Wednesday, June 24, 2009

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How to Cope with an Unexpected Massive Loss And Emerge Again as Professional Stock Trader?

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Every stock trader must have faced an unexpected massive loss at one time or another in his/her trading. When that happens to you, your heart will break down. A massive sudden loss pierces a deep hole in your heart. Especially for the effect the loss has in terms of money, it creates a unique feeling that can only be experienced than described. Often this results in a trader either packing back to their original profession or going beyond to explore their opportunity to emerge again as professional stock traders.

Every Trader Gets Their Chance to Lose Big

I had such an experience very early in my trading. Though that first time big loss is not really big compared to my present standards, it was a big deal at that time. It had a huge impact on the state of my mind at that time. Though I felt I did a bad thing by booking that loss at that time, later I had realized that in fact had helped me learn to cope with such unexpected losses which came to me from time to time.

The case of a sudden unexpected loss is not something new in the stock trading. It happens for any trader. It can happen at any time, in any cycle, in any year. Many traders have gone broke in the history just because of such sudden turn-arounds. Sometimes these events, in fact, triggered the longest bear markets like the one we are facing now and the one during great depression of the 1930s.

Why Massive Loss is a Problem?

What we should realize from such times is that it is not the end of the game. It in fact is a part of the multifarious scenarios that stock market presents to its participants from time to time. Much like a massive loss, the stock market also gives, sometimes, a massive run away profit. But we tend to forget such things and remember only massive loss situations.

The other reason why people get caught up with this sudden loss and completely lose their mind for it, is that they miss the opportunity of run away of profit when the market gives. Stock market plays a fair game with its participants though it does not behave in certain patterns that are obvious to the ordinary. But it is the participants’ failure to not fully capture the profit side but end up drowning on the losing side.

The reason for not taking complete advantage of the profit side is because of the temptation to take profits early. People fail to call the top at the right time. You need to capture top at exactly the peak point. You can catch when the next top is lower than the all time top. That definitely signals a reversal atleast in the medium term time frame. Meanwhile you could go for next good bet.

It is Not Always Unexpected

It is not only missing the profit advantage that burns the portfolio of the stock trader, but also not taking precautions to cut losses with stop loss limits. Remember every big loss starts with a small loss that you can easily cut. You may say that nothing can be done if it is a sudden loss.. But even in the last year’s violent movements of Sensex on Jan 22 and 23, the markets did not really make unexpected sudden jerks. They were steadily and everyday consecutively falling since reaching the topmost point of 21.4k and next top most point after that at 20.7k.

The consecutive falls and the second lower top formation were enough to convince any trader to reduce his/her exposure as much as possible. And that is what I had precisely done. Nevertheless for a new trader who had never experienced a massive loss like I did early in my own trading, it would be definitely hard to take this action. It is easy to see why they would end up in a massive loss.

For this reason, and also for a reason that even after learning all the trading principle there comes a time when you end up making a massive loss for whatever cause, it is important to learn to cope with such a scenario.

Your Trading Does Not End with This

A massive loss is not the end of the world. Most of the times it is perceived to be so. That is why we need to first prepare ourselves not to think like that. Remember nothing happens in your stock trading without giving you an opportunity to learn a lesson. Here too there is a strong and important lesson to learn.

Though the massive loss may come unexpectedly, from my experience I have always seen that it immediately presents an amazing and easy opportunity to make a massive gain in the next few days. Sometimes the sudden unexpected downside of a stock does not continue on the next day when I had placed stop loss order to close the position if it were to continue.

Better Sides of a Massive Loss

Whether it is last year January on Dalal Street or the year 1929 on Wall Street, there were immediate magnificent rallies that created history in the next few days. And most importantly these were easy to capture because the whole market was sympathetic of losers. The buyers are coming in just to show their sympathy without a second thought. That presented an opportunity of a life time for a trader who can trade at the edge. This is when you should actually leverage because the rally appears too certain.

It is also a time when you get to know who are the people that really give support to you during bad times. You will find your true friends who try to understand and feel your pain. You will also get to know people who start talking low about you because you made a “loss”. There will also be people who gossip behind you and possibly you can get to know them as well.

Once you go through such bad times, you will see that you will build good virtues like humility and shatter egoism. You will also have the choice to become strong enough to prepare for such a catastrophe if it were to repeat again. This time you will plan alternate support systems so that you will not go broke overnight. You will realize the importance of helping friends, relatives etc. so that they come to help during these times.

The turn of the century trader Jesse Livermore had gone broke several times and gained riches again and again because there were people who trusted his ability to make gains from the market. Can you think of such a luxury in your life too?

Faith can Save You From a Massive Loss

One last thing that you should note when coping with massive loss is faith. Faith is a basic fact of our life. We cannot live even for a moment without it. Catastrophes, natural calamities or disasters can happen at any time and there is no way we can predict them. No matter how much our science advances, we still feel like a baby in front of the destructive power of nature.

The room you live in may collapse. There can be earthquake in the next moment. If we think of these things everyday, then how can we continue our daily lives? But despite knowing all these things we still continue our life without fear. This is all because of faith. A faith that these do not happen now. They may happen sometime but we don’t know when. And there is no guarantee that they happen or do not happen. But we maintain our faith that these are things that rarely happen and nothing to worry now.

Same faith should be applied in your situation too. When you encounter a sudden massive loss, do not lose hope. Have faith that you can start again. May be this will not happen again to you which means that the path from here is golden.

Expand Your Horizon to See a New Future

Many people, who end up with such massive loss in their first few trades only, really lose faith in the markets. I have practically seen many such people in my life. They go back to their life never to come back again. Partly I feel that it is their unfortunate situation to enter at the wrong time. But partly I also feel that it is their mistake not to try to explore if this is everyday scene or if there is a future beyond this.

Losing big in the beginning when you bet small is much better than losing big later on in the game, when your betting size has increased. Come out of the fear of a big loss and realize that there can be many like you. Treat this as an opportunity to know yourself better and your relationships. Prepare with alternative ways to tackle such a situation in the future. When you do this, you will definitely emerge again as a professional stock trader!

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