Tuesday, 18 February 2020


This is a man who did not stick to his stop loss points. Source.

Late to a trade, only to buy at the peak?

You expected the market to zig, and it zagged instead?

Everything you do goes wrong, with your fifth-in-a-row losing trade?

We've all been there. Believe us. Nothing saps confidence and capital more than a losing streak.

We are not superstitious types (maybe just a little 'stitious'). Streaks are just consecutive occurrences of the same outcome. We can bore you with citing statistics and discuss the wonders of the Gaussian distribution table, but let's not do that.

Look, losing makes people emotional. We lose the capacity for logical thinking, bit by bit. If it gets bad enough, it makes us desperate.

Because we are losing something, we subsconciously feel like we have to regain everything, at all costs. This is the kind of asymmetry that lures people into making outright bets : how else would you describe feeling certain about winning 10 to 1 odds?

In trading, you're not just losing your capital. You can lose your mind if you're not careful!


Imagine this (very real) scenario : markets have just opened and you're down by RM10,000 immediately after your latest stock trade get impacted by a corporate announcement.

You bought Stock X at an average price of 55 sen. Now it's down to 48 sen; a 12% loss. And oh, you forgot to set your loss limits, or even trading parameters.

The reason you really got into this situation was because you've lost a total of RM10,000 in four previous trades. Now you've just made this one big, ballsy bet that you're sure will make up for all the losses.

Reckless? Sure, but the streak would have to end eventually right? And it's OK to make big wagers to win back that RM10,000 loss, right?

Well, the reality looks like RM10,000 in actual losses, and another RM10,000 in unrealised losses. Instead of getting to break even, you have just doubled your losses. To put it kindly: you just goofed big time.

So what do you do? Your options are :

1) Stay patient and wait for the position to turn around.

2) Trade other stocks like mad to make up for this RM20,000 loss.

3) Get out and just sell the position. Cry. Live another day.

We'll discuss the options shortly. But the answer may surprise you.

"If you really want to gamble, come here and support GENM shareholders in these trying times"


We've written before about how dangerous post-event justifications can be. Literally anything can suddenly be rationalised. It's not our own judgment that's faulty; it's the dumb market and criminal market manipulators that whacked your beautiful and totally righteous trading position.

It's not just the market that zagged instead of zigged; it's your own mind as well. And also your dignity, if you let it happen long enough.

When a rational trade turns into an irrational bet, the major change is in your mind. You panic. You try to explain things away.

Let us cut the bullshit and go straight to the point:

You're embarrassed. You're ashamed that you got things wrong. 

Losing so much money in such a short time makes you feel like an idiot. 

You instantly regret putting yourself in a position to lose this big.

All of us has been in this position. Those feelings are real, but you will get over them eventually. (Editor's Note: or in worse cases, you'll get burned for life and spend the rest of your days complaining about Malaysian politics on Twitter)

But in the context of trading, if you really want to be good enough to make life-changing amounts of money, you have to live by this maxim : don't waste time feeling sorry for yourself.

Take it from a group of moderately successful finance blogger-traders who know by experience. We've turned a RM10,000 loss into RM20,000 before.

The example above is a real-life example: it's us. It was quite easy to achieve: all we had to do was continue being in denial.

It took us a while to come to a new way of thinking. Then it took a while longer to apply that in our trading execution. We are still learning, and we always will be.

This also describes a two-day cycle after eating really spicy nasi lemak, 
 and the subsequent bathroom odyssey. Source.

We don't have overblown or complicated theories to offer here. Our insight is very simplistic:

You must detach your emotion from trading at all times. 
To do this, always plan your trades.

We are not robots, but save the feelings for later. 
When you're in trouble, take action first. 

It's quite simple lah - when your apartment is burning, do you sit around for 20 minutes moping and feeling sorry for yourself? Absolutely bloody not, right? You'd jump out of the window and break both legs if it saves your life.
So why would it be any different in trading? If you think the stakes are lower, then we wish you all the best in losing money for the rest of your trading days.

Remember : action before emotion. Plan to act when you need to save yourself.

Let's return to the potential options mentioned earlier. In each scenario, we'll show how they can turn from emotionally driven actions into intellectually driven ones.

1) Stay patient and wait for the position to turn around.

At first, you may think this is a totally rational thing. Maybe you've spent hours poring over charts and liquidity trends.

Maybe you've found that 9 times out of 10, Stock X ends up rebounding, but only after taking temporary losses of **gulp** 25%.

It definitely sound like the things a ballsy trader would do : "Just ride it out, bro. Take the losses and swallow it like a man".

