A Look At A Trading Nightmare

According to an article by Shawn Langlois at MarketWatch, a trader named Joe Campbell went to bed with around $37,000 in his E*Trade account. Thinking that the stock he was short-selling was going to be held overnight for a nice $2.00 fade, and not knowing about a notable development happening in the pharmaceutical industry, he woke up to a debt of $106,445.56!

You may wonder about his stops and his risk management. The move happened after hours and unless he had special trading privileges enabled for after hours trading, his stop would not have triggered, even if he had one. He said, “At the close of the bell I saw the quote montage clear out and figured today there was no action after hours in the stock.”

The following image shows what happened after the market closed.

To view a larger image, click HERE.

As you can see, the KaloBios KBIO market exploded, moving so fast that E*Trade could not liquidate making a stop of little use. Campbell should have used options to cover his position.

The image below shows what happened in better detail.

To view a larger image, click HERE.

You can see in the lower left hand corner how the price had stayed low, then exploded up to its high in the middle of the image. Then, it retraced some, but didn’t return to the original low.

When the market makes moves like this, stops are of little value. This is an important lesson to learn. Although he thinks his only mistake was not using a stop, he does not understand risk management, gaps, quick markets, defined risk, hedging with options or the dangers of shorting a stock, and a Pharma one at that. Looking again at the first image, you can see the massive move this stock has experienced. At the end of last year, KBIO had a larger move, a pure gap.

Shorting a stock or a Naked Call is the most dangerous thing you can do in trading. Campbell did not learn his lesson. After being down 100K, he was still trying to get a better price than market to exit. He said he asked the broker to cover (close) at $16…. He was trying to find a good price. He told him to close it as soon as possible and it filled at 18.50. This shows that even after he was down, he continued to hold onto his position. He still did not understand his risk.

This image shows the real nightmare experienced by Campbell.

To view a larger image, click HERE.

This nightmare does not have to happen to you. When you trade with Nadex, you know your maximum potential profit or loss in advance. You can never lose more than your initial collateral, which is the amount you put up to enter the trade. It is capped and there are never any margin calls. As the market spikes and falls, you are protected.

It is wise to increase your trading education in order to have a firm understanding of risk management, gaps, quick markets, defined risk, how to hedge with options or the dangers of shorting a stock. Apex Investing Institute offers free education where you can learn how to trade. Go to www.apexinvesting.com, a service of Darrell Martin.

Reference article: Help! My short position got crushed, and now I owe E-Trade $106,445.56.