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February 13, 2013 / redman59

Learn To Take The Loss

One of the hardest things to do in trading is take a loss.  This is what makes the game so hard as you will be reminded often that you are wrong.  Then when the hope strategy doesn’t work it creates a mental blow that leaves you offering excuses as to why it didn’t.  But after learning to take several losses you will find that losses are some of the best teaching aides out there and in fact can be rewarding.  Aside from studying and learning why it was a losing trade, it will create a mental relief as you are out of the trade and can reinforce your discipline or strategy as that loss becomes a bigger loss.  As many traders say, all big losses start as small losses.

Today I took my loss in an Amazon (AMZN) trade.  AMZN is a stock I like to trade with options as they are liquid, offer weekly options, and the stock moves.  I don’t want to go into much detail on the strategy here but want to keep this post more about taking losses.  On 2/12 I took on a bearish position in AMZN via March 260/255 Call Diagonal for a 2.45 debit (max risk to upside of $740.00).  Trade order entry shown below:


I took this trade while watching the 30min chart and I was looking to take advantage of anticipated downside but still bullish AMZN hence being on the call side of AMZN and long the March Call with weekly rolling capabilities.  Anyway here is the 30min chart I was looking at with notes:


So with this action I liked the idea that we would retest those 2/7 lows around 255 and this looked like a good place to get long AMZN according to the daily, overall the Call Diagonal was a strategy looking to take advantage of a pullback in order to get long.

So what happened?  AMZN came out with several news bits this morning of minting currency, playing its cloud in cars, and expanding a content licensing agreement with CBS; regardless it was all bullish news that had AMZN gapping up Wed morning almost 3 dollars.  My thoughts were of course “why not as I just put on a bearish strategy” looking for a gap down or selling to 255.  Right away I thought “all this news appears bullish for AMZN so lets see how it handles the opening gap?”

As stated in a previous post I was big on the 260 level for AMZN.  Another reason for this bearish position was its inability to hold that 260 level on Tuesday 2/12, so this was in focus for me.  Seeing that we would gap above this level left me feeling uncomfortable with my position and looking at how it handled that news.  Concentrating on a scaled down time frame, opening volume was bullish and the 260 level wasn’t even breached.  This told me I just need to accept the loss and I was wrong.  Below is a 30min and 5min chart:


It appears that this news from AMZN coupled with its continued selling since earnings was the catalyst it needed for further upside and it ripped through the day creating a nice daily chart.  Below you can see my order entry/exit orders:


I ended up taking a -$85.00 loss on this trade (per 1-lot, -34.6%).  But watching AMZN price through the day made a losing trade into an actual win from a mental capital standpoint.  Here is an EOD Risk Profile of the current trade, currently showing a loss of -$304.98 (-124% debit, -41% risk).  As you can see by the low/high red dashed lines not even a 2 sigma move to the downside (low probability of happening) would put me at  my target of 255:


I cut the loss realizing I was wrong in my thesis and ending up cutting it before it turned into 3.5x the current loss.  To me this is near a win as when I first started trading I would have turned this into a hope strategy (which it could still come back down).  I have learned through several blown accounts this doesn’t work and learning to cut the loss when you realize you are wrong from your initial analysis is the right strategy.

Now when I look back at this I ask myself “would I take this trade again?” and the answer is yes I would.  This just turned out to go against me with maybe some news catalysts & no anticipation of AMZN or some overall market weakness.  I preserved capital to move on to another trade or get back in AMZN.  If there is one thing I have learned through time it is the ability to realize I am wrong and learn why.  There are just some things you can’t control, accept your risk going into a trade.

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