One big loss taught me more than any winning trade I’ve ever had.
It sounds crazy, but this one trade wiped out nearly a year’s worth of gains.
And it was completely my fault because I got arrogant.
But in the long run…
It made me a better trader (MUCH better).
Here’s how…
The reality is, I had zero risk management and lost $180,000 in one day.
I was a short seller back in 2004. And I was SO arrogant.
All I did was short overextended stocks. My win rate was something like 85%–90%.
When something works so consistently, you get cocky and you stop building protection for the times it doesn’t.
Frankly, I was right so often that I stopped preparing. I had no idea of the risks I was taking.
That loss let me know in a VERY painful way.
It also gave me the most important rule I teach.
And in the long run, it taught me more than any winning trade I’ve ever had.
What’s the biggest loss you’ve ever had trading? Did you learn something from it? Let me know here.
Can you imagine how it felt to lose that kind of money in one day?
I don’t care how good of a trader you are, you’re one bad trade away from learning these lessons yourself…
Lessons From a $180,000 Loss
Big, risky trading isn’t necessary, but you MUST follow the rules…
Write these lessons down and remember them, no matter where you are in your trading journey…
No.1: Set a Max Loss
I can’t tell you how many traders I’ve seen who take a big loss and then revenge trade, trying to make it back.
It almost always leads to an even bigger loss (and if it doesn’t, you learn the wrong lesson).
So, set a hard number: How much are you willing to lose on a trade?
Position size should start with risk. Set your max loss, define your entry and stop, then calculate your share size based on the distance between them.
Know the downside before you enter the trade. Also, how much are you willing to lose on any given day?
The market will find a way to punish you if you don’t set a max loss limit.
That’s because…
No. 2: Stocks Can Stay Irrational Longer Than You Can Remain Solvent
That’s a variation of the John Maynard Keynes maxim:
“The market can stay irrational longer than you can remain solvent.”
It applies to individual stocks, too.
For example, do you remember the Avis Budget Group (CAR) squeeze back in April?
Source: Stocks To Trade
CAR YTD, daily candles, epic short squeeze.
Not every short squeeze is that big. But almost every week, we see overaggressive short sellers blow up accounts.
(Thank you, short sellers, for your sacrifice!)
So, how do you apply this lesson to your trading?
No. 3: Trade Small and Have an Exit Plan
I trade like a coward, but guess what?
Since my big loss, I’ve made millions more.
Source: profit.ly
And NONE of it was made by risking such a big loss after I learned my lesson.
Of course, past performance doesn’t indicate future results. But, you really CAN grow an account by trading small and locking in singles.
Remember, these volatile stocks can be SO slippery. So, ALWAYS follow…
Rule #1: Cut Losses Quickly
No exceptions.
I only came up with this rule because of the trades that have blown up on me.
Since then, I stopped basing position size on my confidence in a trade.
Instead, I size in based on how much I can afford to lose if I’m wrong.
I no longer trade so big and so aggressively. And I teach all my students to cut losses quickly.
Every single one of my millionaire students learned to cut losses quickly and lose small.
Be Prepared to Make October Your Best Trading Month EVER
The Nasdaq 100 hit a new all-time high on Friday, crossing 31,000 for the first time. Let’s GOOOOOOO…
Source: Stocks To Trade
Awesome News: Nasdaq 100 crossing 31,000 for the first time in history!!
Let’s make October the best month of the year!
Big, risky trading is not necessary to make big money in the long run.
I have 55+ millionaire students.
You can still potentially make millions of dollars trading scared and cowardly.
Why?
Because there’s SO much volatility and opportunity.
Cheers,
Tim Sykes
Editor, Tim Sykes Daily
