How My Worst Trade Turned Out To Be My Best Trade

Posted on by The INO.com Team

Today I’d like to share a hard, but important lesson I learned in my trading career. At the time I considered it my worst trade ever; in retrospect it turned out to be my best trade.

Here’s why…

I started in the commodities business as a broker for a company called Conti Commodity Services. Conti was a division of Continental Grain Co. one of the largest and oldest grain companies in the world. Back in the 70s, Conti was just starting a new division to handle customers in the brokerage business. I was lucky enough to have them hire me as I had no experience and very little education. But, I was enthusiastic and willing to learn.

So there I was at Conti Commodity Services dialing and smiling and looking to get business for myself and the company. All this was back in the 70s when grain prices were skyrocketing. After a brief time on the job I guess I thought I knew better than everybody else.

So here’s my worst trade…

I was following the wheat market, just like everyone else because markets were hot. All of a sudden a slumbering December wheat market shot up dramatically on no news. I thought to myself that wheat had gone up too far and too fast, so I went short (that is I sold something that I didn’t own). It had to come down, right? That alone shows you how naïve I was back then. Well, for 20 minutes I looked like a hero. Rather than take a small profit when I had it, I decided I’d sit and wait for a bigger profit (call that greed). Well, you probably know what happened next, wheat closed up the limit and I was unable to get out of my short position and finished the day with a loss. Well I said to myself that wheat has got to pull back tomorrow, right? In the commodity markets, things only go from bad to worse when you’re on the wrong side of a trade and that’s what happened to me and my wheat position. I am not going to bore you with the gory details or the pain I went through, but the bottom line was I lost $10,000 on that trade. It doesn’t seem like a lot of money now, but back then when I was just starting up my career it seemed like an insurmountable fortune.

To be truthful it was the best thing that could ever happen to me and here’s why…

I learned a very tough lesson in that wheat trade, one that I’ve never forgotten. I’ve learned that there are two sides to every coin, two sides to every sword and two sides to every trade. For every profit opportunity you see in the marketplace there is an associated risk that comes along with that profit. I learned the value of risk management and why there is no free lunch when it comes to the markets.

Later in my trading career I’ve lost much more than $10,000 in other trades, but it never bothered me because I was managing my risk. A friend of mine lost over a million dollars on one trade. To many, this would seem like an insurmountable amount of money to lose on one trade. But my friend is trading with $50 million, so a $1 million loss is only 2% of his risk capital which is certainly very manageable. It is when you lose 40%, 50% or 60% of your capital on a single trade that it becomes very difficult, if not impossible to come back from.

So when I say my worst trade happened to be my best trade; I mean it. In my mind that early loss in December wheat was a priceless education in risk management that I still use to this day.

I cannot say enough about risk management and how you should manage your risk, but here are some trading tips that will help you avoid disasters like mine.

You must use stops. You must be disciplined. You must be diversified. If you have those three core trading items in your portfolio, you can survive and thrive no matter what the market throws your way.

I hope that like me, your worst trade turns into your best trade in the long run. In fact, I invite you to share a trade that taught you a lesson in our comments section below.

Every success in trading and in life,

Adam Hewison
President, INO.com
Co-Creator, MarketClub

6 thoughts on “How My Worst Trade Turned Out To Be My Best Trade”

  1. Interesting experience Adam. I suppose everyone has their own idea,s on risk management. Stefan obviously is very cautious as a 3% stop loss is not considered high risk dependant upon the exposure of the trade. Life mirrors that in some way, does it not? If by an action I thought there was a 3% risk of losing my wife then obviously it would be too high a price to contemplate.

    So I would say balance was the key. Get rich schemes rarely work but steady growth whilst learning any new art is probably acceptable to all but the high rollers who rarely achieve their goal anyhow.

    1. Don't confound trading with investing. In the latter case it does not make any difference how red the position is, unless you are confident with it, that your final price target should reflect the impact on what the company does have on the economy. Thus, in case of investing, you would buy steadily more shares, as long the price is under the "impact price". In the case of trading, you always look, that you get out of the position with a gain. In that case it will be necessary, that you also restrict the downturn.
      The "behaviour" between trading and investing is very different.

    2. John,

      Great information, thank’s for sharing your insights with everyone. Get rich quick schemes are just that, schemes that are doomed to failure.

      Cheers,

      Adam Hewison
      President, INO.com
      Co-Founder of MarketClub.com

  2. You shouldn't risk more than 1% -2% of your capital on a single trade at any cost.
    Slow and steady works better in the long run.

  3. Yes, indeed, if your trades make you loose more than 2% on a trade, than capital is gone, sooner or later.

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