Thursday, November 09, 2017

My biggest loss in 4 years

So, let's not beat around the bush. This morning I suffered my largest loss on a single trade since the summer of 2013.

As of yesterday's close, the position was +1.13R in profit. Within a few seconds of the market open, I was stopped out for a -1.95R loss.

S*@t happens. Let's look at the chart:

When trading stocks, the ever-present danger to a trader is that of a price gap. If price gaps in your favour, all well and good. If it goes against you, however, you can potentially end up suffering a complete erosion of open profits, bigger losses than you anticipated, or more than you initially risked on the trade.

These types of price moves can result from unexpected news (such as a takeover approach while holding a short position, or a sudden profit warning when holding a long position). These can also be the result of an earnings release or trading update. While the candle on the chart does not show a gap, trust me, it was there!

In this particular case, the gap was caused by the reaction to a trading update.

Trading or earnings updates are a 'known unknown'. We know when they are due to be released. How you choose to deal with them will depend on your chosen timeframe and parameters, as well as your attitude to risk.

To a long-term trader or investor, they may not be a consideration. To a shorter-term trader, then you need to think a bit harder about how to treat them.

There is always a danger of price gap as a result of the buying and selling reaction to an earnings release.

Some people I know simply close the whole position before earnings, some hold come what may, and others take partial profits and run the rest.

I have clearly defined rules about how to deal with earnings, as well as a rule which prevents me initiating positions too close to an earnings release, but even those did not stop me from suffering this loss.

Had the entry signal triggered a day later, then I wouldn't have taken the trade. I've also closed trades the day before earnings if I am sitting on a very small profit (less than +0.5R). However, ifs, buts and maybes are no good in this game - it happened, but the overall damage to equity was relatively minor.

Emotionally, it was a bit of a jolt seeing price open up well down, but it did not create any feelings of anger, or trying to blame anyone else. It was more like: "Oh, that's interesting. Right, it's happened - I can't do anything about it. Let's move on...".*

The funny thing was I skimmed through the update release before the markets opened, and (to me) it actually read quite positive. But you can never tell you how other market participants will react to the past performance or forward guidance stated in such a release.

I talked about the previous 'big' loss from 2013 here. And that itself was the biggest loss taken in more than 3 years. So, given the returns generated over that period of time, to have suffered only such two losses as big as that (but still below -2R), with a handful of other trades where losses exceeded -1R, I can live with that.

And I've lost more than that on days like today, where I am seeing a sea of red across my screens.

Onwards and upwards...

*this is the edited version, free of any additional Anglo-Saxon phrases.


  1. Bad luck. Gaps can be an emotional killer, I just hate them. I hope you recover (emotionally and financially soon).

    1. Hi Jure. As Tiger Woods would say "It is what it is". Gaps are potentially always just around the corner - you cannot predict future buying and selling. No problems emotionally and money will be made back in due course. Hope everything is well with you.

  2. How could that happen? Thought you use guaranteed stops only

  3. Hi Anonymous. I have not used guaranteed stops for a number of years. Once the level of equity (and consequently position size) goes over a certain level it becomes very difficult, if not possible, to use them on stocks. They want you to split your positions down into smaller tranches, the guaranteed stop cannot be placed at the same level on each tranche,and they also have to be placed a certain distance apart on each tranche. This makes trying to keep a track of your overall risk a nightmare. It has also been noticable in recent years that there are more and more stocks where they are not offered as an option.