Trader Frequent Flyer was having another solid day on the month. He was up near 2k, which for his level of experience and skill was strong. The trading session ended. He was up near 10k for the month, with a few days to go. He had just closed out his 5th straight profitable trading session. And then Facebook earnings hit the tape. And then he imploded.
This is a lesson in determining risk for new strategies.
This is a lesson in discipline.
This is a lesson in learning from your mistakes.
Trader Frequent Flyer has 2k of intraday risk. Again he is still a pretty new trader on our desk. He is working on adding after hours trading to his quiver. Which is terrific. What is not terrific is the risk he allotted to working on this new after hours trading. He took a 3k rip. He lost 150% of his daily stop on a new strategy he was trying to develop. Yeah so that is not good.
$300 of max trading risk in FB for the after hours as he was building out his strategies is more like it. When building a new strategy your risk should be low until you prove you have edge. Said another way, trade small until you show proof of concept.
After he took this rip, I visited him on the trading floor. I am sure it was hard for me to hide my what the hell were you thinking face. He explained how he is used to using automated stops for losing trades and they don’t work in the after hours so he took a larger loss than expected. Whatever. This is professional trading. You need to think about that before taking a loss too large.
I asked him in a follow up email what he learned from his after hours trading losses. He responded highlighting overconfidence and excessive risk as issues.
Trader Frequent Flyer will learn from his mistake. What is most surprising is he is one of the most disciplined traders on the desk. I would not expect such a mistake from him. I share this trading anecdote because if this is something he struggled with, I am sure many of you might as well. Trader Frequent Flyer will become a better trader learning from this mistake and eventually develop a profitable after hours strategy for him.
Having said that….don’t make the mistake Frequent Flyer did with your new strategies.
Tomorrow I will write about a mistake much worse I made in trading CRUS.
*no relevant positions
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