Sometimes in life we learn the most from our failures and not our successes. It has been said that ‘experience is just the sum of all our failures’ and this most profoundly evident in the stock trading world.
In this post today I would like to discuss a swing trade that went horribly wrong for me this year.
MY HUGE LOSS WAS THE BEST MISTAKE I COULD HAVE MADE!
The idea for this post came about, when I was looking through my blog and I realized that I, like many other traders have focused mainly on the winning trades and ideas. By going through the mistakes I made with this trade I hope to reinforce how easy it is to give alot of money back to the market and how just one mistake is all that stands between profitability and ‘failure’.
The story begins back in January 2014. The new year had started and I was full of enthusiasm and extremely optimistic for the year ahead – and with good reason – as the year before I had doubled my trading account in just a few short months (as I discussed HERE) and I was feeling like I had really got the hang of this trading business! Unfortunately for me only one single trade lay between me and account devastation (albeit a temporary situation!).
The stock that I bought a long position in back in January trades under the ticker $BOLT. The company manufactures underwater drones which has been a hot theme this year. Given the undervaluation and steadily increasing price action on the daily and especially the weekly charts this looked like a decent buy at $22 per share for me. My first mistake was buying in with much to large a position for my account size. I had, until that point been very conservative with my position sizing. Never getting greedy and never being too optimistic, I had always considered the downside risk in my trading.
However, I bought into $BOLT with about 30% of my account in January 2014. Unfortunately the price action almost immediately went against me. In my naivety I reasoned that patience would pay off and that the stock had some choppy action in the past, sometimes testing the 50 day moving average, but always rebounding and slowly growing upwards over weeks and months. So I held my position. And indeed about a month later $BOLT did rebound off the 50 day moving average and I was back to break even for a short period of time I was almost break even on this position. However, I continued to hold as the stock demonstrated classic ‘topping’ behaviour until in late February it started to sell off. I was determined that this sell off was just the stocks volatility once again rearing its ugly head. Unfortunately my stubborn attitude caused me to ignore a classic ‘sell’ signal – a heavy volume breakthrough of the 50 day moving average. This was in part due my reluctance to take my moderate loss due to having a large position in the stock. So I continued to hold. $BOLT continued its downtrend. Then in April the stock broke down through the 200 day moving average. Still I held thinking ‘this is a long term hold’. Big mistake – of course a stock breaking its moving averages to the downside is not a good hold!! Eventually $BOLT put in a bottom around early MAY and made an attempt to regain the 50 day moving average in late MAY. At this point I cut my losses and sold my position for $18 per share. The loss was a large 20% loss on a large portion of my account. It was the right thing to do though, because since then the stock has continued trending down beneath its 50 day moving average. I just wish I had, had the discipline to cut my loss on the first sign of weakness – the breakdown through the 50 day moving average months ago.
My adjusted rules for avoiding a similar situation in the future are:
1) Control my position sizes more carefully
2) Never buy a stock or hold a stock that breaks through a moving average with conviction.
3) Cut losses fast ! One big mistake can wipe out several months of profits.
4) Don’t try and be right all the time – just try and lose the least amount when i’m wrong!
5) Always try and limit my losses to less than 10% of the position size.
6) Do not fall into the trap of thinking that it will ‘Be OK to hold a losing stock because I am a longer term swing trader’
I hope my detailing this mistake will help you with your trading – it certainly has helped me gather my thoughts about this trade and effectively laid it to rest for me once and for all. I am glad i made this mistake as it has helped me avoid this in other trades this year and I have already made up for this loss by early June this year.