Hey Traders,
Smart traders learn from the mistakes of others…
But try telling that to this young, mullet-headed Indiana boy in the early 80s.
That’s me, I was a brand-new stock broker working in New York City and the holidays were coming up.
Like any young kid who had been away from home for a long time, I wanted to go home for the holidays — which for me was Gary, Indiana.
But I didn’t just want to go home as the same old guy everyone knew me as.
I wanted to prove that I had “made it”…
So my goal was to buy a first class plane ticket and come back home looking like a Wall Street big shot.
Only problem is I wasn’t a Wall Street big shot yet…
But I had a “brilliant” plan.
I went half-and-half with another stock broker — a friend of mine — to buy an option.
Imagine that, I couldn’t even afford the whole option myself, because the little money I had was the last of it.
But don’t worry, I told myself. This option was a “sure thing”… it was DEFINITELY going to work out!
There was just one problem.
I might have thought it was a “sure thing” — but the market had other ideas!
And as the holidays got closer and closer, my buddy and I watched that option dwindle further and further down… Till it expired completely worthless.
Which, coincidentally is exactly how I felt. Completely worthless.
I had bought that option specifically to feel like a big shot coming home for the holidays.
And the EXACT OPPOSITE had happened.
Not only was I not going to be flying home first class like a king…
If I couldn’t figure out a plan, I was going to be walking all the way to Indiana!
Thankfully, I managed to borrow some money for a bus ticket.
But instead of coming home like a king, I rode in on a bus with my tail tucked between my legs.
Lessons Learned
It was a painful and humiliating lesson.
One that I could have learned without spending any money, if I had only been less headstrong and followed one of the first lessons of trading:
NEVER trade with money you can’t afford to lose!
You’ve probably heard it a million times. And most traders think they’re following the rule.
But then a trade starts going south and they start sweating. They start panicking.
They keep refreshing the screen to see if the stock has started going up.
All of these are signs that you’re trading bigger than you should be… trading with money you can’t afford to lose.
It doesn’t matter if you have $1000 to trade with, or $100,000 to trade with…
Everyone should have a limit on what they put on any single trade.
That specific amount is something you have to figure out for yourself — it’s different for everyone. But it’s absolutely essential to have that limit and follow it.
Another important lesson: Hand-in-hand with never trading with money you can’t afford to lose… Never borrow money to trade!
I should never have gone half-and-half with my stock broker friend.
It wasn’t technically borrowed money, but having to split the cost of the option was a good sign that it wasn’t a trade I should be taking.
Another lesson is to always go into the trade feeling 100% fine if the trade were to go to zero.
Literally imagine the trade going to zero. How do you feel? If you’re sweating or panicking, or cringing… stop right there.
I’m not saying you shouldn’t have confidence.
I’m saying that if the worst case scenario were to happen and the trade goes to zero, you should not be worried about where your next meal or mortgage payment is going to come from..
No one ever wants to lose a trade — it stings no matter how long you’ve been trading.
But when you go into a trade with a clear vision of every possible scenario — even bad ones — it has a way of opening your eyes and making your size your trades more appropriately.
One more lesson: I could have avoided this whole thing if I had just admitted I was wrong and closed out the trade at a small loss. When a trade starts moving against you, you should always be willing to take a small loss and move on.
This doesn’t mean you close out the trade the moment it moves against you. But you create an exit plan for every possible scenario:
- if the trade moves against you, what’s your limit to get out?
- if the trade moves sideways, what’s your limit to get out?
- EVEN when the trade is working out, you need to have an established plan. Otherwise you’re reacting emotionally and you could let a small or medium gain turn into a loss.
Closing
How’d you like that story? It was a painful lesson — but it was one that I was lucky to learn early on when the stakes were relatively low.
By the way, this is one of the lessons that ultimately converted me from an options BUYER to an options SELLER.
I hope I’ve been able to show you first hand the imporance of never trading with money you can’t afford to lose.
And remember: If you ever find yourself going into a trade, thinking only about the hundreds or thousands of dollars you’ll have “just as soon as this trade works out”…
Take a deep breath, step away from the mouse and don’t place that trade.
Trade well,
Jack Carter
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