Don't succumb to the toxic masculinity. Get rid of that thinking first. What you need now, and always, is not (just) guts, but a plan you can follow to the death.

What you want is not to let your losses run wild, but to draw a very clear boundary. It's OK to be patient, but determine an exact point where your patience must run out. Set stop loss points in terms of absolute value, and time.

Absolute value : when losses hit RMxxx , sell. We advocate to set very specific loss limits per trade, in every trade. We try to cap our own losses at 5% of capital invested, and we made sure not to let losses run into high four figures. (Editor's Note : find a level that works for you; these are our own)

Time : If the position does not recover by <Month/Day/Time/>, sell. No dilly dallying, no grandmother excuses. Sell means sell. Your (figurative) house is burning, remember?

What we want to highlight is this : having convictions are good, but there will come a time when you'll have to admit to being wrong. And there's nothing wrong with being wrong. Don't let shame be the enabler that grows your losses.

"Move fast. Break things" ~ Mark Zuckerberg. Source.

2) Trade other stocks like mad to make up for this RM20,000 loss.

You can probably see why this can be a slippery slope. It's actually more of a sheer cliff with a 100-foot drop: the probability of being dead is high.

This is yet another example of showing ballsiness, or throwing caution to the wind. By doing this, you have just committed the following mistakes:

a) Overconfidence in your own abilities

b) No planning in order to achieve a tangible goal

c) Opening yourself to an unlimited loss potential

Well, for (c), it's not really unlimited. You only stand to lose as much as 100% of your invested capital. Do you wanna put yourself in that position?

The solution to trading losses is not more trading. It's more on having the right plan to follow in reaction to different sets of possibilities. Again, this is where your stop losses - time, absolute value, percentage figure - come into play.

3) Get out and just sell the position. Cry. Live another day.

Having learned this lesson the hard way, nowadays we have a simple rule.

Let's say our loss limit was 5%. If it is hit, we automatically start exiting.While the exact, rock solid rule would be to sell the entirety of the position in one go, we allow ourselves to be human for a bit.

So when loss hits 5%, we'd sell off around 40% of the position.

When it hits 5.5%, sell off another 30%

When it hits 5.8%, sell off another 30%. Suddenly we'd realise that we had sold off everything.

Note that the percentage loss limits, and positions sold off, are just examples. You have to determine what works for you.

Just the act of partial selling is much easier to do than committing to sell all in one go. The mindset is different.

If you still had 100% of the position, you'd be tempted to roll the dice, even to take it to lower prices. You risk bigger losses this way.

But by selling of small portions, you're essentially forgiving yourself in real time, little by little. Even if you only decide to sell 10% of the position, you'd feel differently about the other 90%. Try it yourself.

Exiting losses can be painful at first, but it brings clarity later. There is much to look forward to in the future: new opportunities, bigger profits to target. 

Pain, then clarity. If that sounds familiar, it's because by taking losses, you were essentially in a grieving process. But it does get better.

Breathe. Calm down. Stretch. Source.


Big losses, losing streaks that don't seem to end, constant pain. What's the cure?

It is so simple you might not believe it. The solution is :

Get out. Do less. Get small.

Get out means : exit, and take a couple days off. If you had been in a serious losing streak, you're in pain. Mentally and physically. You'd lose your sharp thinking, you'd become superstitious, or you end up making decisions that are unguided by logical thinking.

Boxers don't jump straight into the ring the day after they get their ass kicked. They follow a recovery process.

But getting out was the easy part. The next step is to make good use of that newfound clarity.

A lot of losing streaks end with the trader blowing up the majority of their capital. It's because they do not know how to scale, and when to do less. Overtrading is an easy problem to detect, even though people tend to realise it after they have traded dumb positions 20 times, not during.

What we like to do is create self-imposed filters. We try to detect stupidity during the act being committed.

So we track everything : number of trades, number of stocks, total costs, win-loss ratio, et cetera. At the end of every day, we'd review our trades and look for signs of flawed thinking, or in other words, dumb decisions. Then we reflect and we try to improve the next day. 

Doing less means risking less capital. Instead of trading 1000 lots, try 200 lots. Smaller profits, but smaller potential losses also. If you usually trade once a day, try trading twice a week. Give yourself some time to recharge your batteries. The market will always be there; no need to rush back into it. Don't be an addict, because the market is not a high to chase after.

In time, with a series of smaller but consistent profits, you'd have extricated yourself from a rut. Your mindset is now different. With greater clarity, eventually you'll be ready to get into trading in large sizes again.

We'd rather be wrong early and often, rather than later when we'd have lost everything. It's not just in trading; life is a lot like this too.

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