Wednesday, December 30, 2009

Best and Worst Trades of 2009

An integral part of the learning process for traders is to continually identify areas of strength to capitalize on as well as areas of weakness to focus on improving. As each year comes to a close I like to take the opportunity to review my best and worst trades of the year. One of the best trading phrases I've ever heard is: Don't lose enough in one day to ruin your week, don't lose enough in one week to ruin your month, don't lose enough in one month to ruin your year. Internalizing this principle and living it is undoubtedly one of the best things any trader can do in improving their performance. Unfortunately my trading performance in July of this year was of the "lose enough to screw the year" variety. It is therefore no surprise that I'm pulling my worst trade of 2009 from July. Though most people associate July with independence, fireworks, hot dogs, and baseball games, this year it was unfortunately associated with pain, regret, and an increasing in my desire for either a crystal ball or a time machine.

If you don't remember, the market formed a beautiful head and shoulders pattern encompassing the May to June time frame.
[Source: EduTrader]

I was unfortunately lulled into a false sense of security and leaned way too much on the bear side by selling a plethora of OTM call spreads. As you can imagine the virtually straight upward march that occurred in July was a bear killer. Now, there is nothing wrong with being wrong, but for this go around my stubborn self decided to stay wrong for way too long. Needless to say, I'm still feeling some of the pain from that dark month. So what age old advice did I make myself re-learn this year?

1. Position size properly! By allocating too much capital into the call spreads, I set myself to lose too much money if stopped out. Don't let the allure of more riches dupe you into taking on an inordinate amount of risk.

2. Entering similar strategies on closely correlated securities is not diversification! I exacerbated my problem by not only entering call spreads on the RUT, but also the SPY. Two different securities-yes, but diversified? No! You see they pretty much move the same, so if I get pummeled on the RUT then.... you guessed it... I get pummeled on my SPY position.

If you're interested in sharing, what was your worst trade of 2009?

Next time I'll tackle my best trade of 2009.


Suneet said...

I had a similar experience, and was short Call options in March and then again in July. Lessons learnt for 2010 :)

Tyler Craig said...

Yeah, no doubt everyone that shorted calls at one point or another in 2009 has a few losses to mention. Thanks for sharing-


Interesting trades