Losers Average Losers

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During My Investing Career I’ve Made Every Dumb Mistake Possible. This Is One of Them.


I was such an idiot.


I had broken a fundamental rule of investing. My system had told me to enter long one futures contract in GC, Gold.


I entered the order and I got filled, I can’t remember the price I think it was around $1,100.


Almost, immediately, the market stalled. It had spent the previous days in a strong uptrend. But now, as if by magic, the market knew I was getting in and it decided to stop moving up.


Within a day, I was showing a paper loss on my position. I had entered the market correctly, according to my rule but then immediately the move up stopped.


Looking back I did two stupid things. Two things I promised myself I would never do again, but of course, I have done. Plenty of times.


To set the scene, by the time I entered the trade, I was in a drawdown. My previous 4 or 5 trades I had lost on. I was getting some bad luck and I was feeling pretty sorry for myself.


Loses in trading and investing are part and parcel of the business I am in. There in no way to avoid them. Trading is a process of mathematical expectation. Each trade I place will have a probability associated to it. I can have a run of 5 loses and still this will be within what I would expect to be a normal distribution of results. I don’t want to go into more detail here, that’s for another post.


The point is, even *knowing* this doesn’t translate to me being comfortable with it. In fact after 5 loses in a row I feeling pretty sh@tty.


So this is where I break one of two rules I have. I removed the stop-loss I had placed when I entered the position. Big no-no. It should be obvious why I did this. Until I closed the position, I hadn’t actually realized the loss. I could contain the loss and hope the position would come back.


So by now, I’m two days into this position. I’m still showing a loss and the Gold price is flopping around doing nothing.


So frustrated with my bad luck and cursing the market for targeting me personally, like a bone head I doubled up. Angry I went to my trading platform and clicked the mouse and entered another long. Mistake number two.


And so I get to the purpose of this post. Losers average losers. The second contract I bought, brought down my average entry. It meant I would breakeven quicker than I would otherwise had done. However, what I had also done is doubled the amount of risk I was holding.


I would like to say this is rookie error however, by this stage (this happened back in 2011) I had already many years experience under my belt. The reason I am writing about it now and why it’s relevant to the bitcoin market is because of what we’ve seen in the recent price falls in all the cryptocurrencies.


At the start of January, I added to my ether position. On January 2nd I went long at about $770. I was already long and I wanted to add. I took on more risk and in turn brought up my average entry. This is ok. This is part of the system I follow.


Immediately the most recent position is showing me a nice profit. For about 2 weeks my whole position looks very healthy. Then it all kicks off.


Volatility has gone through the roof and I have been taken out of my ether position. I lost money on that last entry. So why am I writing about this now?


The purpose is to say that there are investors who will have been buying ether or bitcoin or any of the cryptocurrencies having bought close to the recent top in the market and they will be continuing to add to the position. They’re doing this probably because the don’t want to realize the loss on their original entry.


They will have kept adding and adding as the market continues falling and then went it gets so painful for them, they throw the towel in and sell their position. This has a funny way of always being when the market stops falling. I’ve been there so I’m not calling them suckers. I’ve done it myself. So what can we learn from this?


So what’s the morale of my Gold story and that of the recent cryptocurrency falls?


The lesson is to determine how much you are willing to lose before getting in. If the market hits your exist price, GET OUT. I should have done this will my Gold trade but I didn’t. It would have been too painful for me considering my previous loses. But I held on and dug myself further into the ground. Trading and investing requires a level of discipline that you see very rarely in life. Our emotions can be our own worst enemy. To mitigate this, the best with can do is manage the risk as if it’s your only calling in life. 


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