When I turned my monitor on, I almost passed out.
Having traded now for 6 years, I thought I was beyond rookie mistakes. I quickly learned that no matter how long you’ve traded you are susceptible to stupid mistakes. This is a story of how I was up over 200% YTD by May ’06 swing trading stocks, switched to shorting futures on 10 May, putting my account up over 500% YTD by June, then proceeded to lose 80% of my account in two weeks.
From January to May 06, the market was in a slowly stair-stepping uptrend. I took advantage of this by flipping the leading stocks on the rallies from pullbacks, managing to run my account up 220% in about 5 months. A huge proponent of the CANSLIM methodology, I noticed in the beginning of May, there were several former leading stocks breaking down, the market was rallying in light volume to new highs and breakouts were not sticking for long. I took this as an impending downturn in the indices. Translation: start shorting the market. What better way than to short the index futures, i.e., YM, ES, NQ. With limited futures experience I tiptoed into the market shorting one or two contracts initially. The market started to melt down, and I was making money rapidly. It just seemed too easy. Why hadn’t I traded futures before? As the downturn continued, I started to short more and more contracts each day because I had apparently become an overnight day trading machine. Everything I touched turned to money. From the 19th through the 2nd of June the market got a little choppy as volatility dropped and the market traded sideways. Not adjusting my strategy, I kept trying to momentum trade the futures with mixed results. I’d be up huge for a day or two then lose it all or most of it in the next day or two. Oh, well, I thought. Easy come easy go. I’m still up a few hundred percent for the year. The market continued the meltdown from the 5th through the 7th and I once again was making money hand over fist. At this point, being the smart guy I am, I figured there must be an oversold rally coming. I started waiting for the bottom. The next day we got a nice washout selling day that closed near the top of the range. This was my chance. On the 9th I really loaded up. I bought as many contracts as my account would allow (mistake number 1), trading roughly 1 contract for every $1,500 in my account. I then proceeded to turn my monitor off, and go to sleep (I’m trading in Korea so I trade at night time) without putting a stop in (mistake 2) confident the market was going to blast off. Unknowingly, I think I bought the high tick of the day and then the market went lower for the rest of the session. I jumped out of bed the next morning eagerly counting my profits in my head. When I turned my monitor on, I almost passed out. Roughly 50% of my account vanished overnight…the last 6 months of research, hard work, late nights…gone in one fell swoop. Desperate, I charted the daily volume for the session and noted that it was below average. Ah, they are just shaking out the weak hands before the big rally, so I’ll just sell half of my position and reestablish it when the markets start moving again (mistake 3). I sat through two days of a “light volume pullback” as more and more of my account was being evaporated. The market had to rally at some point. (mistake 4). I finally got my rally, much to my relief, on the 14th and 15th, though with a smaller position than I put on on the way down. I was still down a good bit from my equity peak, but the market wasn’t going to make a chump of me…I was going to make it all back and then some (mistake 5). Thinking the market was going to blast off, I once again plowed in, maxing out my margin in anticipation of the ensuing rally. From the 16th through the 28 the market literally chopped me to pieces. I was trying to aggressively momentum trade to make my stake back while the market was sideways. Broken and battered, I threw my hands up in distgust as my account was decimated by 80% by the end of the battle. I wanted to quit trading (I wanted to do that numerous times) I vowed to never trade that large again (I’ve said that before) and told myself I would take a month off while I got my head straight. Of course I was trading the next day, albeit with only one or two contracts, trying to figure out what was wrong with my trading method. I then spent the next few days trying to tweak my method to see where I had gone wrong…searching for the Holy Grail the has eluded me for my whole career (it doesn’t exist).
It then dawned on me. If I continue with what I’m doing, I may have to give up trading forever. That was the scariest thought I could think of. It wasn’t the loss of money…I’ve taken my licks before. It wasn’t the frustration with myself for doing stupid things…that’s happened plenty. The scariest thought during this whole process of elation and depression was that I may have to give up the thing I’m most passionate about. For the first time in my trading career, the thought hit me that if I blow out my account I may never be able to trade for a living. I’m in the Army; I can’t afford to throw another stake together. I started with a humble $2,000 account and, with literally thousands of hours of study and hard work, built it to the point where I thought I would be able to trade for a living in a few years. I also realized that the problem wasn’t my style (momentum trading) it was me. The markets haven’t changed…they just express themselves. I was the idiot. These things literally scared me into action. I read and reread “Trading in the Zone” by Mark Douglas and “Mastering the Trade” by John Carter over and over again. My mistakes were staring me in the face with each flip of the page. One thing that was the most difficult to accept was Mark Douglas’ assertion that the outcome of the next trade is random, but it’s executing your edge over a series of trades that makes your method a winner or not. As a trader with a little experience under my belt, I naturally think that I know a thing or two about the market. Betting it all on one trade was my display of confidence in a trade. But here you have Mark saying that the outcome of the next trade is random. That was probably the hardest thing to swallow…the fact that I don’t know what is going to happen next. Naturally if you don’t know, then you won’t make all the amateur mistakes that I made over the last few months, i.e. overconfidence, trading too large, fighting the trend, holding losing trades, not putting a stop in, etc. John Carter puts it bluntly when he says that amateurs become professionals when they start controlling their risk on each trade and stop looking for the next Holy Grail. Professionals always take money from the amateurs.
Even though this was the most gut-wrenching month I can remember in the market, I’ve come away with many painfully won truths. Not just repeatable trading axioms, but truths that hit me in the core of my being. I think my trading mentality has been forever altered because of these experiences. During previous market beat downs…uhh…drawdowns…I’d learn a few more axioms, pay them lip service, then proceed without taking them to heart. Now they seem to be a constant part of my trading psyche. I leave this story repeating the wisdom of Mark Douglas, something that I repeat to myself over and over again hundreds of times a day: The outcome of the next trade is random, but the occurrence of your edge over a series of trades is what makes you consistent. Find consistency in the unknown and you’ll be a winner. I’m up 30% from the bottom, trying to claw my way back, although with a new perspective. Good luck trading and I hope my experiences will spur some of you to action to do the right things.