Early 2001 was a wild time for trading. While most people remember it as being the mid point of the end of a spectacular bull market, I remember the great day trading opportunities the volatile market provided. In a way it reminds me of the current market environment…but this article isn’t about a market call, it is about one of my worst trading mistakes and the lesson learned from it.
I have been accused of being a perfectionist in the past and perhaps that is why it is so easy for me to remember my trading mistakes. I am an active trader, who has always prided myself on being self reliant with my trading ideas and have taken equal pride in my ability to implement those ideas with an almost military like discipline.
I was enjoying the volatility of the market and my account was growing daily in January of 2001. I was happy with my trading, except….the guy sitting next to me was easily making 2-5 times more money than me each day. I was sure that I had forgotten more about the market than this guy (let’s call him Darin) would ever know. Darin was a friend and a genuine nice guy who was always willing to help anyone and that was soon to be my downfall.
You see, I am a trend follower and Darin’s main money making strategy was to look for stocks which were down the most in the first half hour of trading and he would then buy 1000 shares every half point down until the stock eventually turned higher. To me, his strategy seemed insane! But I saw it work for him 10, maybe 15 days in a row and he would always leave for the day well before noon while I sat there grinding out consistent profits until the close. It was infuriating to work twice as hard as Darin for half the results!
Well one January morning that year, I sat down at my trading turret where I headed up the proprietary trading department and proceeded to implode my trading account in a matter of hours. OK, I’m being dramatic, so let me set the record straight, I didn’t lose everything, not even close, but the emotional damage from the large I loss I suffered was enormous.
That fateful morning I turned to Darin and asked him “what are we buying today?” Darin looked at me quizzically and asked “we?” I told him “yes”, I was going to trade his strategy with him, but instead of the 1000 shares he was buying each half point down, I would only buy 500 shares to get comfortable with this new way of trading.
Darin was excited to help his friend and he excitedly told me “we are buying ALXN, it is already down over 3 points”.
I bought my first 500 shares and within a couple of hours I was the proud owner of over 7500 shares of the stock as it kept sliding lower. Darin assured me the stock looked like they usually do right before they turn around and he urged me to step up my buying (in for a dime, in for a dollar, right?). So I bought 2500 more shares, bringing my position to 10, 000 shares. Later that day, with less than an hour less in the trading day I owned 15,000 shares and I was down over $10,000! I will not share with you what was running through my mind, but it definitely was not positive! I knew I would never be able to sleep that night with such a big loser so I sold all but 1000 shares, just in case it gapped higher in the morning. The next day, tired from a sleepless night of obsessing about how stupid I was, I sold the remaining shares in disgust as the stock gapped down another dollar.
I ended up losing a good chunk of change that day, but was able to recover the losses over the next couple of weeks by trading my plan and my style. Darin ended up losing six figures in that trade when all was said and done and he eventually ended quitting trading as he kept trying to pick bottoms in what was a brutal multi year bear market.
The lessons of this trade gone wrong should be obvious. Ignore what others are doing, trade your plan and if it is a good one you will profit on your terms. I am always willing to learn new lessons in the market and in life, I’m just glad that all my lessons haven’t been so expensive!