Yes, WHY stay in a losing position? Unfortunately, people do it all the time. There are trading systems that have it built in, such as scale trading. The thought is that if you hold onto the trade long enough, it eventually will go your way. Sure, if you have REALLY deep pockets and ice flows through your veins! I think that if a trade does not go your way within a short period of time after getting in, you really need to consider getting out. This shows that your timing wasn't very good. Also, if it starts going against you soon after getting in, you probably participated in a trap to suck the public into the trade, and the "big hands" are going to use your stop loss and the stops of the others to make them money. Isn't trading great?
It looks like the market is leaving the lows behind. At least so far. My friend's situation is only getting worse. A few more details on the trades he has open. He's short KLAC, NVLS, and QLGC. I believe he started scaling into position on October 10, ending October 14. If you look at the KLAC daily chart you can see what he was thinking -- KLAC was trending down without a trendline violation through previous highs. With the curent market sentiments he was betting on KLAC to plummet on the next bout of bad news. The cascade of decisions he made over the next few days are probably classic land mines traders step on that make the account blowout statistics so high. On the 15th KLAC gapped up, shooting through what should have been his stop -- it violated the trendline he drew that he entered the trade with. Probably bewildered by the near instantaneous loss and wondering how that could happen with world events being what they were, he rationalizing it as a short squeeze before the big fall. He decided he wouldn't fall prey to this manipulation and stayed in and was rewarded the next day, the 16th, where the market was down again (as "predicted") and the KLAC open was almost where it was on the 14th. So far so good. The next day KLAC closed with a new 2 day high. It continued to make new highs over the next few days. Each day he stayed in, waiting for the fall. The 21st was as interesting day. KLAC made a high just over 34. At this point he had around a 5 point loss. The other two shorts were worse. I don't know specifically how he scaled, but QLGC is up ~10 points from the 14th. NVLS ~6 points. He's a long way from where he entered. What kind of advice can I give him? I don't know. I don't think I can give him any advice for fear that he may take it. I don't want that responsibility. I did pass on tidbits of advice posted in this thread, particularly what dbphoenix said about behavioral reinforcement. If he makes it out of this situation with his account intact what will he have learned? It pays to stay in? I keep asking him is when he is going to cover. He said, "I don't know. I've gone through any reasonable stop. I should have at 5%, maybe 7% at the max." Ugh. He's riding in the back of a pickup truck going the wrong way and it's going too fast for him to jump. He didn't jump when it slowed down and now it's going fast again and through cactus country. More later...
He closed out today! Quick, short everything! It looks like all the chatting about deciding on an absolute disaster stop paid off. He hit the one he decided on and exited all of his positions without hesitation. He lost 25% of his equity. I'm guessing it was around 50k - 80k. Maybe he learned something from this that will save him from a more massive loss in the future. He said to me, "The market is a money printing press and you really can't go wrong unless you do something stupid like I did. i'm not going to trade for a few days so I don't revenge trade, and i'm definitely not going to repeat this mistake when i get back in." His post mortem cited a short bias and bad discipline as the reason for the loss. I think too large of a position size and not hedging were part of the problem as well. He's in good spirits. He was up 25% last month, and he's not out of the game, so things could be worse. Drinks on me for the next few weeks.... Then, the taunting shall begin. ("You could have bought another nice car!")
I'm sorry I'm in no position to comment, BUT in my humble opinion a guy who pulls something like that is ways away from being a money printing press.
Because of the correlation of those three I think most of us here recogonize one of your friends biggest problems besides the ones he mention was that for all intensive purposes he was really short short just one position "the SOX". QLGC may be in storage but it trades with the semi's. When fund managers are lagging their benchmarks like the s&p and need to play catch up they go after "beta" and those high beta stocks are often semi's. Good thing your friend closed them out, cause next week could be a moon shot higher with that MSFT action and all the other stuff on tap. Cheers.
I only recently got the final details of how this turned out, despite working and having lunch with this friend nearly every day since. We never talk hard numbers, so I had to piece together the total carnage to his account. Recently at lunch, with him trying to convince me that longer term swing trades were more profitable (At the time, I liked to scalp 1 - 5 minute positions in volatile stocks), he said, "I'm going to buy [another] SUV. The position I placed yesterday surprised me with a huge move. I'm already up 50k. Do you make that much in a day scalping?" "50k!", I replied. "How much of what did you own?!" "18,000 shares of [some penny stock]" ack! 18,000 shares of any one thing seems insane to me. "That's 25% of my loss i've recovered.." I tried to keep my eyes from widening when I did the quick calculation. He lost 200k by going short in the mini bull that started mid october. ---- All in all, he never really seemed down about the whole affair. He booted himself around a little for blowing through his stop, said he deserved what happened, and vowed "i'll never do that again!" FWIW, He trades exclusively using Stan's system from Stan Weinstein's Secrets For Profiting in Bull and Bear Markets. Except for the money manage part. =)
Atleast he didn't show up in a pink dress (chasinfla's link). You might tell him (on top of all advice already administered) that he may wish to leg into positions in the future. And to keep in mind Jesse Livermore's advice to sell short at declines (not advances). Since he wants to swing trade, I hope he will respect the words of one of the best swing traders in the history of the market.
From the article: "Rusnak threw away hundreds of millions of dollars. Which makes you want to ask some very simple questions. Why did he throw all this money away? And why, when he was in the process of throwing this money away, did nobody notice? " Those aren't the questions I thought of. I was thinking: Where did the money go? How can I when somebody else is doing that? How can I get some of that money?