As with most of my favorite trades, they occurred to me after getting my teeth kicked in by the markets. Sometimes many times in a row. It’s those moments when I’m watching a trade go against me, in a most agonizing way, that I learn the most. When the fog of pain clears, I ask myself, “Why was I not on the other side of that trade? What did I miss?”
Armed with this determination, I can dive back into my trading journal. I can search for pattern recognition clues. Think through the psychology of traders on both sides of the move. True, there are times when a trader wakes up on the wrong side of news. But other times – hidden patterns are there for the finding.
Take the case of the end of the year trade. A long, long time ago I was in a stock trade that lasted about 6 months. I remember it was a lower priced stock. I bought it for about 8 bucks a share. It did nothing for the first few months, and then it started to decline. Never by much, and not enough to be annoying. After a while, the little declines added up. As I headed into the middle of December of that year, the stock was trading around 5 bucks a share.
Hmmm, I thought. It would be awesome if this stock would gain some steam into the end of the year. Let’s see what happens.
Much to my chagrin, the selling accelerated. With 3 trading days left to go, it traded at 4 bucks and change. At this point, I had resigned myself to it being a loser. I just wanted to time it right to get out “on a bounce” before the last trading day of the year ended.
Why get out? So I could take advantage of the tax loss when I filed my tax return. After all, I could always buy it back 30 days later.
With two days to go, the stock continued to dribble lower, offering me no bounce in which to exit. I felt the stock mocking me throughout the trading session right up to the closing bell. This meant I had one more day to wait for my dreams to come true.
I woke up early that last trading day of the year. I anticipated the many stealth moves I would be using to get out of my stock on a bounce. In fact, I prepared myself mentally to be the first one out the door on any early strength at the open. Coffee in hand, knuckles cracked, I hovered over my keyboard, ready to dominate.
The opening bell kicked off. I checked the quotes.
The stock gapped down like 5%. I could feel the frustration surging through me. But what could I do? I waited. And waited. And the stock continued to fall harder and faster than any single day I had owned the stock.
Finally, out of both frustration and the fact that the closing bell was fast approaching, I dumped my shares. Right at their dead lows of the year.
As usual, after living through that pain, after selling I felt an immediate wave of relief. (Years later I would learn that getting out of a losing trade is one of the best gifts to the psyche. After all, reentry is only a commission away.)
I went out with my friends to ring in the new year, and didn’t think I would ever look at that stupid stock again.
Yet out of curiosity, on the first trading day of the year, before heading off to work, I glanced at the stock to see where it was trading. The stock traded up 5% at the open. The move I was looking for! I ran off to work and checked the stock again at the end of the day. Up 8% on the day. The next day? Up. And the day after that? Up. In fact, over the next week the stock had moved 20%. The pain of loss had turned into the pain of missing out. And, after many years, a realization.
Other people’s pain and suffering is our opportunity to profit. There are few times during the year when retail traders force a decision on their accounts. Although it took my own pain and suffering to realize and understand this phenomenon, now the last trading day of the year is also one of my favorite. Why? I just look for people who, like me, pinned their hopes and dreams on the wrong horse. And I take the opposite side of their trade. (In a loving and respectful way).
I’ll be trading this year’s Tax Loss Harvest live on December 30th from 8:30 am – 3 pm CT and you can join me by following the link below. See you there!