Original Posting Date: Feb 25, 2010.

I traded Goldman Sachs (GS) recently and made some significant mistakes to cause a winning trade to become a losing trade. I feel that I need to document these mistakes to prevent it from happening again. At the same time, I can learn from every one of you how I can further improve my trade. Welcome to leave your comment here. 

• I spotted a Bearish Engulfing which is a reversal to down trend pattern on Jan 22, 2010. I entered a trade @$156.22 buying a GS MAR 155 PUT option. This is considered a nice entry point because I entered the next day when the pattern is seen. My original plan is to watch the chart closely before deciding my exit point. I was looking at when GS stock price started to off hook the lower Bollinger Band because that was a sign the price would be moving up.  However I did not monitor the chart daily as I was on business trip on the subsequent week (Lesson Learnt #1).
• After my business trip, I had a chance to get out of the trade when I spotted GS off hooked the lower Bollinger Band. If I exited the trade at this point (1^st exit point), I would be making a 30% profit handsomely. Due to the greed (Lesson Learnt #2) because I was hoping GS would go lower, I did not close my position because the whole market was bearish generally.
• The next day a Bullish Harami pattern was formed. This is a trend reversal pattern and the stock may move up or move sideway; and I would be losing money regardless which way the stock price moved. If the stock moved sideway, I lost money due to time decay. If the stock moved up, I lost even more. After seeing this pattern, the next day was my 2^nd exit point opportunity but I still hope GS would come down again (Lesson Learnt #3).  If I had exit at this point, I would be breaking even on my trade.
• I was happy to see a shooting star was on the subsequent trading day because this is a trend reversal pattern (going down). This was my 3^rd opportunity to exit the trade but I did not take action because I did not want to lose money (Lesson Learnt #4). At this moment, I was losing a little money due to the time decay of the option.
• GS traded sideway for a few days and suddenly had a gap up and crossed the 20D MA. This was a bullish signal and if I exit here (4^th exit point) I would lose 30% of my capital. At this juncture, the option price dropped very fast due to the time decay and significant dropped in the implied volatility (IV). This IV indicated by how wide the Bollinger Band. IV is high when the Bollinger Band is wide and vice versa.
• When GS started to touch the upper Bollinger Band, I started to wake up. If I still did not make up my mind to cut loss, I would be losing 100% of my capital in this trade as option will expire worthless. The PUT option was losing its value due to the strike price, reduced in implied volatility and time decay.
• I exit the trade at $155.87 and suffered a 50% lose in this trade. 

Summary of the Lesson Learnt

• Did not spend time monitor the chart every day.
• Emotion takes over plan. (Greed takes over when making money, Fear takes over when losing money)
• Refuse to cut loss.
• Believe in hope rather believe in the chart.
• I have a trading plan in place. My entry point was good but exit point was extremely bad. This is an execution failure!

Improvement made for my future option trading (A reminder to myself)

• Have a trading plan (Entry, Exit, Time Frame, Profit Target, Stop Loss target)
• Close the position within 3 days
• Monitor the chart everyday
• Set auto-triggered Stop Loss target after enter a trade. Let the machines takes over on the execution!
• Exit the trade immediately when the chart is not right. (Respect the chart and don’t doubt the chart!) 

Feel free to comment if any improvement needed in my plan.

Thanks!