Reviewing lessons learnt as a short-seller in 2021.

This has undoubtedly been a wild year, mostly noted for the ‘meme stonk boom’, led by $GME, which turned out to be the top stock of 2021, with 815% returns according to Investopedia. Not to mention the hedge fund blow ups it generated on its way up.

 For once, retail did get the last laugh, even if just for that day.

And, surprisingly, the lack of attention given to NFT stocks, with $TKAT, $DLPN and $ZKIN all experiencing a quiet end to the year with little movement/traction for months.

But mostly, for me, the year was characterised by an influx of new traders. The markets boomed with fresh blood due to work from home orders as a result of corona virus.

More traders meant more volume in the market and the increase in volume changed my bread and butter patterns that I’d previously enjoyed as a short-seller.

When first starting out as a short-seller, my first main broker was TradeZero, I had a $600 account and my dream was to one day make $100k in profits.

In March this year I passed that milestone, the dream became a reality, but shortly after I endured some very tough lessons in the market and gave back a large chunk of profits in the final half of this year.

Looking back, I’ve realised where I was right and where things went wrong. So let’s document the learnings now for me – maybe for you – and for new traders to the game.

Here’s my three biggest lessons, for moving into 2022.

  1. The market is always changing
I found my edge by tracking stock-market related data using Excel. Simply explained, I looked at stocks that gapped each day (25% or move from prior close) and tracked where they opened and closed that day and what volume the stock traded. Other points of interest were the highest and lowest point the chart reached intra-day.

These basics can be enough to generate a potentially lucractive strategy. My error? I stopped tracking data after finding success. When the market changed, with the influx of new traders, my data, in some regards, became out of date.

Instead of finding a new edge I tried to repeat the same strategy with no success.

A key lesson is to always remember that the market is changing and to be the first to change with it.

  1. Size down when your strategy stops working

The biggest mistake I’ve made this year – similar to others, too – is to use more size when things are going poorly. When the market is quiet, or your strategy isn’t working as effectively as before, that doesn’t mean you size up, it means you size down.

Many size up to attempt to equal their previous record months or in an effort to recover losses to get back to personal account highs.

A key lesson is to always remember the market doesn’t care about your P&L. 

The reality is:  if your strategy is lacking edge you need to size down until you’ve recovered that edge by waiting for a market correction or tweaking your strategy. Throwing more money at a problem will generally always end in disaster as I’ve experienced.

  1. Use a system
After my old strategy started to fail me, somehow I thought I could solve the problem by trading based on ‘feel’ because I have some degree of skill in reading price action.
After returning to data-tracking to formulate a new system, I’ve realised I was trading many low-probable set ups for success.

You can trade on feel, but It should be backed by data to inform which set up has a high success rate so you can choose the right battles to fight. No one in their right mind wants to fight several losing battles, which is what I did for much of 2021.

And why? Because I didn’t want to track data to find a new edge in the market. I Thought it was easier to put my head in the ground and throw money at a problem.

So that said, 2021, was a year of extreme highs and lows. But, it put me in a good position for 2022 to trade the markets as a more matured, experienced trader, who has now tasted success and defeat.

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