The market finds ways to humble us all at one time or another.
Apparently, yesterday was that day for me…
I ended up cutting my losses at $37,000—the second-largest losing day of my career.
I didn’t do anything unusual, in fact, they were positions that I had on, that never materialized.
In hindsight, I had too many positions on.
Whenever we have money on the line, our emotions will find a way to get involved… I kid you not, during a live session on Thursday I caught myself breathing hard with sweaty palms…ME!
That should have been a warning. Instead, I plowed forward with my longs, setting myself up for a horrible Friday.
Now, the way I get over a loss like this is by reviewing and analyzing my actions. Not only is it therapeutic but it will help me regain my focus and confidence.
This is your chance to learn from my mistake so it doesn’t happen to you.
Eventually, you get it wrong
Crashes happen when no one expects them, not when you do. The bears beat the drum for the last decade in spite of the longest bull market in history. With an untested easy money policy, the Fed forced money into equities, whether it wanted to go there or not.
Why fight the trend? It worked for the last decade. Who am I to call a top or bottom? I kept telling myself that I never made money that way and wasn’t about to start now.
Most of us forget the massive corrections that peppered the last decade!
This became my crutch and then my foundation. My deliberateness turned into pure arrogance. Even though I know the market can swing hard, I figured I’d know ahead of time and pull my money out like I had the last few months.
A friend of mine literally blew up his small account on Thursday for the same reason. He assumed that he would know when to stop out as he had for the last two months. With a 90%+ win-rate, it seemed obvious to him.
He and I both shared the same fate. We forgot that even in perpetual bull markets, weird things happen you can’t plan for. Where did we go wrong?
We assumed we could manage better than our strategy.
For him, that meant forgetting to actually use stops. In my case, I carried way too many positions and way too much leverage to the upside. Then, when I had a signal to dump on Thursday, I ignored it.
Recommit yourself to your strategy
Trading is a business and deserves all the seriousness that entails. Large companies hold weekly, monthly, quarterly, and annual reviews. They set up rigorous processes and checks along the way to ensure they don’t spin out of control.
We must do the same thing. Most of us call it going ‘back to basics.’ What we really mean is making sure we don’t wrap ourselves up in the trades to the point that we ignore our strategies.
Strategies keep us grounded. They statistically prove how to make money in the market (or at least should). No one should deviate or change from their strategy unless it is a deliberate, thought out test.
The number one component of every strategy – RISK MANAGEMENT!
Bad beats will happen, that’s just inevitable. When they occur outside of what’s expected, that means you did something wrong.
My first mistake – I failed to notice my heavy-handedness for bullish positions.
My second mistake – Ignoring warnings that my strategy and training signaled.
Trading by yourself can be a blessing. It can also be a curse. People use one another to check each other in an office setting. Work-from-home traders rely entirely upon themselves outside of group chats.
Put a plan in writing
Now that I know what happened and why it’s time to make it count. Don’t let a bad beat go to waste. Learn something from it!
Here’s a simple plan to help me correct my issues.
- Every day at the open and the close I will review my portfolio delta as a percentage of my total capital
- Additionally, I’ll look at the total capital I have in play relative to my account
- I will create metrics around these that are simple green, yellow, and red light warnings
- Lastly, at the end of every day, I’ll ask the simple question to myself – if the market changes dramatically right here, right now, how exposed am I?
This isn’t an elaborate plan, nor is it overly dramatic. It’s incremental as it should be. The idea isn’t to change everything around. It’s to LEARN from the mistakes and correct them. Nothing more, nothing less.
Building out your trading plan
All of this assumes you start with a trading plan. They should guide your decision making and trading every day.
I know not everyone has one. I certainly didn’t for a long time. But if you want to become a successful trader, you need one.
You can learn how I created my trading plan for my upcoming webinar. I explain how I went from flailing about to becoming a serious trader.
Newsflash – it didn’t happen overnight.
It’s much less painful to learn from other’s mistakes than to create your own – trust me. Learning just one thing could save you a lot of money in the long-run.