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Trading Lessons: Never Turn a Hedge Into a Trade


Let the underlying stocks determine what you do with the hedge.

One of the greatest memories from my youth is post-game analysis. Growing up, I was consumed by basketball, and I'll never forget spending hours with my teammates and coaches breaking down the play-by-play and analyzing game film.

There was always a humbling truth about reviewing video because, regardless of what you thought you'd done in the game, the film never lied. If you made a bad pass, it was there. If you missed the open man, it was there. If you botched a screen switch -- yep -- it was there. Needless to say, watching those videos was one of the best exercises the team used to improve.

I try very hard to bring this same exercise to the game of trading since I'm always breaking down my play-by-play in the trading journal I keep for each and every trade. If you don't do this, you're missing a huge opportunity to improve your results.

Like film, the journal never lies; and when the trade's over, your thoughts will be there in black and white for you to reread and analyze.

Recently, I made a mistake I want to discuss. I've had a very nice run in the FlexFolio, coming back from a net draw to move up over 11% year-to-date. I've already analyzed the reasons for the draw, which helped me to bring me back in line with a more respectable return.

I believe I've been managing the trades appropriately and following my plan for each and every action taken. Recently, when the direction looked a bit uncertain, I chose to add the S&P Dep Receipts ETF (SPY) long as a hedge against my individual short positions, along with Apple (AAPL), Amazon (AMZN), JPMorgan (JPM), and a few others. My journal discusses this trade in detail:

"I'm seeing lots of stocks probe support but not break down further. I feel generally that many are becoming short after the big move has been made. I'm becoming increasingly nervous about being short, yet my individual shorts have done nothing wrong. Rather than cover shorts for no reason, I'm going to add SPY long to hedge my existing short positions."
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No positions in stocks mentioned.

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