lucky gains lead to bigger losses

As I wrote about earlier this week, I made a few bucks buying aapl calls at intraday lows and selling them at their intraday highs.  Basically I would wait an hour into the trading day and let the calls (and aapl) establish a range.  Then I would step in and try and catch the calls (I was buying the july 180’s) at their lows of the day with a buy limit order.  Once the order was complete I would put in a stop to protect my downside and wait and see the market action by mid afternoon.  Then I would put in a sell limit order at the day’s high (as determined by the swings of the morning).  This worked really, really well two days in a row. In fact I was able to start with about $3800 and end up with over $5,000 in profit in total.  And then I got greedy…

It was bad enough I broke my rules by trading during the day, but I really screwed things up by letting my greed get the best of me. I went back for a bigger bet yesterday, ignoring a logical voice that told me this strategy would lose it’s effectiveness at some point.   After all AAPL’s stock, like every other, does go down sometimes.  And yesterday it did.

I put in my buy limit at morning lows on the 185 calls yesterday, but made a first of many mistakes.  The first mistake was betting the farm on this strategy.  This was akin to winning blackjack two hands in a row, and then betting everything you have that your “strategy” for winning blackjack would yield another 21.  Of course it never does. I did not invest or bet all of my money but I certainly went for it more than ever. My greed won that battle over logic. The second mistake was I left the order open even though I knew I would not be around to see it executed and even more importantly I would not be able to enter in a stop to protect my downside.   I was at lunch meeting for several hours away from a computer (and scottrade’s mobile site is just awful…it’s almost like working in dos prompt again).  So my buy order executed and then the market danced around unchanged until about 230pm, and then it started to head south.  This is when I would have gotten out, when a stop would have cut my losses.  But I didn’t have a stop, I was exposed…and the calls fell $1.

This is where the 3rd and most costly mistake came to play, the one that erased my gains from the previous two days entirely.  First I panicked because I had more money at risk than I was used to.  So I set in a measly stop, one I knew would be executed because I wanted out.  I happened to time the bottom almost perfectly, getting out of the calls just as they rebounded.  Fear won that one.  Next greed started feeling a little more confident…I suddenly KNEW aapl was coming back, the market (this horrible, horrible, weak market) was coming back towards the close.  Buy now…buy low, sell high right?  So I put in another large buy limit order, thinking I could buy just above the low of the day.  I think this behavior requires a new rule…I can’t buy and sell and buy again in the same day EVER.  When I’m doing that, it is a sure sign I’m being ruled by my emotions. Not good.  So I was back in, at a slightly lower price than I had just sold for a loss.  I held over night thinking AAPL would surge today.

This morning the market opened and I found myself watching the scottrade streaming quotes feeling like a gambler at the horsetrack who had bet his mortgage payment on the long shot horse…it was very scary.  This is why I started this blog..to stop things like this.  I set a stop and closed down Scottrade.  If I’m stopped out, I’m finished I told myself. Strangely despite a loss, I felt better clearing up the uncertainty.  I may lose, but at least I know how much I”ll lose and I’m ok with that.  That is a big key I’m learning…it’s ok to lose money because quite frankly it will happen a lot in investing.  But you need to know just how much you can and are willing to lose.  I lost.  I was stopped out, ending down about $1K (after being up $5k) in this whole fiasco.  AAPL’s stock recovered from the lows of the day, meaning my strategy would have worked today, nonetheless I am happy to be out.

No more gambling…investing only.

potential new rules from lessons learned:

-Can’t buy and sell and buy (or sell buy sell) a stock in the same day

-always set a stop..if you are unable to set a stop then don’t make the trade..OK to wait

-never bet the farm all at once