Impressive trades for a beginner don’t you think?
Make a guess which of these were paper trading. If you guessed the ones with positive profit and loss (P/L), you’re right.
There was a massive selldown at the close of market this past Thursday (20th Jan 2022). My plan on Friday was to go short, meaning I’m predicting the price will go lower and I’ll profit from selling a stock at the higher price and buying it back at the lower price. The difference is my profit.
This was my entry plan:
- Enter when price goes below $980
- Take profit at $975, $970, $960
- Exit when it goes above $985
When the price was at $985, I executed an entry. I mean what could go wrong, it’s only paper trading right?
Wrong.
I was not taking my paper trades seriously. I did not follow my plan. Trading is about discipline.
But my paper account was rolling in with amazing profits. It hit $100, then $400 all within minutes. I was on a roll.
Seeing the success on my paper account, I was confident the direction I’m trading in was going according to plan. I keyed in another entry — this time on my live account (on another trading platform).
Sized into a huge position is wrong on many counts
I had a small account and the only way I could afford taking a TSLA trade was trading options. Even the option contracts were too big a position on my account size. Let me explain.
TSLA costs $980 a stock. I had $2,000 in my account. To trade TSLA for a good gain (or a huge loss), I bought a contract which allows me to “control” 100x of TSLA. Each TSLA contract expiring on the same day (cheapest possible) costs $11 multiply by 100. I spent more than 50% of my account on TSLA.
For context, I typically take a 5-15% position on my live trades. This was nearly 10 times the usual. I was risking too much.
The price reversed
Naturally I panicked.
Seeing the drop from -$100 to -$400 was too much for me to stomach. I had no stop loss on my position because I rushed to enter into the trade, on a platform I rarely trade on no less. Thankfully, the loss reduced to -$300 in the next minute and I quickly exited my position.
Was I relieved? A little.
I did my best to exit at the best possible price to save whatever I’ve lost.
Or did I?
Red arrows indicate the exact time I entered and exited my live trade.
My loss resulted from impatience and oversizing
TSLA’s price then continued to move according to my trade plan. It was sliding down beautifully had I kept my position. Which I did in my paper account.
I was seeing a 50% gain had I been collected.
Seeing the “success” on paper, I scaled into yet another position (on paper), hence the three trades in my trading journal. It met all of my target prices and I took profit on both paper trades.
The lessons learnt
- Position sizing is extremely important. One saying goes like this: if you cannot sleep at night knowing your potential loss in that trade is something you cannot afford, it’s too big a position.
- Know that you can gain a lot of money by trading options, you could lose just as much just as quickly. I couldn’t stomach the loss as much as I’d hope it would give me a quick buck.
- I bought the “cheapest” option contract at what mental price? 0 day expiration contracts lose their value at breakneck speed. This contributed to the loss of $100 to $400 within minutes. My heart was racing and I was dumbstruck at my untimeliness throughout the live trade position.
- Take all practice trading seriously and with discipline.
- Unfamiliarity with platforms can be a hinderance. I say this not to blame the platform but more on my greediness to get into a trade on a different user interface. This unfamiliarity created the lag time between which I could have entered on the platform I typically practice in.
In all honesty, I still have a long way to go to become a better trader. I know that practice takes time and I must pay due “fees”. This is a painful lesson to learn, one that I’ll remember and remind myself to practice patience and discipline.