idea of trading this. It’s too early, it could go to $100, I don’t know anything anymore. How can I have any confidence in my judgment when I was shorting this at $18 with size? You’re an idiot, let it go. Let’s just skip trading and play pool all day. Make the choice to be happy.

It’s 8:40am. HKD is back under $40. Hmm. There are “thoughts” deep in the recesses of my mind. I try to bury them. I tell myself ok, if I’m going to trade it, I’ll be disciplined and create a coherent plan. I won’t just enter on impulse and have to wing it and figure it out on the fly. Don’t trade HKD until 10am, let price discovery from pre-market 9:30-10am work itself out, then make a move, if any. Be the good trader today. Restraint. Discipline.

It’s 8:50am. HKD is at $35. They are just relentlessly selling it down. Every uptick met with size on the offer. Where was this yesterday? I can’t help myself anymore. The temptation becomes too great. I’m going to wing it and figure it out on the fly. I start a small position at $35, about 40% of what I had covered at yesterday’s afterhours close. I can’t let this go. If this collapses and I miss it, I’m stewing about it over the entire weekend. I’ll be a depressed husk of a human, wallowing in my own self-pity. I just can’t. 

It’s 9:13. HKD trades at 30. It has now given back every single dollar of its 100%+ pre-market move. I have added to the same position size of what I held yesterday afternoon. This stock is going to 0. It’s game over. It’s a scam. The pumpers can’t liquidate this fast enough. Yeah I’m being a reckless scumbag but I’m right.

9:28. HKD went to $26, yesterday’s key support level. I am about up $21,000 on my new position. From my experience, this is almost always the best time to cover a position if you catch a pre-market fade. HKD traded from a high of 68 down to a low 26. The idea is you take risk off the table and reset your trade plan and your mind going into 9:30 price discovery. You have to seperate the pre-market and market open as two different phases of the trading day. If I were teaching a class about day trading, I would have an entire section about pre-market trading and the importance of that exact time 9:28 — THIS IS A GOOD TIME TO TAKE PROFIT AND RESET YOUR MIND. I can come up with so many cases of stocks looking like death at 9:28 only to pop back with a massive 9:30 green candle.

9:30 I covered nothing. In fact, I actually added at 26, 27, 28, and 29. Adrenaline took over. I have a big position and I only care about my size rather than my entry price. I am throwing all caution out. I feel such massive entitlement–I deserve not only to make my loss back but to make a big profit on it as well. Why? Because FUCK YOU, that’s why. Fuck these guys for squeezing it up like this and making me feel the way I feel. I’m taking this a little too personally.

9:42 There’s a massive 9:30 green candle. HKD halts up to $36. I am now four points out of the money despite initially starting my position at this same price because I piled in at far shittier prices during pre-market when I should have been covering. There’s a large red number on my risk monitor again. What am I doing? I am trading completely out of line because I am so hell bent on recovering yesterday’s loss. I’m summoning all my strength to pretend everything is still ok and that’s it’s fine–just a normal retracement before resuming lower and yeah, bad process I know, but the right outcome is going to happen. I fire my last bullet and add 20% to my position. I understand the possibility that if I’m wrong, the loss amount will be over six figures. That has only happened 5 times in my life (and I have kept them all in the low 100s), one of them being FNMA in 2014.

I am tapping into the darkest recesses of my subconscious mind. There’s a part of me that believes that sometimes trading just comes down to… go and get it. Forget the strategy, forget the psychology, trade good and go get the money. Pure Instinct. This isn’t the trader that shows up 97% of the time. During normal times, I follow my playbook and I focus on clinical execution and consistent position sizing. That’s not today. Today is about getting what I think I deserve, the “trading rules” be damned. Go and Get It, baby.

9:47 HKD halts down to $30 and I’m back in the money. I cover the partial amount–the “last bullet” that I had fired at 35. It’s not where I’m supposed to cover but I pushed myself past my normal psychological limit and covering here is less about the money and more about concession. At the first sign of hope for my position, I send a sacrificial early cover to the trading Gods and I pray that they are appeased.

Within seconds, HKD wipes out under $30 and there’s a second downside halt.

9:57 HKD opens at a new low below the key price of $26. In the next 20 minutes it finds a low of 18.75. I cover almost my entire position in the low 20’s. I am now up $75,000 for the day with a two day net profit of $27,000. I’m back from the dead. I am not smiling. I am shaking my head. I am Jack’s Limbic System feeling that sweet sense of palpable relief. I tell myself I need to re-evaluate my entire process and even my entire life, including all the trauma I felt back to when I was 8 years old getting chemotherapy in a pediatric hospital. Somehow I know some of that is related to what happened the last two days. All these things that happen in our lives, they’re all connected. I snap out of that dark place. It’s just regular me now. I can’t go back… never again.

Anyway that’s my worst trade of the week and I ended up making more on it than my average win. It’s silly. It’s ridiculous. I think shorting small caps for too long gives you permanent brain worms.

These are the things they would tell not to do in a trading book:

1. Inconsistent position sizing based off emotion and short-term desires
2. Inability to stay from away from difficult stock that causes giant losses
3. Youre not supposed to take it personally
4. Youre not supposed to let anger and revenge dictate what you do

Well, that’s me. Not all the time but I do it and I get away with it. Sometimes I don’t get a happy ending and it’s a whammy of a loss. I’ll then take several days off to contemplate retirement before getting back in the saddle and pretending nothing happened. No self-improvement actually takes place. I just acknowledge that what I did was wrong and I tell myself it won’t happen but yeah, I know it probably will. And when it does, I win more than I lose.

If you are considering trading for a living and you are looking specifically at the “short small caps” sandbox… I just want to tell you: don’t do it. Most of you don’t have the restraint and discipline to avoid blowing up. Those few who do probably then lack the technical ability to consistently pull money. Those extremely rare few who do have the discipline and the technical ability… go freakin’ trade large caps or futures man. Or buy breakouts and ride trends. Save yourself the headache. I hate this shit.