In this post I will expand on exactly what happened during the past 3 months, the most important trades and the lessons learned.

The bulk of my trading profits and mistakes during the last 3 months came from 4 trading ideas:

1. Shorting the S&P 500, the Dow, Nasdaq and Russell 2000

 

E-Mini S&P 500 Trades

(click on the image to see trade details)

ES Trades Dec 2014 - Sep 2015

 

DJIA mini-sized Trades

(click on the image to see trade details)

YM Trades Dec 2014 - Sep 2015

 

E-Mini Nasdaq 100 Trades

(click on the image to see trade details)

NQ Trades Dec 2014 - Sep 2015

 

Russell 2000 Mini Trades

(click on the image to see trade details)

TF Trades Dec 2014 - Sep 2015

 

Equity and Index Option Trades (SPY and QQQ puts)

Equity and Index Put Options SPY, QQQ - Aug, Sep expiry

 

Option on Futures Trades (ES puts)

Options On Futures ES - Aug, Sep expiry

You can already see what was the problem here. The bet was too one sided, I’ve taken a too big position. I was short 3 ES, 1 YM, 1 NQ and 2 TF on average and I had about 5,000$ in equity and index options and options on futures. The big drawdown of 36% came because I had the misfortune that these positions were going against me along with gold and silver and that big Netflix position. The lesson here is don’t take a bigger position than you can handle! Now I was pretty confident about the trade but no matter how confident you are you always have to have a limit.

In the end my bet paid off and during the crash I won big. I made a profit of about 50,000$ from my ES, YM, NQ shorts and put options trades. However because of the previous drawdown the net result is that in the end I was basically flat. I started with 200,000$ in equity in May and I finished at the same place where I started. Had I taken a smaller position I would have still ended up flat but the drawdown would have been smaller. I can tolerate pretty well a drawdown of about 10%-15% but anything above 20%, especially 30% and I get extremely nervous. You could actually see that this portfolio was in danger of having a large drawdown before it happened  because it was way too volatile. For someone it may have been too volatile and other traders could have still been comfortable with that level, but the crucial point here is that it was too volatile for me and I have to control it in the future by taking smaller positions.

Now if you’re wondering why have I taken such a large position in the first place the answer is basically greed. I was very confident in the position and I was aware of the fact how much would I lose had the position gone against me (which it did initially but in the end it worked out well this time) but I was blinded by greed. I said to myself nah It won’t go against me so I can afford to take on a bigger position. Hadn’t the market had that crash I would still be down. I am repetitive but the lesson is worth it: Don’t take on a bigger position than you can handle. You may be successful a couple of times but there is always that one trade looking for you and it is gonna get you sooner or later.

The other thing that you can see from the charts right away, especially from the ES chart is that one behavior that I haven’t yet weeded out sufficiently – overtrading. On the ES trades if you sum up all those trades I actually have a small profit but even then overtrading is a mistake. It is a tremendous waste of time and mental resources which I could have used more effectively on better trading opportunities.

A word here about my options trades. I made a 100% profit which is an excellent result considering that according to statistics 90% of options expire worthless. I was hoping for a multiple of that but I was too early. The lesson here is not that I should have waited more because hindsight is always 20:20 and you never now the exact moment of a crash but that I should have bought the put options gradually and spread more over time, perhaps over 2-3 months rather then all at more or less the same time. I see a similar opportunity in bonds in the not too distant future so let’s see if I can be more successful the next time around with these lessons learned.

2. Going long gold and silver

 

Gold emiNY Trades

(click on the image to see trade details)

MGC Trades Dec 2014 - Sep 2015

 

Silver Trades

(click on the image to see trade details)

SI Trades Dec 2014 - Sep 2015

Here there is nothing special to say, I was looking for a medium term rally in the precious metals so I started buying gold and silver futures. I started buying at the 1140 area but gold declined to 1070 and I got stopped out of some of my positions. As I said above I had the misfortune that these positions declined at the same time my S&P 500 positions were going against me which resulted in a pretty large drawdown. You have to be aware not to concentrate too much of your portfolio in highly correlated trades because you’re risking all of them going against you at once.

One interesting thing to add, last weekend I was listening to the Goldseek radio podcast (of course I stopped listening when Robert Ian came along because my nervous system just can’t stand that man’s voice) and Chris Waltzek was talking to Robert Grandich. The interesting part is that Robert Grandich was taking the bullish side and Chris Waltzek the bearish side for gold. They were almost having an argument and Chris actually tried to convince Robert that he was wrong and that gold was going down. That shouldn’t happen, it’s like hell has just frozen over. One of the permabulls became extremely bearish. It was one of those shoe shine boy moments and as soon as I finished listening to their conversation I set an order to buy 3 MGC contracts which got triggered last Monday. I didn’t care about the price, pattern or anything I just bought them. I got stopped out of 2 of those positions this week but if gold continues to go up I will add to them again.

