I started investing and getting into the stock market back in October of 2011. The markets were just bottoming from a relatively large correction at that time and I had bought stock in Ford (F), Verizon (VZ), Paychex (PAYX), Freeport McMoran (FCX), and Apple (AAPL). I had under $10K invested at the time and was doing alright. By mid 2012 I had pulled a decent 10-20% profit on each investment. This was to be expected, since if you bought anything in October 2011 and held it for a few months you’d instantly be up as the bull market continued.
Then I started options trading.
After making profits on my investments, I wanted to do more, make more.. Build up my account more. I began learning how to trade options after I realized their powerful return potential. I first bought options in AAPL, some monthly options for an earnings play. I just figured they would beat earnings so I took around $1,600 in options risk during that play. After earnings, the stock opened up just about neutral and my options, already decaying badly, had been reduced to close to zero. This was my first loss I ever took playing options and I was devastated to say the least. How could $1,600 be lost so fast? I had nearly wiped out all my gains from stock trading, in a day or two timeframe.
And I continued trading options.
After that loss, I decided I had to make it back. So I traded larger, more risky plays in order to have a potentially large payout. I ended up putting in more money to my account, increasing the total I had put into it around $30,000. By the end of Spring in 2013 I had gambled away about half of it, sitting at $15,000. I was losing money very fast, and didn’t know what to do. At the end of the week, Friday September 20th 2013, I had put just about all I had left into AAPL options. During that day AAPL was hit hard, down quite a bit, and ended the day at $467 per share. I went over the weekend with 20 contracts of calls, and whatever money I had left into more calls.. This was one of the worst weekends I can remember, every minute I was checking twitter and news sources for anything AAPL related to see if I was going to be hosed come Monday morning. I did the stupidest thing.. Essentially I put everything on black.
The worst thing happened.
Over the weekend, AAPL announced it had sold 9Million iPhones in its opening launch of the 5S and 5C. This was, ‘well ahead’ of expectations. The stock opened up at $496 a share, almost $30 higher. I sold all my calls as fast as I could at the open. I made a boat-load of money. (https://www.youtube.com/watch?v=uE5B5c0OgUM) This was great right? I made back everything I had lost, and then some more. My account ended that day at $52,000. I was ecstatic. I did the smartest thing out of all of this.. I took a 2 week break from trading. Eventually I came back.. made some more, lost some.. etc. I ended 2013 with $72,000. Doubling my money in one year, not a bad year eh?
I continued my trading style, and during January, I played AAPL many times, against the tide.. Breaking all rules of trading.. I was adding to losing positions, doubling, tripling down.. I wasn’t cutting losses, and letting them grow and grow, as AAPL continued to fade its stock price. I played earnings again and lost. I ended the month of January, down $30,000. I knew something needed to change, or my account would be $0 soon. I knew that the way I traded was lucky and that my gains have been doing more harm than good–to my trading psychology that is. You see I didn’t think I could lose a lot of money, and I thought my trading was sustainable. Boy was I wrong.
Whats happened since then?
Since then, I’ve changed my trading strategy. I trade NOT to get rich quick, but to pursue persistency while mastering a sustainable trading strategy that can work with any amount of capital. During every trade, no matter what, I risk 1% of capital.. Meaning my losses are capped at that amount. Anything worse would be detrimental to my trading psych and to my trading account.
Learn from my naivety.
Just because I made good money one year, doesn’t mean that my strategy for trading worked. I was throwing money at the market, and it just so happened it was paying me back pretty well. Over time, that strategy will crumble to the ground. By risking 1% of your capital for any given trade, you’re protecting your account. In this game its all about surviving. You don’t have to trade a lot, you don’t even have to win a lot. You just have to protect your account from losses, and the winners will come. Cutting losers has been the hardest thing for me to grasp and learn, however once I understood it and put my pride aside, my account started to grow again. Take it from me–have a plan when you trade, have an entry, exit, and a good reason, all while managing your position size such that you can’t lose more than 1% of your account. Trading shouldn’t be gambling.. You should create an edge for yourself and then manage that edge so that you can win.
Helpful resources to learn more
WatchHimTrade – Live Options trading.
New Trader U – Trend trading with technical analysis.
Kay Kim (2 Traders Club) – Trend trading with technical analysis.
Train Wreck Trader – What can happen when you don’t trade properly.