Trade Detail: Lessons Learned From a Losing Trade
By now, you know I take a systematic approach to trading.
I spend several years developing my strategies to make sure they find consistently profitable trades.
That’s why one of my three rules when trading options is to follow a proven system.
So, I know an occasional loss is just temporary. The strategy finds more big winners than losers, and we’ll soon be back on track.
And although we all know at this point that losses are a part of any trading strategy, learning to deal with them can be the biggest challenge for traders.
That’s why I want to walk you through a losing trade today — to talk about how we deal with them in our portfolio. Because at the end of the day, it’s something we all have to learn.
Here’s what happened…
The IONS Trade in Review
On March 10, I alerted my readers to a trading opportunity in pharmaceutical company Ionis Pharmaceuticals (Nasdaq: IONS).
The strategy I was using looks at companies that have been beaten down in the market and predicts when a stock will hit its bottom point to capitalize on the rebound.
Ionis shares had dropped 15% over the six weeks before the recommendation.
Everything was lined up for this stock to take off and deliver us another solid profit.
But things didn’t head higher like I expected. Instead, shares took a turn for the worse when Ionis’ partner, Roche, stopped a late-stage pharmaceutical study.
The news came out of nowhere and caught investors off guard.
As a result, in a single day, shares plunged 20%, and our position swung from a double-digit profit to more than an 80% loss.
So, we acted quickly. I sent an alert to my readers and recommended they preserve capital by exiting the trade.
Talk about devastating.
The hardest part for some traders, after a drop like that, is to cut their losses and move on. But I’m glad we did…
You see, the option was set to expire today, April 16. And had we held it through expiration, we would have lost 100% on the option.
4 Lessons Learned
Now, this trade didn’t pan out, but that doesn’t mean it’s time to quit.
That’s one of the main things I want to show you through the Weekly Options Corner.
I’m here to teach you because I’ve been there before — taking losses is never fun, but they’re inevitable. And I didn’t quit. My job today is to show you how to protect your portfolio and minimize their impact.
That way, you don’t have to learn on your own the hard way.
You’ll be in a better position than 90% of the traders out there because you preserved your capital and stuck to your strategy to bounce back with another big winning trade.
So, what did I do?
I didn’t dwell on what I should have, could have or would have done. I stuck with my strategy…
The day we exited our call options on Ionis, we jumped into a brand-new opportunity … following the same strategy. And that trade we added is up more than 90% in just three weeks.
So, here are four lessons I want you to take with you whenever you experience a loss:
Lesson No. 1: Losses are part of any trading strategy. You have to have the courage to get back up and take another trade.
Lesson No. 2: You never trade just for the sake of trading. You trade to follow a proven strategy for profits.
Lesson No. 3: Don’t be afraid to preserve capital. It’s never fun closing out a losing position, but sometimes the best thing to do is to walk away with some capital from the trade.
Lesson No. 4: The best way to handle losses is to control your position size. Never risk more than you are willing to lose. You should always use 10% or less of the capital you set aside for options in each trade — less is better.
By using sound capital limits with each recommendation and following a proven strategy, options can create massive profits for your portfolio in a short period of time.
I hope you take it to heart.
Before I sign off, I want to hear from you…
It’s a fast-paced world that can be overwhelming at times. That’s why I want to hear questions from Weekly Options Corner readers before the end of the month.
We have covered a lot here. And by now, I know many of you have more questions than ever before.
If there’s anything on your mind about options, or about the market in general, you can send them to our team at WeeklyOptionsCorner@BanyanHill.com.
We’ll feature your questions in our special mailbag edition later this month.
Chad Shoop, CMT
Editor, Quick Hit Profits