4 errors and lessons from being long just before the October 2008 crash

[![S&P 500 review][]][] : S&P 500 review

I have been waiting to go long in this bear market for a few weeks now, hoping for a bottom soon (first of my errors).  Then on week of September 29th, I decided to go all in (error #2).  S&P closed at 1099 that Friday.  A week later, on October 10th, the Friday close of S&P 500 was 899 points, and I am still left holding on (error #3).

Error #4 though, requires some explaination.  Simply put, I was not reading the chart as I should have.  While both the price action and contrarian sentiments were bullish, I totally missed out on a basic technical analysis indicator â€â€Â? the volume.  Looking at the above chart, it’s easy to see that the first downward break of the trendline in mid-September was confirmed with volume.  The volume on that day (left blue arrow), and for that entire week, is substantially higher than usual.  The subsequent mini rally attempt before the next break has been marked with little volume.  This suggests that market participants, particularly the longs, still haven’t flocked in yet.

Seeing that, I [should at least reduce my position size by exiting some of my most weak positions][] (i.e. least profitable positions) before the weekend.

While this is not my costliest lesson in trading, it illustrates some very fundamental lessons which I should reiterate, because I should have known better.

  1. Never try to pick the top or bottom.  Which I thought I learned from my futures trading already.
  2. Manage risk according to volatility.
  3. Exit at any cost if it doesn’t look right in a bear market.
  4. Don’t get fixated on the individual stocks, look at the bigger picture.

Actually, I think this all boils down to proper risk management.

[S&P 500 review]: http://traderpau.files.wordpress.com/2008/10/week_spx.jpg [should at least reduce my position size by exiting some of my most weak positions]: http://www.quantisan.com/didnt-cut-losses-as-planned-and-now-paying-dearly/