All Entries Tagged With: "Losing"

Lessons from My Biggest Trading Loss

May 28, 2009 at 9:58 am

The trading has been really, really good lately.  I’ve been fortunate to nail some nice moves for both day trading and swing trading timeframes, which of course is always fun.

But in order to recognize and appreciate the good times, one must also go through some periods of poor performance.  You have to struggle, and fight through the pain.  Expensive lessons get learned, and thank goodness, they can stay with you for a while.

That’s what I’m here to tell you about in this post.

I want to show you some lessons I learned from the biggest trading loss I ever took, and hopefully you’ll benefit from my mistakes.  After all, standing on someone else’s shoulders is the best way to look forward.

Setting the Scene

With summertime having arrived in 2004, the usual conditions were present.  That means lighter trading volume – and whenever that’s the case, I tend to prefer short selling over buying.  (I view volume as the fuel needed to propel a stock higher, so when it’s present, I realize bidders can simply disappear and the stock can slide without needing high activity.)

Having noticed a deep correction in NVTL which shaved off about 1/2 its value in just a few weeks, I had the stock on the radar and was waiting for a good setup.  No harm so far.

It had begun a lazy, light-volume bounce off its correction low, which of course left me skeptical.  I watched for the pace of the bounce to slow, and once it did, I started a position.  That was on June 1 as it attemped to roll over slightly, but it was merely an attempt.

The following day, NVTL made a new recovery high, but I stayed in the position.  Mistake #1. As soon as the bounce resumed, that was grounds for dismissal, but I stuck around in a stubborn fashion.  A week later, NVTL was again on the move, and I found my P&L turning deeper red by the day.

I was wrong, and it hurt.  So I did what any trader in the midst of breaking trading rules would do – I added to my position.  Mistake #2. Now I’m in a bad trade and I have too much of it.  Why?  Because I needed to be right.  Mistake #3.

StockFinder Chart courtesy of Worden

Long story short, after adding a couple of times on the way up to improve my basis, I ultimately drew a line in the sand which was crossed 3 weeks after my entry.  I blew out of the trade… stunned, bruised, and yet relieved.

Ultimately NVTL corrected, but I would have had to hold the position for another month and endure another 10% against me before that happened.  Even then, I only would have been able to exit at breakeven.

It was a nasty loss, and it angered me to have allowed it.  Now 5 years later, I still shake my head at the series of mistakes I made, but it’s a great reminder to me of what can happen when I allow myself to break my rules.

Reminders & Takeaways

• “Paper” losses are very real. Many try to fool themselves into thinking that because a gain or loss hasn’t been realized, that it should be viewed differently.  Wrong.  If you’re underwater in a position, you’re losing whether it’s a closed or open position.
• Adding to losing trades is a recipe for pain. If you’re already in the hole and you’re already in the size of position you originally intended to be in, you stand to dig a deeper hole and cloud your judgment even more.  Don’t add to a losing position when it’s a hail-mary effort at escaping a bad trade.
• Accepting a big loss can bring about some needed relief. For one, you’re ending the loss – it can get no worse.  That’s a big reduction of stress and distractions from your other trading efforts, which is a huge benefit.  You’re also accepting that you were wrong, and creating some closure which mentally helps you move on.  There’s no substitute for a clear head when trading, so take it.  Further, there are few things worse than logging into your trading platform and staring at a giant loser day after day.
• Being early = being wrong. This trade ultimately moved back in the direction I thought it would, but not until it had far exceeded my “uncle” point.  Just goes to show that the market can continue moving against you for longer than you can handle it sometimes, so it’s never worth arguing with.

If I could get away with only talking about my great trades here, it might be more enjoyable for me, but you’d take less away from it as a reader.

And the reality is that I lose on plenty of trades.  But there is much to be gleaned from glancing in that rearview mirror, both for me and for you.  That’s how we get better!

Sometimes it comes with a grin and sometimes with a grimace, but it always offers valuable lessons to gain from.  I hope you’re willing to do the same with your own trades.

Are you watching the Trading Videos over at TheStockBandit.TV?

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

The Importance of Losing Small

April 7, 2009 at 2:05 pm

Losses are inevitable, but small losses are easily overcome.

I put that first because if you don’t read anything else here, I want you to be sure and see that.

In fact, that one statement could be considered the key to my trading.  I remind myself of it often, and when I’m staying disciplined, I am able to see it in action.

Take Monday for example.  I took several trades…7 to be exact.  I made money on only 2 of them (no, it wasn’t a great day), and yet my net P&L was only slightly red.  Just a little bit negative – that’s all.  It was a down day for me, and yet it was about as painless as they come.  A minor loss.  All because I was able to recognize quickly when I was wrong, and immediately focus on damage control.

The trading landscape has changed dramatically just in the past year.  The market is moving differently, the stocks which are in focus are a different group, and there are even some new fees and rules making their way into the fray.  Nonetheless, there is still one constant: the trader who is able to lose small is able to stay in the game.  He’s able to survive, which means he’s able to profit.  And that of course means he’s able to thrive.

Two Big Benefits

Keeping those inevitable losses at a minimum carries with it a pair of huge benefits…

First, when you’re wrong, the damage is far from devastating.  Falling off a pony compared to falling off a Clydesdale sure makes it easier to get up and get back on that horse.  And trading is all about getting back up.  It’s an attitude thing.  It’s important to stay in the game, and that means an occasional bump or bruise is far easier to overcome than the occasional amputation.  The point is this – protecting the downside offers you a safety net to fall into.  Why not use it?

Second, confidence stays high, and that’s a major factor for a successful trader.  Confidence should be protected just as vigilantly as one’s capital, for it can be considered your psychological capital.  Just as money isn’t easily replaced, confidence isn’t quickly replenished once it’s wrecked.  Looking out for yourself by way of small and limited losses means you’re taking no big hits to your trading account or your psyche.

So on those days when you’re just not feeling it and you feel a step or two behind, be quick to recognize it and live to fight another day.  Keep the damage minimized, and you’ll be able to return tomorrow fully prepared to erase that small deficit quickly.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]