Today I\u2019d like to share a hard, but important lesson I learned early in my trading career. At the time, I considered it my worst trade ever, but in retrospect it turned out to be the best trade of my career.<\/p>\n
Here\u2019s why\u2026<\/p>\n
I started in the commodities business in Chicago 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.<\/p>\n
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.<\/p>\n
So here\u2019s my worst trade\u2026<\/p>\n
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\u2019t own). It had to come down, right? That statement alone shows you how naive I was back then. Well, for a whole 20 minutes I looked like a hero. Rather than take a small profit when I had it, I decided I\u2019d sit and wait for a bigger profit (that's called greed).<\/p>\n
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\u2019re on the wrong side of a trade. That\u2019s exactly 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\u2019t seem like a lot of money now, but back then when I was just starting up my career it seemed like an insurmountable fortune.<\/p>\n
To be truthful it was the best thing that could ever happen to me and here\u2019s why\u2026<\/p>\n
I learned a very tough lesson in that wheat trade, one that I\u2019ve never forgotten to this day. I learned that day 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.<\/p>\n
Later in my trading career, I 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 incredible amount of money to lose on one trade. But my friend was trading with $50 million, so a $1 million loss is only 2% of his risk capital which is certainly very manageable. When you lose 40%, 50% or 60% of your capital on a single trade it becomes difficult, if not impossible to recover from.<\/p>\n
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.<\/p>\n
I cannot say enough about risk management and how you should manage your risk, and I offer up some trading tips that will help you avoid disasters like mine.<\/p>\n
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.<\/p>\n
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.<\/p>\n
Every success in trading and in life,<\/p>\n