What Can We Learn From StopFapForever
Luckin Coffee Inc. engages in the retail sale of freshly brewed drinks, and pre-made food and beverage items in the People's Republic of China. It offers freshly brewed drinks, including freshly brewed coffee and non-coffee drinks; and food and beverage items, such as light meals.
I thought Luckin Coffee was going to be the next Starbucks of China and with over 1 billion people in China, the opportunity was huge. When the stock price of Luckin was in the $20s then shoot up to the $50 level, I thought I missed my opportunity and refused to chase price. But then price came back down to the $25 level. I was about go get in for the long haul, until I saw unusual options activity.
I noticed some unusual options activity with a long volume in the April contracts at the $15 strike puts. However, I couldn't really tell if it was bullish or bearish trading at the time. Because I couldn't tell and because the options were expiring within a four week window, so I put on a lottery ticket for $100.
Then news came out that the company was fudging their sales numbers second quarter of 2019 to the fourth quarter of 2019 to the tune of $310. That day in Aprile the stock opened on Thursday at $4.91, down 81% from the previous closing day’s price of $26.20. That $100 lottery ticket turned to $1900.
SEC Chairman Jay Clayton, three other SEC officials and chairman of the Public Company Accounting Oversight Board later said there was greater risk that disclosures will be incomplete or misleading compared to US domestic companies and that will be made to crack down on the fraudulence.
One retail investor with a PG-13 Reddit name took a particularly grievous hit.
Yes, StopFapForever, who claims to be a 28-year-old Italian, shared his brutal market mistake with the bunch on WallStreetBets. He apparently he went all-in on Luckin and lost his entire life savings in the process. “Now I’m broke af,” he wrote, posting this screenshot of the carnage:
When pressed by the mob as to why he would take sink all that cash into such an obviously sketchy position back in January, StopFapForever, who says he still runs two business that should allow him recoup the losses within a few years, did his best to explain.
“It was before corona, lockdown and fraud,” he said. “Nobody knew back then. It went from 17 to 51 in 2 months from Nov to Jan. Could have just kept going instead of explode.”
So what can we learn from StopFapForever because we should learn from good and bad events.
2% Rule - losing only 2% per trade means that you would have to sustain 10 consecutive losing trades in a row to lose 20% of your account. This is the most common - and yet also the most violated - rule in trading and goes a long way toward explaining why most traders lose money.
So in conjunction with the 2% Rule is utilizing a stop loss order. A stop loss is an order placed with a broker to buy or sell once the asset reaches a certain price. A stop loss order is designed to limit a trader/investor's loss on an open position.
Mental stop losses don’t count because as a trade goes against you, you will rationalize why the trade will make a comeback. Also, so what your stop order becomes transparent and the market makers and algos “run your stop.”
A stop loss (is risk management and capital preservation) is the single most underrated tool that will determine your destiny as a trader/investor. In general terms, traders/investors like to get out of profitable trades/investments quickly and like to hold on to their losing trades/investments for longer periods of time in the hope they will bounce back in the future. This bias in behavioral finance is termed as "fear of loss." Stop losses can protect trades from becoming investments and/or investments from becoming headaches.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.
Posted Using LeoFinance
