5 steps to survive a painful trading losses

“Everyone has a plan until they get hit hard in the face”
– Mike Tyson

The reasons you get punched in the face in trading can be many: an attack on a refinery, a bombing, a flash crash, … or more mundane: a strong move and sl. A quick rise in price followed by an even quicker fall. An upward impulse, a downward impulse and a breakout of previous lows. You are on the minus side.

First: ALWAYS think ahead trading losses

Always, but always, I repeat always (did I already say always?!), you should think through the possibility of such a situation beforehand.

The best of the best traders I have had the pleasure of talking to have a saying (I will say it in my own words): “I know that the biggest loss is still ahead of me. Will it be today?”

This attitude protects them from a couple of things – going in with too big trade position and making a senseless decision in the heat of a market battle.

If you take the possibility of such a situation into account then… you will protect your capital (this is the first and most important rule of a professional trader), secondly your mental toughness – reactions (anger, frustration, rage, panic…) will be less.

You will protect your psyche (this is the second basic principle of a professional trader invented, or rather, discovered by me).

The following descriptions are not a recommendation of specific actions, because these must be tailored to the situation and still preferably consulted with a lawyer or even several.

trading losses - new city trader magazine

Second: Evaluate the scale of the trading losses and damage.

Do not combine, they will check anyway.

Third: Prepare a plan.

A plan built under the pressure of trading losses is usually worth little but… it’s always something. At this point, I encourage you to think about what you would do in a very difficult situation, how you would recover from a huge trading loss. Again, I refer to the situation when if today you realize the magnitude of the problems and destruction you can cause with your decisions then… you will become wiser and more cautious.

There is a saying in London City that if you have doubts about your action then consider if it fits on the front page of the Financial Times? This is usually sobering and gives a very valuable perspective.

Fourth: don’t combine, don’t hide from your superiors (Nick Leason put Barrings Bank down this way) and yourself the size of your losses and the fact that you have a problem.

If you already have a plan then go with it or a suggestion from others on what to do to get out of the problem. Usually the size of the problem is paralyzing and people are grateful for any hint of a solution.

How to prepare yourself for a big trading losses in the future

Fifth, and most important – think today about what you should do, what you would advise someone who got hit like this and has a loss.

If you do this exercise today you will benefit in two ways:

  1. you will be better prepared at the moment when indeed shit hits the fan.
  2. You will be more cautious when trading, knowing that anything can happen in the market and there are things that will break even the toughest traders.

A trader to whom I suggested this exercise told me after a week that when he did it and saw that he could (because he could) have such a situation he broke into a cold sweat and thought he would do everything to make sure it didn’t happen.

Just thinking about the situation, he imagined what he would have to endure as a consequence, how his colleagues, superiors would approach him, how his family would treat him, and that such a negative situation could last for months and years.

A cold sweat covered him and after 5 minutes of just imagining the situation he was already a different person.

To summarize:

Realize that the “mother of all losses” is still ahead of you.

Think what your colleagues, family and half the world will think about what you will do.

Think whether your idea is suitable for the front page of the Financial Times. And if so, stay away from it.

Think that the unforeseen negative consequences of what you do could last for years.


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