May 20th, 2015 was a crisp, sunny day in California. The alarm on my iPhone went off at 5:31 a.m., and I rolled out of bed. In about 5 hours I was going to take off to Lake Tahoe for a trip with my dad for a few days. I wasn't looking forward to missing out on trading the rest of the week, but I knew I was starting to get burned out and I needed a break. This trip would be a great time to kick back, relax, and forget about stocks for a while. I knew I could come back the following week with a fresh mindset.
Fast forward 4 hours and 30 minutes, and I had a blood red P/L for the day staring right through my eyes, deep down into my soul. Nearly -$400k. Not a bad day at work, huh?
I won't lie: the next week was tough. Very tough. Whenever I wasn't busy with something and had time to sit in silence and think, a whole flurry of emotions would hit me. One minute I would be punching the floor, the next I would be trying to pull my hair out or sobbing helplessly. What the hell just happened to me? ‘My life is over,’ I thought to myself. I don't even want to trade anymore; I can't. Trading was supposed to be my job and source of income, while pursuing freelance music jobs on the side. But not anymore--not after what had just happened. I was up over 450k at one point in 2015 alone, at 20 years old, and now I was basically back to square one. Game over. Life over.
Just last year, around September 2014, I had lost a lot of my YTD profits and was faced with a decision to either get back to the grind, or quit. What kind of idiot do you have to be to get yourself in this bad a situation, twice?
"A mistake repeated more than once is a decision." - Paulo Coelho
After every mistake I make in life, whether in trading or some other activity, I like to clear my mind and dig back to the root of that mistake. I try to find out what REALLY caused it. Each time I tried to do this during that week, a brick would hit me in the face. The thought of the gap between where I had been and where I stood now filled me with dread and sadness, like staring up at a mountain it had been hell to climb, and knowing I would have to start again from the beginning. But luckily, after going on a family vacation the next few days, my head was cleared. The ‘old me' was back. I told myself to stop wasting time, feeling bad, or complaining, because in the end none of that would do ANYTHING except dig the hole even deeper. So what was at the root of this problem? What had caused this situation, not just on the surface, but deep down?
My whole life, I have been a private and under-the-radar type of person. Instead of striving for popularity among peers, I have striven for perfection of my craft, regardless of what others see or think. But after trading for a year and being part of the trading community, I had flipped the switch and become more public. Not in the real world--only in the online world. In real life, I was still very private about my success, only telling my parents and siblings, never flaunting it to anyone else. The online trading community and Twitter give a nice outlet for many traders to show off their wins and successes, because, after all, it’s just the internet. You can type or tweet anything and then go right back to living your normal life outside of trading if you wish, as I did.
But I realized that as I shared more and more of my wins and success publicly, I suddenly became more and more invested in being seen as the young gun trader who is “making bank.” And, of course, along with that image came the pressure to uphold it and not allow any dents in the armor of the image, no matter what. Perhaps that is not the case for everyone, but for someone with my personality and competitive spirit, this was definitely the case (although subconscious), and I had never really thought about it or realized it until now. I had also realized that posting big wins on Twitter and in my trading community became less of an outlet for sharing and more of a way to get a quick satisfactory ego-boost.
Since mid-February 2015, I had been reading The Fountainhead by Ayn Rand. I finally sat down and finished it the week after my loss, and this gave me fantastic insight into the root of my problems, and the solution going forward. (I highly recommend reading this book; discovering her philosophy on life was one of the turnings points in my life.) I thought about all my actions in the trading community and on Twitter the last 6 months or so, when I had really starting gaining traction in my trading, and asked myself this: Was there a legitimate reason to post this stuff? Was I really, truly helping anyone? Some argue that posting P/L on Twitter is positive because it inspires others to see what is possible from trading. But I had noticed a trend. Over the last 6 months, I had gone from sharing my success in a sincere effort to help others, to posting hollow green numbers simply for personal satisfaction. I was in shock. I suddenly cared more about what others thought of me, and the image I had to uphold, than how well I was executing my craft. Never before in my life had I been that guy; now I was.
Some may have differing opinions on this, and that’s fine. But perhaps ask yourself the same questions I was asking myself in these tweets:
What kind of life is one in which one’s survival is solely, or even primarily dependent on other people's view/approval of themselves?— Nikkorico (@Nikkorico_) June 1, 2015 Another thought: What kind of life is one in which one’s survival (mentally) is dependent upon clinging to one’s past successes?— Nikkorico (@Nikkorico_) June 1, 2015 With each post of a big P/L on Twitter, I added one brick on my back. Eventually those bricks became a burden, and when I stumbled, the bricks came crumbling down on top of me. Ego got the best of me, and I believe that that will always come back to get you whether it's financially, emotionally, or physically.
