(Heavy sigh). Heading says it all. Not a good day. It seems that every time I bring my account over $10,000, I get handed a huge, expensive day trading lesson. Today, only thirty-three minutes into the trading day, I lost 30% of my account. By 12:00, I lost another 8%. It was my second worse day since I started trading.
Here’s what happened. I purchased 3,000 shares of MGM premarket (my broker allows transactions before and after the official New York Stock Exchange market hours) at 8:32, right after the Department of Labor released positive figures indicating a decrease in continuing unemployment claims. The data was better than expected, so I assumed that the market would react favorably and go up. But I made two initial mistakes with this purchase. First, I should have waited until 9:30 when the market officially opened and when the great majority of people trade stocks. The premarket volume is very low, and it is difficult (impossible?) to correctly identify a stock’s short term pricing trend with low volume. True day trading is based on a stock’s current momentum and really nothing else. Second, I should not have tried to predict the market’s reaction to news. I ended up being right about the overall market (not hard to do as unemployment figures always have great effect), but being right didn’t matter, because the stock I purchased went down anyway, as you will see.
The market bell rang as usual at 9:30 and it was immediately obvious that I was in trouble. MGM opened at $13.20 and dropped to $13.10 in one minute. With 3,000 shares, I was down $450 in 60 seconds of official trading. Then, over the next 60 seconds, I lost another $300. $750 gone in two minutes. Unfortunately, instead of a rational, objective conclusion based on what was happening at that moment, I started to hope for a reversal. I remembered how many times I had seen this stock drop for a few minutes when the market first opened and then quickly shoot straight back up. Surely, I thought, this would be one of those days due to the great unemployment figures. The overall market was up, and I just needed to be patient for a few more minutes. At this point, I was committing mistakes three and four.
The third mistake was, obviously, trying to anticipate a stock’s movement instead of simply accepting what I saw. It was dropping fast, but I thought it would reverse soon. The fourth was not using a stop loss. I never use them because I trade very volatile stocks, and I have seen that stop losses can get easily triggered during a stock’s normal fluctuations, shaking me out of a trade too early even if I am positioned correctly with the current momentum. But I should use them anyway to avoid catastrophic losses (more than 2% below the entry price, maybe), and I didn’t.
MGM’s price continued to fall at a pace I’d rarely seen, and I kept waiting for the reversal that I was certain would come. By 9:35 I had lost $1,350, and I had decided to get out of the trade and take my loss when it started to rise. By 9:41 I had made back $400 and surely the reversal had begun. But the rise was short lived, and at 9:54 I was back down to a $1,650 loss. Again, I entered a sell transaction in my trading software to exit the trade when the stock started another rise. The overall market was up 50 points and I thought that this was finally the change I had waited for. Then, six minutes later at 10:00 AM, the Existing Home Sales data was reported on CNBC. The figures were much worse than expected. The Dow Jones Industrial Average dropped 40 points in 15 seconds. My stock plummeted. By 10:05 I was down over $3,000 and I sold in order to avoid any more pain.
A few minutes later I tried to make back some of my losses by buying MGM yet again, this time 2,000 shares for $12.37 at 10:10 AM. The stock had bounced 20 cents from its bottom and I thought that momentum had finally changed. But, apparently I was not going to make any money today and I sold 45 minutes later with another $650 loss. The stock continued to drop after that, so at least I did one thing right by taking a smaller loss rather than yet another huge one.
I know that education is expensive, but these mistakes may cause me to run out of money before I’ve discovered how to be a successful day trader. I am therefore very discouraged. But, in an attempt to build from today, I will summarize what I learned:
1. I need to achieve a certain clarity (emptiness?) of mind in order to see a stock’s trend without prejudice from overall market news or the memory of previous movements. But that is hard to do. Really hard. All traders watch CNBC, and most scour the internet for articles and discussions about which way a stock is going to move. But that constant stream of information, or noise as I now see it, clouds my ability to just focus on the data on the screen. What is the stock price at the moment? Is it going up or down? I can’t predict the future. I don’t know when the direction will change, if ever. So, am I in the right position? If not, get out with a small loss. That’s all I should care about.
2. In keeping with the goal above of getting out of wrong trades with a small loss, USE STOP LOSSES.
3. Only trade during official market hours, and preferably not within the first 10 minutes.
4. While I will turn CNBC off during trading hours, I must still pay attention to the release of potentially market moving news (such as the home sales data mentioned previously), and I must be weary of how that information can effect my current positions, if any. It would be better to not hold stocks before such news is released, and instead trade them based on the market’s reaction.
5. I didn't necessarily figure this last point out today, but it is important enough to mention here. And that is the fact that I am putting my entire account on the line with every trade. Actually, with the 4 to 1 margin allowed by my broker, my risk with each position is increased by a factor of 4. I can't risk losing any more money, so I will have to address this issue by purchasing smaller blocks of shares for the foreseeable future.
I read somewhere that 80% of those who attempt this give up due to their losses. I don’t want to fall into that statistic. I still love the idea of day trading. I’m still fascinated with the concept of trading as a business, or full-time job. I want to make this work. I’m just not sure that I can…
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