September 7, 2014

Breaking Down My Worst Trade Ever

  Back in March 2014, I had the opportunity of a lifetime. I witnessed the over-extension of one of the most traded OTC stocks in the market, FNMA.

  It was clear this was going to collapse soon and I was totally prepared. So how did I snatch defeat from the jaws of victory? For several reasons.

  On the crash day, I initially failed to recognize that FNMA was likely tanking because of a big shake out in the $5 area that bounced back instead of tanking. I failed to use simple trendlines that could have alerted me to switch to a short bias. In addition, I didn't plan my trade and trade my plan. I didn't identify good entry points and profit targets BEFORE getting into a trade that would have dramatically calmed my emotions that day. Then things got worse.

  I bought the dips near green to red (G/R), which failed. To make matters worse, getting a fill was very difficult if I wasn't buying into panic or selling into strength. Then the selling hit really hard after going red.

  Instead of shorting, I continued to look for bounces--which was a stupid idea because the chart was clearly broken and I knew deep down that a massive tank was on. And it's this disconnect between my subconscious mind--that knew exactly what was going on--and my conscious mind--that got emotionally committed to finding the bounce--that gave me more and more losses.

  I began over-trading fake bounces that always failed, really hurting me mentally. As a result, my losses started to add up and I was not mentally capable of effectively trading the real epic bounce. I was despondent and finally capitulated. I couldn't take the pain and mental anguish. I gave up the minute the massive bounce started.

  I've learned quite a bit from this trade. Specifically, I've learned to plan my trade and trade my plan. The trading plan must be developed before trading. Simple planning and a cool head could have allowed me to trade better and reap sizable rewards.

  I revisit this trade every now and then to remind myself what I'm good at (picking the right stocks to focus on for the day) and what I'm not good at (over-trading, not having a plan, becoming emotional, and missing clear intraday opportunities) to keep me focused and motivated.

  I can be capable of true brilliance (focusing on the best stocks at that moment in time), but I'm also capable of letting my emotions get the best of me and huge profits. When emotions get the best of me, it affects my profitability as a trader, which affects my perception of self-efficacy as a trader. I inevitably feel that I'm not worthy of being a trader and that I should just quit trading to save myself the mental torture and financial disaster.

  Interestingly, if I simply follow my trading rules, I feel confident and extract my share of the market pie. I feel like I did what my experience suggested I do and what my mentors begged me to do. It's crazy how hard it can be to listen. It's like ignoring someone trying to rescue you. Just listen and trust the process. Everything will be alright.


No comments:

Post a Comment