After the euphoria of my $80,000 three month winning streak from November to January, in February, March and April I did everything wrong. It's taken me three months of depression and gut wrenching losses to get to the point of writing this post.
How it all went Wrong
When your portfolio outperforms both average growth rate and also hits all time highs, it's time to take profits across the entire portfolio, liquidate all losers, and take some time to reassess.
Making so much money in January had an inspiring impact. I was full of energy and possibility, and got a sense for what my Financial Wizard goal might feel like. The election of Joe Biden as President had made the markets explode in January as he was inaugurated, despite record covid cases, and the terrorist attack on the Capitol building by Trump supporters. I bought a new paragliding harness that I had wanted for a long time, and started dreaming about buying a black Porsche Panamera to replace our not so sexy minivan.
When my TDAmeritrade account hit its high of $126,000 in early February and my overall investment portfolio crossed $400,000, I should have realized I that that was a overbought situation for my portfolio as a whole, and liquidated everything to give myself time to reassess and build a more balanced portfolio.
Instead, I was caught up unconsciously in the euphoria around the Gamestop bubble in speculative retail stocks. I took on the attitude of 'gambling with house money' concept where you scale up your risk using profits you've already made. Athough I saw that the huge rally in January was that took many high flying stocks 100% higher in a month, was a bubble, I failed to act on that by selling everything and shorting those massively inflated stocks.
February's Vicious Turnaround
All rallies come to an end. The end of this europhoric period was brutal. In February, a profit of $11,000 in the first week turned around with weeks to a loss of nearly $20,000. Instead of closing out all the losing positions, I kept them all open, thinking they would recover along the lines of the volatility but overall upwards direction of November to January.
As a mulled over the losses, I found a new reasonably priced trading Algorithm via a Facebook post. I used that Algorithm to develop the idea of a Continuous Trading System, where you stay invested in a small group of stocks in order to make sure you are in the market when it makes big moves.
I was so confident in the backtest of the system and the accuracy of the Algoythm, that I invested heavily back into the same volatile stocks. But I failed to follow the system and reverse the positions when they all turned aroun in unision and dropped sharply.
Hedge funds were abandoning growth stocks and moving to a boom in crypto currencies. Volatile stocks continued to go down a further 20-50%, doubling my existing losses from February. As of April 16 2021 my losing positions peaked at $100,000, or approximately 25% of my total portfolio.
The Irony of the Lesson
Perhaps every trader has to go through an experience like this, where they really have to confront their own faults as a trader, pick themselves up, commit to learning the lessons, and start again. The irony of the lesson is that perhaps subconsciously, I needed to experience the opposite polarity of the euphoria of Gamestop surged 500%, leading a bunch of stocks to unsustainable highs. In January I broke all my records, closed $15,000 in profits one week, having my portfolio gain over $10,000 in a single day.
Euphoria
After one more fake rally, April was more of the same. Finally, at the end of April, these seemed to be a bit of stability, then another lurching week in May when I finally gave up and sold positions resulting in $50,000 of losses on a single day.
I was mentally absorbing the idea that making more money trading means both my gains and losses get bigger. In hindsight, this may have opened up a possibility that I needed to experience what bigger losses would actually feel like. Well, I certainly got that.
I now know that making big losses really, really sucks. Psychologically, it's like taking a punch to the gut. When you have a $400,000 portfolio, you can expect it to go up and down by perhaps $2000 a day, with perhaps a variation of $20,000 from low to high in a month. But my portfolio was full of highly speculative stocks, that were universally being punished by the deserting hedge funds, while the rest of the market made new highs. I had no diversification, and all of the stocks I was trading went the same direction - down. I'd sold everything that was diversified in a panic to free up cash, not realizing that it was simply my terrible focus on one sector that was the cause of my problem.
On multiple days, my portfolio went by $10,000 or more in a single day. Just like in the covid crash of March 2020, I was completely paralyzed, unable to pull the trigger to take losses out of pride and paralysis. I lost sleep, was depressed and irritable.
Bigger Questions
I have been fascinated by and wanted to make money in the stock market literally rom the first time I ever met someone that traded stocks in my early twenties. He was a Money and You graduate named Dean, and had hand drawn charts. It just seems to be something I am not willing to give up on, not willing to fail at.
Can I do this? Can I succeed in this goal? Can I work myself out of $100,000 of losing trades? Can I make my Continuous Trading system work as well as the backtest.
Right now, I need to nurture an intense determination to succeed, a dedication and focus on making this work that I have rarely applied to anything in my life. The week that I wrote this, I made one trade and it netted $1,300 in two days. So I did something I have never actually done, and transfer the exact profit from that trade to my checking account, to pay myself for my success.
