My Most Stressful Trade of the Year

Recently, I found myself more stressed about a trade than I’d been in a long time.

After 30 years trading the markets, stress doesn’t affect me much anymore.

I have my processes and don’t risk more than I am comfortable losing… so why was this trade bothering me so much? It wasn’t looking like a big loser.

Stress and emotions are investors’ and traders’ worst enemies.

Fear and greed make us exit losing positions too late (because we keep hoping they’ll bounce) and exit winners too early. The more stress you have over a trade, the longer you’ll avoid dumping it in order to not experience the pain of taking a loser.

But this trade was nearly break-even, so why was it keeping me up at night?

Anyone who knows me knows that I’m pretty disciplined.

I wasn’t always that way. In my young adulthood, my room was a mess, my eating habits were even worse, and there was no rhyme or reason to the way I traded.

Understandably, those areas of my life weren’t what I wanted them to be.

I constantly misplaced things (since they were usually buried under the detritus on the floor or the furniture).

For a young guy, I really wasn’t very healthy.

And I lost more than I won in the market.

Things needed to change.

I’d like to say I had an epiphany, met a mentor, or watched a TED Talk that challenged me to take a hard look in the mirror.

It was none of those things.

I just got tired of bad results in various aspects of my life. I wasn’t the person I wanted to be, so one by one, I fixed things.

It took years. Bad habits are hard to break. But I kept making steady progress.

Now I know where everything is in my room. (No more throwing things around trying to find my keys.)

I’m much healthier.

And my trading has improved greatly.

That being said, I’m not a neat freak, I still eat pizza and desserts, and my trades sometimes lose.

But having hard-earned discipline means that if I bend the rules, it’s a conscious choice − and I know what the risks or remedies may be.

If I have two desserts over the weekend, that probably means more salads for lunch during the week. My choice.

Process Over Results

That’s how I examined this trade that was causing me so much stress to figure out what the heck was going on. I had placed the trade according to a system I’ve used for well over a year − one that has an enormous 80% success rate and has smashed the relative return of the S&P 500 by more than 600%, averaging 12.1% in 21 days.

I’ve told my subscribers that if the system is working, which it is, I’m not going to second-guess it. If I were to deviate from the system and it didn’t work out, I’d end up kicking myself.

However, what I concluded was that, for a few hours, I had to take the reins from the system − and that caused me stress because, as I said, the system works.

Let me explain.

I use an options trading system. The trade was just about at our strike price heading into the final session, just 6 1/2 hours before expiration.

The system trades options over a three-week period. The previous backtest and real-life trading over more than a year were in line with each other (with outstanding results, as I mentioned).

But with just a few hours to go, market noise could have produced a wide range of results. A move of just a fraction of a percentage point could’ve meant the difference between a maximum loss and a maximum win.

I described it as a coin flip.

We’d won for the previous 11 weeks in a row, and I badly wanted that streak to continue.

But as soon as the market opened, I realized I was not going to risk taking a maximum loss on what I saw as a 50/50 proposition.

The system works incredibly well over three-week periods, but over any given single trading day, anything could happen.

So another form of discipline took over: risk management.

Normally, I trust the system and let the trade play out as designed.

But discipline doesn’t mean being inflexible. It means “behavior and order maintained by training and control.”

Because of the particular circumstances of this one day, with the market being right at my strike price with just a few hours left, my training told me I needed a different kind of control.

Risk control.

So I exited the position early. We took a tiny loss. The 11-week winning streak was over.

Then the market bounced higher.

As I sat there thinking about the possible gains we would’ve had if I hadn’t taken action, I realized it was still the right decision.

Keeping a lid on losses is how you make money in the market. The wins take care of themselves.

Over the long haul, if you keep making the right decisions, you’ll be a profitable trader and investor. Occasionally, you’ll get lucky and unlucky, but managing your risk well will result in better trading results.

I thought to myself, “No matter what happens between now and the close, it was the right decision. I don’t care about the results of this one trade, because long-term, my subscribers will make more money.”

At the end of the day, the market tanked. If I hadn’t exited our trade early, it would have resulted in a maximum loss.

I made the right decision.