3 Lessons Learned from Trading in Q4

I made only 19 trades in the entire fourth quarter of 2008. Seventeen trades were profitable, while 2 were not, and the 2 that were losers resulted in losses of 91% and 84% of the amount at risk. Both were trades of US Steel (X).

These 2 losses were also the result of a dollar-cost-averaging "strategy" that was my failed attempt to double-down on what I thought would turn out to be a profitable trade. Lesson 1, don't average losers.

Time frames aside...

My worst, profitable trade returned only .75% of the amount risked. This trade also happened to be on US Steel.

The best, profitable trade returned 17.23% of the amount risked. This trade was on SPY.

Time frames included...

My worst, profitable trade returned an average of .08% of the amount risked per day. This was a trade on FXP and was held for 15 days.

My best, profitable trade returned an average of 1.89% of the amount risked per day, and was surprisingly a position on US Steel. This one, however, was only held for 4 days and was very early in the quarter. I think the sense of the profitability of this trade led me to be more confident in my trades and take on larger amounts of risk that clearly came back to haunt me (with the same stock). Lesson 2, be consistent in risk parameters, no matter past performance.

The average daily return was actually -.13% of the amount at risk, due to the two huge (percentage wise) losses on US Steel.

The average hold time was 9.7 days.

Looking back, what have I learned?

• Don't average losers.
• Be consistent in degrees of risk.
• Risk should be inversely related to position size.

Disclosure: None

Comments

[Marcap:]

Lesson 1 is a big mistake that many investors make. They take a long position in a stock, and then seeing it fall in value, attempt to lower their average cost by purchasing more of it, only to find that it drops even further in value, quite often never to recover to even the lower cost paid. In short, more often than not, buying more of a falling stock rather than lowering costs, simply results in greater losses.

Lessons 2 and 3 should be combined in that risk is a variable, not a fixed parameter. The higher the risk...the higher should be the reward. Risk should always be considered when evaluating any potential return from an investment, in that the "riskier" the investment, the smaller portion it should be of one's overall investment portfolio. An finally, past performance should never be used to predict future events. Unfortunately this too is a very big mistake that many investors make.

Feb 19 02:08 PM