Today i took my biggest loss of my trading journey after growing my account from $2500 to almost $50k being very consistent and disciplined which allowed me to have a good win streak before this big loss.
After going over my trade post market close after a clear mind, here are some key lesson that I have learned. I really hope anyone who is reading this learns from my mistake.
1. Trading volume: Never ever short a stock thats trading less than 1 mil in volume. Forget the dollar volume, you need enough liquidity to get in and out of trade very easily. Each minute candle should atleast have 50k - 100k volume. The higher the better. When i started shorting $GDLC it was only trading 3-5k shares per minute candle.
2. Shorting front size: When I was shorting $GDLC, my thought process was this is the third green day, so lets start shorting into the spike and then add when it goes red. This strategy normally works well for me, but key difference was volume. I was shorting a low volume illiquid stock which had barely traded 100k in volume on the day on the front side of the move. If you do want to short on the front side, keep size super super small. For eg, if your avg size is 1k shares then probably only short a 100 - 200 shares. But please ensure the stock is trading enough liquidity and there is barely any spread.
3. Adding to losers: When the trade started going against me, i was thinking this is going parabolic, so let me average up. This is probably a short sellers worst cryptonite. NEVER EVER add to a loosing position. By adding to loosing position, my size suddenly got out of hand and I was at a point looking at a 35k loss. Had the stock gone any higher, I would have for sure blown up my account or worse owed money to the broker and received a margin call.
4. Shorting with no resistance or risk level: When $GDLC started going parabolic, I had no risk level in mind as there was no resistance on daily. This strategy works great but only takes one trade to blow up. Never ever short a stock that has no prior resistance level. No matter how parabolic the move is. Instead let the stock go parabolic and then wait for the first hard crack, then look for the bounce to short into. That is a much safer strategy and you now also have a clear risk level in mind plus there are also bag holders trapped at higher levels.
No matter how disciplined you were through out the year, it will only take one trade to blow up your account. A trader is only as good as the next trade, its a constant battle every day when you are coming into the markets and risking your hard earned money.
I am sure anyone reading this blog must have read or heard what I have written in this blog many times but its probably the worse feeling when you are experiencing it in real time and I sincerely hope, no trader has to ever go through or feel what I went through today.
I was lucky to escape without blowing up my account and still having most of my account intact to fight another day but taking winning streak for granted would be the reason why a trader might blow up his/her account.
Best of luck trading!!