Never Waste a Good Loss

No one likes to lose. Especially me. Especially after all these years of experience. But losses are inevitable. They can be caused by technological issues, surprise events, human error or outlier trades gone wrong. It happens.

Whatever the cause, I learned early on that, even though I lost money, I should never lose the lesson. I love to celebrate my wins, but it is the losses that teach me the most. That is likely the reason why most traders simply give up; they fail to analyze their losses and learn from them. When you get serious about trading, want to learn all you can to avoid costly errors and focus only on what works, you will then be able to achieve success in the market.

As you may know, we are in the middle of our third round of $2,000-10,000 Challenge, where we take $2,000 and turn it into $10,000 in three months — as seen in the daily Trading Room.

Everything was going fine for the most part. We were ahead of ourselves by about $357 when I suffered my first of two recent substantial losses. I had 15 contracts on the $511 puts, which I had bought for $2.97. They were sold the next day for $1.30. The total loss, including commission, was $2,520. What went so wrong?

First of all, most losses are not necessarily caused by a single error. Instead, they are caused by a series of missteps. My post-trade analysis revealed the following:

1. I was medicated and trying to fight the symptoms of an illness. This likely clouded my good judgment and response time.
2. My initial decision, to go with calls, was spot on. When SPDR S&P 500 ETF Trust (NYSEARCA: SPY) retraced, I hastily and erroneously changed my mind without a proper assessment.
3. My experience with puts was poor; hence my better bias to the upside was sideswiped when I decided to buy the riskier puts instead.
4. As I was called away to meetings and a medical appointment, I was unable to watch the market as I should have.
5. I took a higher risk than I probably should have, knowing a Fed Reserve announcement was to occur later that afternoon.
6. I entered my puts trade ahead of the confirmed setup I usually wait for. I succumbed to my anxiety instead of exercising patience.
7. I failed to confer with/listen to Ahren’s alert of a hard support, which provided the bounce needed for SPY to push higher.

These are seven items that I, a seasoned trader, regrettably failed to consider. All of them, when combined, resulted in a loss on such an important project.

The next day, I got back on track and started erasing some of that loss with two profitable positions, one which was an aggressive same-day expiration trade.

However, the day after, I was knocked back down with another $675 loss.

The reasons for this failure were:

1. I took on higher risk over safety with same-day expirations in trying to recoup some losses. As a result, I made snap decisions.
2. I entered my trades mentally charged instead of emotionally neutral and detached from them.

In the end, this was a stirring mental shock that brought me back in line and made me realize that the important task is to create even more wealth from the original $2,000 seed money. We will return to executing safer trades and see where our efforts take us at the end of April. We will remove the self-imposed pressure to hit that lofty target and accept that there is no shame in converting $2,000 into $4,000, $6,500 or $8,000 at the end of a three-month run. Our DayTradeSPY’ers know this all too well. If there is anything to be learned from this exercise, then it was not all for naught.

I am divulging this all-important function of reviewing bad trades to all you readers as the lessons from them are too valuable to only present to the participants in the Trading Room. Remember, learn all you can from others’ mistakes, as you won’t live long enough in this business to make them all yourself.

As a subscriber, you will be exposed to the winners and losers, in real time and in real markets. In my years of trading, I have never encountered any other mentor who offers this kind of service — where they attack bad trades head on. We do. In our morning Trading Room.

Join us in the Trading Room, every morning at 9:20 a.m., ET. You may well learn more in one week than all your years of other trial and error programs.

If you never heard of options but are interested in this amazingly rewarding career, join us on our weekly Intro to Trading/Week in Review session at 8 p.m., ET, tonight, Thursday.

And remember, never let a loser go to waste!