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Lessons Learned/Thoughts Moving Forward
1. Ego and Overconfidence are the bane of a successful trader.
This year started out for me with a very slow January, and then quickly sped up. Week after week after week, pigs that perfectly fit my niche setup criteria were running huge. I was making money hand over fist, and I really couldn't do much wrong. I believe everyone has these phases in their trading careers, whether they last for a few days, weeks, or even months. But I was almost halfway through the year without encountering ANY serious reality checks. I was up a little over $500k in 2015 going into the month of May, and I felt pretty solid about my trading. What was there to stop me from making $1M this year?
Friday, May 1st, started with a nice dead cat bounce on VLTC, and I made around $60k on it. This was a fairly easy trade. I was never down on the trade, which took my feelings of self-confidence soaring to new highs. Over the weekend I relaxed, but I was ready to re-short VLTC on Monday for the next leg down, most likely a swing trade. Then Monday rolled around and there was ICLD--a much better setup. So, I traded ICLD. At the end of the day I had a realized loss of -$92k in one account on ICLD, and an open position of 60k shares to swing at a 3.94 avg. The next day, I added 30k short premarket in the mid 4.20s, and it ended up fading hard and closing at 3-3.05. I had made back ALL of my loss from the previous day! Pretty great right? Not quite. I decided to hold my full position in ICLD with the intention to cover at 2.60 or 2.70 the next day. I knew the company had a shelf out, so I figured they might do an offering. The following day, ICLD gapped up with news, shattering my trading plan and putting me back into the red on the trade. I had let greed get the best of me and held for a win instead of covering for break-even after a large drawdown the previous day.
These were the first signs of my death spiral into the abyss. The size I was trading was absurd. Of course, I had a reason to be trading large size. When you are on a hot streak in trading, you want to push your luck and play more size when the best setups present themselves. I was trading good setups, but my rules were not set in place. I wasn't locking in profits like I typically would, and I felt like going for the home-runs instead of taking quick $5-$10k profits when I had them. Basically, I was trading overconfidently. There is a huge and very important difference between overconfident trading, and trading with conviction.
During the rest of May, my accounts were swinging all over the place. I was swinging 100-150k shares of ICLD from May 5th to May 18th. A quick glance at the daily chart during this time period and you can see how ridiculous of a roller-coaster my account was going through.
What I thought was profound conviction in my short position in ICLD was actually just overconfidence. The night before their earnings report on May 12th, I had a late flight and didn't get to bed until around 2 a.m. PST. I decided to turn my alarms off for the next morning and sleep in. I just wanted to be ignorant to the earnings report, and avoid the whole situation. I knew if I woke up early, my stomach would feel awful and I would be staring at every pre-market tick, as I had been the last week as it squeezed from 3.05 to a high of 4.73.
Let me tell you, it's not healthy to get stomachaches and feel depressed about one particular position, or trading in general. But that was the situation I had put myself in. I was being truly reckless, and had spent the entire year with no grasp on the amount of money I was making and losing. This leads me to the next HUGE lesson I learned, and the changes I implemented in my trading because of it.
2. Pay yourself.
Trading is very rewarding and not a typical "job". Nevertheless it is a job, and, if done well, a very lucrative one. Unlike some, I don't trade for the sole reason of making money. I trade because it is rewarding mentally and there is an endless amount of knowledge to absorb each and every day. From the day I started trading up until May 20th, 2015, my day of reckoning, I had never really wired money out of my accounts. Sure, I had wired out $10k here and there for small expenses, but for the most part, I had 80-90% of my net worth in my trading accounts at all times. In retrospect, this was a huge mistake, and by doing this I now know I had sealed my fate.
