If you’re wondering how a millionaire trader bounces back from brutal losses … it’s time to pay close attention.
You see, even some of the most experienced traders (like me) are forced to face the realities of their bad trades sooner or later.
I’m in that boat right now after losing 30%+ on my regrettable Amazon.com, Inc. (NASDAQ: AMZN) calls trade on Friday.
The bottom line on my AMZN trade is this … I shouldn’t have tried to catch a falling knife.
Take it from me … If a stock is in a clear downtrend, wait for clear confirmation of a reversal to the upside before attempting to hero-buy calls.
In times like these, I have to remind myself of something…
Every trader faces losses at one point or another. That’s inevitable. But the important part is how you react to your losses…
I know people who can’t handle losing a dollar out of their wallet, much yet risk thousands of dollars in the stock market. Risk-averse people like these will never be successful traders.
On the other hand, the most excellent traders I’ve met evaluate every loss as a learning lesson.
They identify the mistakes they made and use those errors as motivation to avoid similar fates in the future.
So … what mistakes have I been making in my trading? And how will I work to improve on those blunders in the immediate future?
Keep reading and I’ll show you…
Mistake #1: Failure to Scale
I’ve said it before, and I’ll say it again — timing is EVERYTHING!
You can be 100% right on a trade thesis, but if you enter the position too early (or too late) … you might as well be 100% WRONG!
And that’s been a trend in my trading recently — I’ve consistently been too early into trade, forcing me to cut the position just before it heads in my direction.
So, how will I fix this error?
I think one answer could be to scale into my positions more gradually.
Instead of buying 30 contracts at once, I should probably be buying 10 or 15 to start, then adding to the position once I get the technical confirmation I’m looking for.
Lowering your initial size helps psychologically as well…
If you risk too much immediately, you’ll be worried about the dollar amounts as opposed to the actual mechanics of the trade.
I’ve fallen victim to this as well. It’s important to find an average position size that you’re comfortable with and not exceed it.
Once you’re strung several small wins together, you can gradually increase your position and scaling sizes.
Mistake #2: Trading Away from My Main Strategy
My primary strategy is buying puts on blow-off tops and overcrowded momentum stocks.
Sure, I’ve had success going long before … but bullish setups aren’t my bread and butter.
I need to remind myself of this and stop trying to trade patterns that are outside of my area of expertise (like the AMZN trade).
There’s nothing wrong with sticking to one setup or strategy and trading it over and over again. Some of the most successful traders in history have done exactly that.
HINT: If it ain’t broke, don’t fix it!
I learned this way back in 2010 when I first joined Tim Sykes’ Trading Challenge. But sometimes you need to remind yourself of the valuable lessons you’ve learned in the past.
So allow me to remind you…
I think it’s best to zero in on one area of trading and become a master at it.
Whether it’s puts, calls, short, long, big, or small … find the setups that work for you and don’t stray away from them.
Focus on developing a strategy that you can be consistent with. Then stick with it continuously until it stops working.
Don’t assume that you need to be trading every type of setup under the sun.
I tried to get a bit creative with my long AMZN trade, but I’m not as confident trading calls.
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Moving forward, I plan on mostly sticking to my puts strategy unless I’m 100% confident in my timing on a calls trade.
Mistake #3: Ignoring Friday Options Expiration
Last, but not least, I think my AMZN trade was largely affected by the fact that I was holding the position from Thursday night into Friday morning … which was one of the biggest options expiration (OPEX) dates in months.
Of course, I was aware of this. But I probably didn’t factor in how wildly volatile Friday could be solely due to OPEX.
Friday morning’s opening candle was one of the deepest and reddest I’ve seen in a while.
This single 5-minute move poured cold water on every single call position from Thursday (mine included).
While exact price action is impossible to predict, I probably should’ve expected some market maker shenanigans on such a huge OPEX day and avoided holding through it altogether.
Instead, I disregarded this fact and held the calls overnight. Now, I’m regretting that decision entirely.
At the end of the week, there’s huge motivation on both sides of the options chain to swing share prices all over the place, making it particularly hard to nail entries and exits.
So, take it from me. In this market, you’ve gotta be very careful holding high-volume options into Fridays.
If you trade long enough, you’ll get comfortable with taking losses.
But that doesn’t mean they won’t still sting…
Then again, I think that pain is important. You must weaponize the pain of losing to improve your trading.
Identify your mistakes and fix them. Check yourself before you wreck yourself!