Fear And Panic Caused Me To Lose 40% Of My Trading Account In One Day
In the spring of 1999, I had been trading for about 2 years. I was doing OK. Not
making a lot of money, but keeping my head above water. I was doing well enough
to want to take larger trades. I did not have a specific system except to buy
when stocks moved far enough away from a 20-period Exponential Moving Average to
look “oversold†and sell when they had rallied far enough to look “overboughtâ€.
I stayed with stocks that were part of the S&P 500. As I am sure you remember if
you were involved in trading, it was not difficult to be a “pullback†buyer on a
regular basis and be a star in the trading world. If you bought a little early,
average down (add to your position) and the uptrend would bail you out.
That was the extent of my technical analysis knowledge at that point. I relied
more on the fundamentals of the stock to keep me on the long side. If it was a
“good†stock with “good†earnings, then I bought it when it pulled back.
In early 1999, there were analysts that started talking about how the internet
build out was starting to end. The equipment that was being sold by companies
like Lucent, Nortel, PMC Sierra and the like had reached a point of saturation.
They expected inventories to rise and sales to fall. With the benefit of
hindsight, it is easy to see how correct they were.
Well armed with this analysis that internet equipment inventories were going to
rise, I was going to make my trading fortunes by starting to sell these stocks
short. Armed only with a vague concept of “overbought,†I decided I was going to
start to sell Lucent stock short. In early April of 1999, it looked to me like
Lucent was “overbought.†I started selling the stock short around $48.00 a
share. Actually, it was $96.00 a share, but with a subsequent split the stock
charts at $48.00 a share today. It did not go down, so I sold some more at the
end of the day. The next day the stock opened higher on a company announcement
that the stock was going was going to be split 2 for 1. Now during this time,
even the person cutting my hair had a pager that notified them of stock split
announcements. What lunacy–this stock will never continue to rally and I am
going to short some more. I kept shorting the stock all day. Before you know it,
I have a larger position than I have ever had while daytrading. Fear and panic
introduce themselves to me late in the day. They become my evening companions.
By the next morning, I begin to question my judgment. (A little late, I would
say). I know this stock price is going to come down. It doesn’t, and as fear and
panic have now become my “bestest†friends, I cover right near the top of the
day.
The capital loss was 40% of my trading account. Not a small number, percentage
wise or dollar wise
I can console myself for the next 2 days when the price of the stock does not
really fall. I tell myself that I have done the right thing. Of course over the
next 7 days, I would have made a profit. This only led to reinforcement of what
would become a terrible habit of trying to “pick tops†for the next couple of
months. Only by quitting trading and going back to work did I eventually break
this destructive trading cycle.
Only after slogging away at a job that I did not like did I come to realize that
technical analysis probably had a place in trading. Perhaps it would also be a
good idea to evaluate things like risk management, position sizing, overhead,
and the other elements associated with trading as a business. It is possible to
become a successful trader, but it does take more than just instinct.
John Emery