Today exposed a serious crack in my risk management--previously unforeseen, and inadequately managed. So, it's time to hit the pause button and reevaluate. The account was savaged this week and is down about 40% from last week. Though, some perspective here, I'm still sitting on 60% gain YTD (excuse my contrived optimism on this point...)
The situation:
1. After substantial gains this year I increased position size. This was the first week of the larger positions.
2. After taking losses early this week on positions, I stopped out, and put the money back into the market.
3. I make earnings trades with profit from the proceeding week.
4. A systemic move today affected all of my positions.
Each of these was a previously considered risk, and appropriately managed. The shortfall in managing this risk was putting the money from the closed losing position back into the market (and to a lesser extent, trading earnings). But that problem was magnified because of the other items. Because that loss is managed by already open positions, a new loss with a new position cannot also be managed by the open positions (see MSFT trade--which blew past my stop today). That is to say, once the loser has stopped out, the winners that are open against it cannot support the risk of another position. Corrective action: when stopping out of a loser, that money cannot be reintroduced to market unless offset by a winner (and specifically, a winner that is 30% greater than the loser).
I've realized that position size must be stepped up over a series of weeks to prevent a single bad week from wiping out more than 1 weeks gains. Earnings trades are compatible with my strategy only to the extent that they are done with a small percentage of gains realized that week.
Particularly because of the 100% step-up in position size compared with last week, this was a particularly expensive lesson. We saw the perfect storm this week and paid for it...so time to pick up the pieces and move forward.
The damage report:
MSFT - still open as we're sitting at 95% of the spread--another take-away here is that the price exposure on this was relatively high due to late week opening (i.e. a 0.30 premium on Monday is not the same as a .30 premium on Wednesday with a Friday expiry). Little left to recover here and we're staring down a 100% loss of at-risk (which is about 2x expected gains on my positions).
V - Looked bad this morning, but looking just fine right now. Good chart pattern after bouncing off of moving averages. We'll let this one ride through tomorrow (barring a good gain or stop today)
BIDU - closed at 3.25 (opened at 2.67) - jumped ship early on this one, but still walked away with 21% gain (though because I managed risk by closing a spread asymmetrically with the short leg breaking even, this was nearer a 30% gain in reality).
CAT - closed at 0.17 (opened at 0.66) for a 37% gain.
I'm revising my trading plan based on lessons learned (and also because I've strayed from it a bit--which cost me). I'll probably put that up here later today or tomorrow.
