A Case Study: On How NOT to Trade

A Case Study: How NOT to Trade

Hey Traders. The below information is a good example of what not to do. I was given permission to share this email chain between a trader and myself. [By the way, my email, if you ever want it is jerremy@reallifetrading.com].

To give you some back ground, this trader and I had met in Real Life a few weeks prior to this email. This trader also joined our live trading rooms and upon realizing it's not a hard sale after turn, he decided to share his story with me. Most of you are familiar with my journey and marathon to make back all I lost in the outset of my trading. This is just another tale. Unfortunately, one I hear far too often. I get an email like this about once a day. And yes, I do reply to each one. This brave soul though, was kind enough to allow me to share. So, I will copy his email, unchanged, unedited, word for word.

"Jerremy,

If you have time id love to chat with you sometime in the next several days about the following.

I'll forewarn you, fasten you seat belt as I am your new poster child for how not to trade.

2-3 years ago I began day trading with 5K. In a matter of a few weeks

I quickly turned it into 20K, so then I started thinking about how much more I could make if I had more money to trade and could take bigger positions, so I wrote myself a check for $100K from my HELOC

and started trading $120K per day. I quickly grew it to $173K (leveraging margin) and promised myself once I got to $200K, id take $100K and pay back the HELOC.

You can guess what happened next. I had 10,000 shares in MU at $28, leveraging my daily margin.

Very quickly it dropped to $24 and in no time I was down $40K. Don't panic I told myself it will be back up tomorrow. The next day it was down to $18. I couldn't believe myself, down $80,000 in the blink of an eye. Then I started getting margins calls and had to start lightening up my position to cover.

Now I am still sitting on 8,000 shares at $10 (of course waiting for it to come back) and every couple of weeks sell covered calls. I am struggling with what to do as I'm now realizing the only one making money is my broker. I have $25K in MU and $34K in Margin. I could sell more shares and then take the realized loss to pay off the margin entirely. I could sell all the shares and take an even bigger realized loss, and then id have more money to day trade.

As if that wasn't bad enough (yes you can go ahead and laugh at me, I deserve it), I have $75K in my Roth account which I was trading in twitter, which also went down (again caught by surprise) and is now worth $45K. At least in that account I wasn't using Margin and I am slowly working my way back up in that account mainly doing call spreads and ICs.

I would really welcome your input. In a short amount of time, I have really come to respect you. So many other companies and services are only interested in selling you more services and making money off you and then when they cant make anymore money they abandon you. Also another lesson I have learned is their are many companies and services that provide advice on how to trade, but they don't offer any advice on how to manage a bad trade, which I have come to learn is a crucial aspect of trading.

Again I would love to chat with you about this if you have anytime over the next several days ?

Cheers!

ps, you have my permission to use this as a case study on how not to trade. I know many folks will get a good laugh at my expense, which I deserve it. Fortunately I have a great sense of humor. Let's face it I have to laugh otherwise id be crying and as my dear mother used to always remind me, I always have my health :-)"

If you're wondering...so, did you call him? I indeed did. We spoke on a lovely Sunday afternoon for about 30 minutes and outlined a plan of action.

What's the take away? We have a few.

1. "And started trading $120K per day. I quickly grew it to $173K (leveraging margin)" Never allow yourself to turn a winner into a loser. Ever...Ever...Ever... Lock in the gains and risk only the profits once you have some. At least walk away with something to show for the battle you just went through.

2. "Very quickly it dropped to $24 and in no time I was down $40K. Don't panic I told myself it will be back up tomorrow." Panic and hope are too different things. Not panicking can feel a lot like discipline at times. But it's not. If you ever go into any trade without knowing where to get out and how much you're going to lose if it happens, that's the sign of an amateur trader/investor.

3. "And pay back the HELOC." Don't trade with a HELOC. Simple. End of discussion.

4. Be patient! I know how badly we all want success and financial freedom. It never comes quickly or cheaply to those who deserve it the most. Remember, enjoy this life we have! As Mark Twain said "the two most important days in our life are, when you are born and they day you find out why." You are here to do more than pay the bills and die. Give! Love! Laugh! Smile! It's the recipes for happiness. And happiness my friends, is free. That Yacht that you want, isn't free.

Do you have a horror story? Any wise words of wisdom? Any comments you would like to leave below?

Until next time! Love life, live life and trade it! 

Jerremy Alexander Newsome