Seven Lessons to Learn From a Trading Loss
It makes good sense to learn from your trading mistakes early or the same errors could resurface when your account is much larger.
When I started trading in 1995, it was a very different market. Among other things, I had particular affinity for a pharmaceutical stock, partly because I had been making money on it and partly because I had transcended from being a shareholder to being a "believer in the company." So, one Friday after a profitable week, I closed my position with a larger-than-normal size (there's no defensive-trading school where they teach you what not to do). As I picked up my print edition of Barron's on Saturday morning (it wasn’t available on the Web then!), I was horrified to discover that there was a negative cover story on my stock. I remember thinking that the reporter hadn't done her research well and I remember spending that weekend in agony.
The stock was slammed at the open on Monday morning, down about 15%. Over the next few days as the stock treaded lower, I did get out of my position but took another larger-than-average "revenge trade," with an intention of covering the losses. That is another story that ended in a loss. But thankfully the vicious chain reaction stopped there.
The irony is that over the next 15 years, the absolute size of that loss would be but a drop in the bucket. But the lessons were priceless. Among the many, here are a few:
1. Have an open mind and be prepared to listen to dissidents. (For more see my article, Why Investors Should Keep Enemies Close.) It's one thing to hold a position and another to fall in love with it and vigorously defend it, no matter what it does. The reality was that the news article I read was the first warning bell about the financials of that pharmaceutical stock.
2. No one stock should be given the power to hurt the account in a significant way. It's imperative to manage your market exposure and your exposure to any one stock and sector.
3. "Defensive trading" is a must. One should have a clear idea about the risks before the position is initiated. The market doesn’t "owe" anyone anything. Does life?
4. After a large loss, step aside. Any trade taken after such a loss is built on a whirlpool of emotions, not necessarily objective analysis.
5. It’s good to learn lessons early or the personality traits will resurface when the account is larger. It’s like falling from a couple of feet versus 100 feet. The hurt and the impact is less in the beginning.
6. There's no one out to get you!
7. From the outside, trading looks as if it’s merely managing numbers (fundamentals) or patterns (technicals); in reality, the two biggest things to manage are often position-sizes and ones own emotions!
I still find myself thinking about this trade at times. You never forget your first loss. You never forget your first lessons.
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