You may have noticed something peculiar in the Live Trading section of our Recent Results page. It is a strange oddity that that sticks out like a sore thumb – on September 21 we had our first losing trade in a very long time. As many of you know, we pride ourselves on being disciplined traders, using rational decision making to guide our trades. Our expert trader Hugh has mastered this approach, but on September 21, he proved that even the most seasoned pro can lose control, crash and burn.
Here’s what happened. The morning leading up to the opening bell was normal; Hugh properly assessed the market conditions and wrote in the Inner Circle of his anticipation that SPY would drop. Hugh was right about SPY dropping, but he lost his discipline once the Trading Room began and SPY climbed in the first 20 minutes after the opening bell. Rather than relying upon the solid technical analysis that underlaid his pre-market decisions and also his decision to buy some September 26 292.5 puts the day before, Hugh allowed fear to take over and sold those puts for a loss (bought for $1.84, sold for $0.83). Shortly after selling, SPY reversed direction and Hugh watch the value of the puts he prematurely sold rise. If that wasn’t enough, Hugh decided to chase SPY to the upside, buying calls just as the upward run was losing steam – he eventually sold those calls for an 81% loss.
The damage from the morning carried over into the afternoon as Hugh hosted a special afternoon edition of the Trading Room. Again, he set aside his discipline as he attempted to make a very high risk trade to double his investment and make up for the morning’s loss. This risky move, fueled by greed, resulted in a 39% loss on options that expired that afternoon.
I see every trade as a learning opportunity and make a habit of debriefing my trades to review my decision making process. These are encouraging when I review my successes, but the best learning opportunities come out of the failures. Think about it – the sinking of the Titanic identified flaws in ship design and passenger organization, the Challenger Space Shuttle disaster identified failures in process management and decision making, and the Deepwater Horizon oil spill in 2010 identified a culture of unsafe operations. Each of these event resulted in changes aimed at preventing re-occurrence – we are generally more safe now than we were before.
Okay, so maybe Hugh’s recent trading loss wasn’t as disastrous as these examples, but September 21 is a day that will live in infamy in the halls of DayTradeSPY. We were reminded to stay vigilant and disciplined in the face of fear and greed, and we were reminded about the importance of relying upon facts and data. At DayTradeSPY, we teach our clients how to build discipline into their trading, curbing emotions and sticking with the facts. We drill the details of these concepts into our clients so that they develop into consistently successful traders. But Hugh demonstrated that no matter how much trading experience you have, it is all too easy to fall back. Hugh ate a big slice of humble pie that day, but we all benefited as we reinforced the importance to focus on disciplined trading.