Compounding losses & compounding problems

Well folks I just wrapped up my worst trading week of 2014.

Let me lay down the numbers and then I'll get into the psychology of it.

First off I gave back a THIRD of my annual gains! A THIRD IN ONE WEEK PEOPLE! I WAS up $3,000 (15% return on my $20,000 account) on the year - not anymore. Folks it's been a while since I've been smoked like this! In fact, I'm on pace for my first red month since March of 2013. I also took my largest loss on a single trade in 7 months. Overall, I got my face kicked in! This market is NEVER short on humble pie.

However, looking at the positives - I'm still up roughly 10% on the year, and I'm on course to make my 2014 1st half profit targets. So all is definitely not lost.

Look, everyone loses money - I get it, but I'm more interested in the "WHY". I need to understand what led to these poor decisions and compounding losses! How did ONE bad trade turn into SEVERAL bad trades? Because that's exactly what happened last week.

Let me tell you how all this started... Way back in April I set up a a bearish bet on the SPY, a June 189/190 call spread. This trade actually went green for a little bit. At one point I had like $100 profit. Either way, it started going against me and instead of cutting my losses, I stayed in. I continued to stay in the trade even AFTER the SPY closed above 190 on May 23rd - which was my mental stop. As we know, the SPY gapped up the next day and hasn't looked back yet. So the bottom line is this - I had this nasty trade in my portfolio as I rolled into June expiration. 

So that got me thinking of ways to make up for this loss. Now let me just say, this is a BIG problem of mine! When I start putting on trades in an effort to clean up the mess left behind by other craptastic trades, I'm going to start losing lots of money! Here's why, anytime I trade with the mentality of making up for losses I force the issue. I take chances I have no business taking. I put on trades I'm not comfortable in and I get in positions where the risk FAR outweighs the reward. Instead of letting the market come to me - I force myself into bad plays.

Here's a couple of specific trades I put on in an effort to clean up the SPY crap, a MO credit call spread and a FB put spread. First, I had no business getting into the MO trade. The set-up wasn't right and sure enough I lost $260 on that one! Oops, now I have a new problem! Not only am I trying to make up for the SPY loss, I've got to make up for the MO loss! That brings me to the FB trade. This was a high risk spread that expired the next day - not the type of play I normally do. That one cost me $270! So my plan to "get back to even" actually compounded the problem and put me in a deeper hole! 

Here's the thing, this whole chain of events can be traced back May 23rd, the day the SPY closed over 190. I should have exited that call spread for a $200 loss and moved the hell on! But because I didn't do that, because I didn't cut my losses, I not only took a max loss on the SPY call spread, but I attached another $530 of losing trades on to it! 

So the lesson here for anyone reading this is to CUT YOUR LOSSES on the front end! Yes it sucks to lose money, but a $200 loss won't hurt that bad. It's only 1% of my portfolio. However, $1,000 worth of losses is 5% of my portfolio and those kinds of loses DO HURT!!

Lastly let me just say it's not only about cutting losses, it's also about trading 'em ONE AT A TIME! I've got to stop letting bad trades bleed into my other trades - it infects them like a deadly money sucking VIRUS! 

People, this is a tough game we play. I said this last week, but this is what I LOVE about trading - it's HARD! 

And it's the HARD that makes it GOOD!