Recently I was asked if I had a “best” trade or a “worst” trade, and if so, what did I learn from them?
I’ve had a lot of great trades over the last twenty-five years, but I don’t remember much about most of them. It’s the bad trades, the losing trades, the trades that feel like someone is rubbing thirty grit sandpaper on your neck while humming Justin Beiber songs that you remember.

And that’s actually a good thing because we learn more from our mistakes than we do from our successes, and we can use that new found knowledge to be better traders going forward.

MY WORST TRADE
My worst trade of all time happened back in 1996 in Oakley (OO) which though no longer public, was a hot stock at the time. Oakley’s claim to fame was that they made the best high-end eyewear (or sunglasses in non-marketing speak) that money could buy. It was a great and sexy story.

I had been building a very large position in the stock over the previous few weeks and had the majority of my account value tied up in it. I was sure that this was the position that was going to make me a boatload of cash, some of which I had already started to spend in my mind.
Then came that awful day that Oakley crashed.

OOPS, NO STOP
I had toyed with putting in a stop in the position the day before, but didn’t, and had even thought about putting a stop in first thing that morning, but decided to sleep in instead.

THE ACTION
Oakley opened like normal, with little movement for the first hour. But then Sunglass Hut, who was their biggest distributer, announced that not only were they closing a large number of their retail outlets, but were actually shipping previously ordered inventory back to manufactures, of which Oakley was one of their biggest.

Once the haze of sleep wore off me and I absorbed the news, it felt like someone had hit me in the stomach with a 2×4. I lost probably 75% of my account value that day.

THE TAKEAWAYS
I could write a book about the lessons that trade taught me, but here are the top five.

  • Holding outsized swing positions can be a killer. By being overleveraged you can blow out your whole trading account, the only thing that you can’t recover from.
  • Never get complacent with your positions. Always know where your “uncle” point is and make sure you have stops in to protect yourself.
  • You can’t factor a stock’s “story” into management of your position. Remember, only price pays.
  • Profits are not real until you take them, but losses are. If you act like your open profits are already “money in the bank” it will skew the way you handle your trade.
  • Oakley’s suck, always buy Ray-Bans.

To make matters worse I held on to the stock for another two years waiting for it to “come back,” which it never did. Holding that losing position so long not only was demoralizing, but it cost me tons in opportunity loss, as this was when internet stocks were going to the moon on a regular basis.

LEARN FROM YOUR LOSERS
The moral of the story is, we all have our “worst” trades, but the only way you get better is to analyze those trades, find out what the key mistakes were, and then work hard to create a trading methodology that eliminates them going forward.

[Editor’s Note: Tell us about your worst trade and what you learned from it. Post a comment below.]

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Read more stories by Brian Lund:
Learn the “Catch A Falling Knife Strategy”

Survive In the Trading Game: Risk Management

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