Market Volatility and Strategies to Cope With a Big Loss

strategies_to_cope_with_big_loss

As a trader and strategist, I would like to promise you extraordinary profits. Unfortunately, that is not true. Some days, you will make sweet returns while in other days, you will suffer losses. This is true to both individual and corporate investors. In fact, there is no person I know who has achieved extra-ordinary success without suffering some setbacks. Here are some examples. Warren Buffet is regarded as the best investors of all time. In the last 60 years, he has grown his business from millions to hundreds of billions of dollars. It has not been a smooth walk. In fact, some of his portfolio companies have suffered significant losses. In 2006, John Devaney was one of the leading hedge fund managers. He owned multiple yachts, private jets, and multiple homes. He was worth billions. In the financial crash of 2008, he lost a large part of his investments. Today, he manages less than $10 million. Bill Ackman is currently a leading hedge fund manager. However, his fund has lost more than 30%. The same case goes to all hedge fund managers, private equity investors, and other institutional investors. Personally, I have lost a lot of money trading. How then are you supposed to manage your portfolio during such periods?

Time off

As a trader (or investor), the first thing you need to have at the back of your mind is that the path will not always be smooth. There will be ups and downs along the path. By appreciating this, you will always hope for the best while anticipating the worst. In such periods when you make significant losses, you need to know that these are the times when you are mostly vulnerable. These are the times when you are open to make huge losses. Therefore, I recommend that you take some time off from the market. This will help you ease the tension and avoid making stupid decisions that will cost your portfolio a lot. Depending on the loss, you can take even a month off. Yes, a month without making money. While this might not make sense to you, always remember that your account balance is better off than the negative losses you might suffer.

The mistake

The secret that has made Warren Buffet very successful is the fact that he has always seen his mistakes and appreciated them. He learns from these mistakes. As a trader, you will often think that you have made the right analysis only to find one mistake. This mistake could cost you a lot of money. The right thing to do is to identify the mistake that you have done and then finding strategies to avoid it. For instance, you might identify a trend only to realize later that it was a false trend. Always learn from those mistakes.

Capital allocation

In trading, you need to always anticipate such downs. As such, the way you allocate your capital is very important. Many traders follow an approach where they limit their maximum losses to 2%. To me, I believe that is very conservative. My number is 10%. Let us say you have $10,000. With my strategy, the maximum amount I can lose per trade is $100. In many trades, the maximum I can get from this amount is $50. In simple, you should come up with a strategy that lets you lose only a small portion of your money. A stop-loss will always come in handy. You should always use a stop loss to limit the amount of money you can lose. A few weeks ago, EIA reported declining oil inventories which led to oil prices gaining by 6%. This was a surprising number and traders who had betted that the oil price would continue to decline made huge losses.