Trading like this can be fatal for you, Part 1

I was 24 years old and it was July 2007. I was sitting on the fixed income trading floor of BNP Paribas at the time and was just itching to take a big short on the stock market. Equities had been rallying in the face of a crashing fixed income market. It was like smiling into the fist of a much younger Mike Tyson.

I finally pulled the trigger after months of waiting and shorted as much high beta stocks my margin would allow. After all, that’s how the legendary Jesse Livermore used to do it right? I doubled my money in a matter of weeks and was on an emotional high. I truly believed I had found my calling in life.

High off the initial win, I routinely maxed out my account by shorting S&P e-mini futures contracts. I had one thesis and that was the stock market was going to crash due to the subprime crises brewing underneath the exuberant indices. I could feel it in my bones – this was my short of a lifetime!

Fast forward 6 months, gone were my profits from my “big short” and gone also was my initial capital. Easy come easy go, but the emotional pain persisted for much longer.

I’ll never forget the feeling of waking up to a $25K loss even before the market opened. I closed my short in disgust by 9:45am…only to see the market close negative for the day. The catalyst was the introduction of the TARP program to ease the strain on the financial sector which had no real impact for months. But staring at such a big loss had totally incapacitated me mentally and even physically to react in the proper manner.

Yes, I had caught the top in the market and Yes, I doubled my money at first, but I lost everything. The emotional suffering was made infinitely worse because just after I gave up, the markets really started crashing, where -500pt days became routine.

I found out the hard way just how physically, psychologically, and economically taxing trading the wrong way can be.

A trader who fails to keep his emotions in check often make common mistakes that trap them in a vicious cycle:

  • Revenge trading
  • Not respecting stop loss levels
  • Forcing trades, especially when losing money
  • Chasing trades for fear of missing out

The psychology of trading is so fundamental to a long and healthy trading career. I wish I had read this article when I was 24. If you are having issues keeping your emotions in check, do yourself a favor and read part 2 of this article. Closely.