A Costly Reminder Of Why Trading Rules Are So Important…
A couple of years ago, I found myself in a bit of a pickle in my trading account. I went against everything I talk about in the pages of my premium newsletter, Maximum Profit, and I was at risk of paying for my mistake dearly.
I couldn’t believe what I had just done. I let my ego and emotions get the better of me. And I lost.
I was trading cattle futures and following a similar technique that we use in my Maximum Profit premium service: momentum. I would wait for a solid trend — up or down — and I would either buy or short cattle depending on the trend. I had my sell signals in place (both a trailing and hard stop in this case), and I was following them.
No surprise. It was working. I was quick to cut my losses short if it hit my stop. It was going well, very well, in fact. So I started expanding into other futures markets. I saw a good trend in soybean futures, went long and made money. After just over a month, my portfolio was up more than 60%.
Now, if you’ve never invested in futures, know that it carries a tremendous amount of risk and is highly leveraged. That leverage is how you can make (and lose) large amounts of money. For example, if you want to trade West Texas Intermediate (WTI) oil futures, then know that one contract controls 1,000 barrels of oil, or 42,000 gallons. That means that each point value, or dollar move (i.e. the price of WTI going from $67 to $68) translates into a $1,000 swing for one contract.
To buy one contract of WTI, you only have to put up $3,795 in a margin account. So say you buy one contract of WTI at $67 and it jumps up to $70. That means you just made $3,000, while only putting up $3,795 as collateral. Of course, if it drops to $64 then you lost $3,000 and you’ll likely get a “margin call” if you don’t have enough funds in your account.
That’s just a quick rundown on futures. Of course, there’s a lot more to it, so don’t dive into this market willy-nilly. I had been following and learning about futures for two years before I ever made my first trade.
Anyway, here I was, my futures portfolio up 60% in a little over a month. I was on top of the world. I was sure I had it conquered. I began looking into hog futures, and I was positive that they had topped. Everything pointed toward an oversupply. And since I was on a winning streak, I decided I would short the hog market.
What Went Wrong
Prior to this, I had a conversation with a couple of gentlemen who regularly trade the agriculture futures markets as part of their jobs. Both expressed a decided lack of enthusiasm for jumping into this particular trade because of the extreme volatility. But I proceeded anyway, because I was confident that I was right.
Also keep in mind that there wasn’t a downtrend yet, I was calling the top.
Boy, were those gentlemen right. That first day, hog prices swung down, then back up, before ending the day about where they started off. The next day futures rallied a couple of points, close to where I had my hard stop (remember I was short hogs, so I was betting that the price would go down). The next day hogs plummeted… just as I expected.
“Finally,” I remember thinking, “this will be the start of the downtrend.” Hogs continued to drop over the next couple of days, and all was well. I had set a profit target for my trade and I was right there… but I wanted more. “Ah, what the heck,” I remember thinking, “this thing will just keep dropping.”
So I started calculating my “future” gains. Instead of following my rules, the very ones that got me to this point, I got greedy. I had set both profit targets and stop-losses for my strategy, and was ignoring both rules.
Worse, emotions and pride got the better of me when the trade started going against me. And not only did I not sell when I hit my stop-loss, I shorted more. I doubled down, positive prices would swing back in my favor. Instead, hog futures kept climbing and climbing and climbing.
I held firm. I couldn’t book a loss now. Each day that hog prices climbed, that little voice in my head said, “it’ll turn around, and then you can sell when you’re back to even.”
Well, it never turned around. I finally had enough. The damage was done. I had let my emotions and ego win. And it cost me all my profits and more. Instead of exiting the trade at my target price, which would have put my portfolio up 76%, I ignored all my rules. I didn’t follow the strategy and system that I had in place.
Of course, I tried justifying to myself that this was just “play” money and it didn’t mean anything. But that wasn’t true. It was money that I foolishly lost.
How You Can Learn From My Mistake
In my premium services, I constantly preach about cutting losers short, letting winners ride, not letting emotions control your investing decisions. They’re vital to becoming a successful investor. And this works even better if you have a rules-based system like Maximum Profit at your disposal.
And here’s the thing… I was doing exactly that. I had my rules laid out, I was following them, and I was doing great. At first…
I felt like a hypocrite. My futures trading account took a massive hit, a 63% haircut to be exact. To put that into perspective, imagine starting with $10,000, growing it to $17,600 in a month, only to watch it shrivel to $6,512 in a matter of days. All because you couldn’t follow some simple investing rules. That means it would take a 54% return just to get back to “even” and a 170% return to get back to that $17,600 mark.
I don’t tell this story for sympathy. I tell this story because I hope you can learn from it. Understand that rules and a system can truly help make you a better investor. Don’t let emotions, ego, pride get the better of you, as it did with me. Stay humble, and remember that you can lose it all just as quickly as you made it if you don’t follow some simple rules.
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