Anything Can Happen. Be Ready.

Sean McLaughlin
October 12, 2022

The best trade I ever executed was a loss.

That is not a typo. I lost money on this trade. Actually, it was a series of trades. But it was executed with one decision and one combination of keystrokes.

It was the summer of 1998, and it was my first year trading.

The Long-Term Capital Management debacle was weighing on markets. There was money being made on the short side. Big money.

Many of the more successful traders in my office had already earned a boatload of cash with aggressive short trades on this particular morning. And at lunchtime, they decided to head out to the golf course to celebrate another day of crushing the markets.

But not me.

Nope, I was still a piker trader at that time, still trying to figure out how to stop losing money. So while the rest of the guys were high-fiving each other on the way out the door to the golf course, I stayed at my desk banging keys, trying to catch up to the big shots.

As we moved through the sleepy lunch hour, markets were showing signs of another leg down and I was building a short position in about 8-10 stocks. Slowly at first. Small amounts of shares. Nibbles, really.

But my conviction in my bearish position continued to rise as S&P futures fell. So I continued to increase my position. I was shorting the big dogs at the time: Microsoft, Intel, Yahoo, Worldcom, Dell, eBay, and a few other semiconductor stocks.

Over the course of about an hour, I had gotten my position big enough that it was actually starting to make me uncomfortable. It wasn’t my largest position ever, but it was still uncomfortably large for me. I was making a little bit of money – not a lot – in this position, but I was already starting to count the winnings I was surely about to earn when the bottom fell out of the market and skidded toward the closing bell.

And then the unthinkable happened…

Out of nowhere, catching every single market participant by surprise, the Federal Reserve announced a surprise interest rate cut. The Fed was in between meetings and nobody was expecting any kind of announcement out of the Fed at all that day. Not for another few weeks, in fact.

As a new trader, I didn’t really understand what an interest rate change would mean for stocks. Was it bullish or bearish? 

But I certainly noticed that all of my short positions started trading up immediately. Finding myself in a situation where I was now turning a profit into a loss, and having no idea what was happening in the markets but sensing that something wasn’t quite right as the guests on CNBC all seemed to be shell-shocked by what just happened, I hit [Control-Delete] on my keyboard which was a hot-key setup I had that closes all open positions with market orders immediately.

I had enough spidey sense to know that when I find myself in a situation where I’m lost, it’s best to go to cash and reevaluate from the sidelines.

And boy, was I glad I did. Closing all my positions with market buy orders resulted in a net loss. It wasn’t a bad loss, and it was in line with any typical loss I might take. But watching all the stocks I was short jump higher by multiple dollars per share each, I avoided what could have easily been a 5-figure loss, which would’ve been devastating to my account at the time.

If I had stepped away briefly to the restroom while that announcement hit the tape, I surely would have suffered a terrible loss.

Instead, I suffered a small loss. And even made some money back later in the day as the markets whipsawed all over the place, providing ample opportunity for nimble traders to dart in and out for profits.

Anything can happen in the markets at any time, including now. 

Be ready.

~ @chicagosean

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