Did I Do Anything Right?

I think it's important to be balanced when analyzing a trade. Rarely is a trade all wrong. It's critical to see the nuance.

I think I did some things right. For one, I laid out some pretty specific rationales and conditions that served as checkpoints. I also had a specific timeframe within which my scenarios needed to work out. It's important to frame a trade in falsifiable terms.

Another thing I did right was to keep the size of my bets fairly modest. I didn't bet heavily against my basic medium-term view. It was a short-term trade and I sized the position accordingly.

I also correctly identified the potential weaknesses of the trade in advance. In particular, I identified the fact that way too many people were expecting a correction. And I think that I correctly identified the fact that strong flows seemed to be driving the market, which would ultimately limit the downside.

Finally, as the trade developed and it went against me, I didn’t act on the anxiety I felt as the market shot up. Several times I was tempted to close out the bear positions, reverse, and go long, chasing the break out - but I resisted. Perhaps I missed out on some money by doing this, but proper mechanics dictate not abandoning a strategy while in the heat of battle unless the fundamental rationale behind the strategy has been clearly falsified. Conditions on the battlefield always ebb and flow, and it's imperative to allow a strategy to play itself out. Abandoning a strategy in the midst of battle merely because of the ebb against you is a sure way to lose money over the long term. I respected my stops.

How Did I Deal with Failure?

Feeling like a chump, it was extremely hard to pull the trigger on putting long positions back on, despite the fact that this is what my medium-term view strongly suggested I should do. In particular, it goes against every emotion in my being to chase the market. And it was excruciatingly difficult to buy stocks that were up huge since I'd sold them 3 weeks ago.

My pride had been hit. And emotionally, I was being strongly influenced by a feeling that if the market did correct after I got in, I was going to be feeling like the biggest fool on earth.

So how did I deal with this?

The most important thing I did was to recognize that the above feelings of pride, shame, fear, etc., are emotions that have absolutely no value from an investment standpoint. On the contrary - they're totally destructive emotions. They get in the way of making carefully reasoned and weighed decisions. These emotions are killers of good investment performance.

Recognizing these emotions as problems is an important part of the solution.

The second thing I did was simply clear my mind and heart and look at this market from a totally fresh perspective. I needed to completely forget what happened in my last trade. This was really hard to do.

I don't think it's an exaggeration to suggest that successful trading and investing requires the emotional strength of a Zen master. Seriously. Investing, above all else, is more an emotional discipline than an intellectual one. Skill comes with deliberate practice. And the greatest advances in strength are derived from how one deals with failure.