I don't spend money on much besides the necessities of life, as I prefer to grow my wealth instead of blowing money on trivial things. But going forward, at least until the end of 2015, I will be wiring out all excess money over $X. Specifying this number is not important because it will differ for each person and their style of trading; the point is, I really didn't NEED as much money as I had in my accounts. I will also be forcing myself to spend money instead of holding onto it for dear life. If I see a nice guitar or amp for $3-4k that I might not NEED but would like to have, I'll buy it! If I see a great deal on 2-for-1 skydiving lessons or another activity that I might not NEED to do but would like to try, I'll go for it! If I see a brand new house I might not NEED but would like to have, I'll...well, maybe not that. The point is, I need to create a connection between how much money I am making from trading, and what that money actually translates to in the real world.Before, I would make $50k+ in a single day and still buy the cheapest steak on the menu at dinner. Next time, it's the filet mignon!
3. Risk Management. Risk Management. Oh yeah, and Risk Management.
After my large loss, I thought in depth about my future, both as a trader and just as a man. When I first started trading, I had no idea I would be making (and losing) the amount of money I am now. I figured it would just be a fun way to challenge myself and maybe make some spare change on the side. I have since proven to myself that I am very capable of consistently making money as a trader. But at some point, one has to step back and look at the bigger picture. I want to be a CAREER trader. That means I want to be around in 5 years. In 10 years. In 20 years. When I look back over the last couple years at all the people I have met trading, how many are still around? I have not seen or heard from the majority of them for a long time. Is it because they found another profession that is more fun and lucrative than trading? Odds are that's not the case. It's probably because they lost it all, and ran out of capital.
When I look at my future, I think in terms of goals. I think about the things that will assist me in reaching those goals, and, perhaps more importantly, the things that could STOP me from reaching those goals. One of my goals is to still be trading in 5-10 years. What is the one and only thing that will STOP me from reaching this goal? Running out of trading capital. Blowing up. Losing it all. I came close to experiencing this after PBMD, and I saw my trading life flash before my eyes. I never want to have to go through those moments in my life again, and to avoid doing so I have put a max loss on my trading accounts. Admittedly, I had a rough “max loss” number in mind this whole year, but several times I didn't respect it. Why? Maybe the stock was getting close to my max loss number, but the chart looked as if it was stuffing, so I decided to let it move around a little longer. Then I moved my max loss up to a bigger number to give myself more wiggle room. Or perhaps I convinced myself that since it was a “big picture trade,” a swing trade, I could just let it do its thing and it would come around eventually. I had any number of excuses.
No more of that. Many brokers can set up a max loss automatically for you: when this number is reached, they will close out the position for you, and even lock the account for the rest of the day. Again, my specific max loss number is beyond the scope of this blog, and really shouldn’t matter to you. Find that number for YOU that represents the max pain threshold you can stand before punching a hole in the wall. I am working on being robotic and having the ability to respect my max loss number automatically, but for now I need to put on training wheels. I need to have a system in place with my broker that robotically cuts the max loss off for me, reinforcing that number in my head so that over time, I will gain the ability to cut bad trades off before they get anywhere near it.
One important thing to note about this max loss number is the emotional connection tied to it. I have had some large losses before PBMD, but never that large. I know that I do not EVER want to go back to the place I was that week, where I was suffering emotionally and questioning everything I had done. By having this max loss number, I can avoid that train back to hell.
4. Green is good.
In my previous blog posts, I have stressed the importance of being consistently green every day, and how critical it was to my early success in trading. In 2015, I had started looking bigger picture. Sure, green every day was nice, but it had started to matter less and less to me, as a day-by-day view was too granular for my style of trading. This is not just carelessness speaking. I believe that once you get your feet off the ground and can prove to yourself that you are consistently profitable for 3-6 months, then and ONLY then can you increase your size and think bigger picture. This year, my primary goal was to be green each week. I didn't really mind having one or two small red days in a week, as long as those red days did not wipe out a full week’s or month’s work. This mindset change was also due to the fact that I had shifted more and more into a swing trading mentality as opposed to only day trading, although I still do one just as much as the other.
Near the end of April and early May, however, I had ditched this mindset. It was not an intentional transition, but a subconscious one that came from recklessness and overconfidence. Due to the wild swings in my trading accounts, in May especially, I had been thrown far off-course. Looking back, it’s certainly not a coincidence that after I stopped focusing on consistency, my trading took a turn for the worse.
Moving forward, and in the spirit of thinking about my trading career over the long term, my main focuses are risk management (respecting my max loss NO MATTER WHAT) and consistent profitability, day in and day out. When I started trading again on June 1st, after my break, I refocused on being green every day, and June has been a very solid month due to this. I know that with these two things reprioritized, I have put myself on a solid path to reach my ultimate goal of longevity in my trading career.
Thanks,
Nikkos
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