 

3. Shorting Netflix

 

Netflix Trades

(click on the image to see trade details)

NFLX Trades Dec 2014 - Sep 2015

Netflix is my worst trade so far. At one point I was down 39,000$ just on that instrument alone when you some up all the trades I have done since the inception of the portfolio. During the crash I recouped some of that and now I am down “only” 20,000$. I reduced my position from 700 to 200 short and I got out at an average price of about 100$. I remain short with the 200 with a stop above the all time high and profit taking orders placed in the 90-50 area. So at the moment my NFLX position is on autopilot and either I will get stopped out or I will get out at the profit targets.

Why did I lose this much on this single instrument? The stock gapped up on me twice and on each gap I lost about 10,000$. The problem was not slowing down or stopping my trades but emotionally trying to recoup the first large loss. It’s easy to get out of a position and stop trading an instrument for a while when you lose a little but you must get out even if the instrument gaps up on you and you lose 10% of the value of your portfolio in a day. Why? Because if you don’t and you keep on trading emotionally without an objective entry and exit plan, you may lose 20%, 30% or even more if you don’t stop yourself in time.

4. Long Oil

Oil Trades

(click on the image to see trade details)

QM Trades Dec 2014 - Sep 2015

These oil trades are a perfect example of my most serious error in trading. This type of error cost me in the past more than I care to admit and it was one of the reasons why I started this blog. I wanted to eradicate (or reduce to an absolute minimum) this behavior. So let me illustrate what I mean on this example.

As you can see when oil was trading near 38$ I was long 5 QM contracts and I made about 15,000$ on those trades (almost 10% of my total account). I feel that oil is very close to a bottom so I didn’t want to sell my position right away, but at the same time I wanted to protect some of my profits which I earned in a very short time. The way I chose to do this was by keeping all of my core position of 5 QM contracts but hedge it by going short the next month’s contract. That is equivalent to selling a part of my position without hedging but I chose to do it this way because in the past I missed some large chunks of big moves when I sold part of my position. It is more natural to remove the hedge when the time is right then to reenter the position. That’s the way it works for me at least.

The problem was that I put the hedge a little bit too early and oil went up more than I expected. I was upset about the lost profits (which I would have made if I had put the hedge on 2 days later) so I tried to recoup them right away. As Arnie would say: BIG MISTAKE! Trying to recoup the lost profits escalated into buying more short QM contracts to the point my short position became larger than my long position. At some point I was short 15 QM contracts and long 5 QM contracts (equivalent to a 10 QM unhedged short position). It was a too big position for my portfolio so I covered it at the end of the day. If you hover over the balloons of 27th and 28th of August you will see the trades I did. It was my typical error of trying to pick the top which resulted in extreme overtrading. I made more than 50 trades in these 2 days! The result of that is that I lost all of my 15,000$ profit and ended basically flat.

At the end of those 2 days I felt like when Tom in the Tom & Jerry cartoons looks in the mirror and sees a donkey instead of his reflection. That’s how it feels like losing your hard earned profit after making stupid mistakes.

Some of you may be thinking to yourselves now: “Why did you do this? Are you nuts?” Well everyone has their demons and stupid mistakes that they make, this is mine. I started this blog to correct it.

I lasted quite a long time without making this type of mistake, about 9 months, but now I reverted to my old behavior. However I made quite a lot of progress. First I didn’t repeat the mistake for a long time and second, it was much less severe then my past ones. In the end I lost all my profits and I am basically flat. In the past I would lose all my profits and then some. Also that mistake would bug me so I would try to recoup it in other instruments by taking trades emotionally and without an objective reason for entry. In my most extreme cases, trying to fix a 10% loss resulted in a loss of 50% or 60% of the value of the whole portfolio in a very short period of time before I finally came to my senses. This way I would eradicate rather quickly the profits which took a long time to accumulate.

I have done this mistake many times in the past and it has caused me so much pain that the probability that I ever repeat it to that extreme level is 0.

You can see the proof of that in this case where I stopped myself in time and I no longer have a desire to “get back” at the market. The next step would be catching myself in the act as soon as I start doing this type of behavior and as a result keep the bulk of my profits instead of giving them back to the market.

Writing about and analyzing your mistakes in this way really helps at pinpointing exactly what you are doing wrong and the steps you have to do to correct them.

5. Shorting the Long Bond

ZB Trades

(click on the image to see trade details)

ZB Trades Dec 2014 - Sep 2015

I had moments of overtrading the long bond also as you can see clearly from the stream of red ballons. However the overtrading I made here was much less serious and much less emotional than my oil trades. ZB is one of my most successful trading instruments and during the lifetime of the portfolio I made more than 35,000$ in profits on it alone

That’s all that I will write today because this post is already too long and I think I was very exhausting in explaining the reasoning behind my trades and the mistakes that I made so I don’t think it needs any special concluding remarks. If something else interesting pops in my mind about the subject and if I have some trade ideas I will write about them in my next post.