A week ago I wrote an article (http://tinyurl.com/prxklkh) detailing a potential bullish trade in gold using call options on the ETF ticker GLD.
Oops.
One week later, instead of breaking out to the upside of the triangle pattern it had been forming, gold (and have I mentioned lately that Murphy hates me?) broke hard to the downside. In the article I mentioned the idea of stopping out of the trade if GLD hit 122.00. It did.
So let’s recap and see if there is anything to learn. Let’s start with:
Jay’s Trading Maxim #14: Trading is not about right and wrong, trading is about dollars and cents.
In other words, trading should not be about ego, it should be about making a lot when when you make money and not losing a lot when you lose (Or alternatively, if your winning trades tend to be small by design, then winning a whole lot more often than you lose).
And good thing too. Because if trading is about ego, then this trade is a debacle. One day I publicly put out an idea to play the long side of gold and one short week later the bottom drops out. From an “ego” standpoint it doesn’t get much worse than that. But here is the bottom line:
This trade lost $135. So repeating from last week:
Jay’s Trading Maxim #56: Before you put on a trade, imagine the absolute worst case scenario. If you can live with it, go for it. If you can’t, go away.
I can live with $135 loss. In fact, let me be brutally candid: I you can’t lose $135 without getting your ego bruised you should not be a trader.
One other maxim that seems to fit:
Jay’s Trading Maxim #36: When entering into any speculative investment, risk a little to make a lot.
Some comments from a trader I knew early in my career led me to create the following two maxims.
Jay’s Trading Maxim #46: If you are trading right, every trade should be just as unimportant as every other trade.
This one can use a tiny bit of explanation. What he basically meant was that if you are trading without ego then there will be no times when you “load up” on a position because you “just know” that this is going to be “the big one.” If you “root” for every trade like you’re rooting for your horse to win the Kentucky Derby then you are not “trading right.”
“Trading right” means taking out the emotional highs and lows that are tied to “being right.”
And finally:
Jay’s Trading Maxim #47: The sole purpose of a stop-loss is to “save your sorry assets.”
This one needs no explanation.
Jay Kaeppel
