Don't bet the farm | stockbee

5/10/2011

Don't bet the farm


As you have noticed lot of traders and investors have suffered huge losses in silver. For some it has ended their trading career. Wall Street Journal had a big story about this recently

Silver-Mad Small Investors Fueled an Epic Rise and Fall

When silver prices hit a three-decade high last week, David Zornetsky decided to do some buying. Searching for a job, the 31-year old in Beacon, N.Y., hoped to use gains from silver to finance a move to New York City and to pay down student loans. "I had been hearing that silver could go up to $150 an ounce this year," says Mr. Zornetsky.
Instead, silver has suffered its worst one-week drubbing since 1980, when an infamous alleged attempt by Texas's Hunt brothers to corner the silver market came undone. This week's brutal tumble sent silver-futures prices down to $35.28 an ounce from nearly $50 in just five trading days, and has left Wall Street pros and individual investors dazed, some dealing with sudden losses.
"I don't understand," says Mr. Zornetsky, whose silver investment fell about 25%. "Silver is supposed to do very well this year."
Behind silver's historic collapse is a market that came loose of its moorings, fueled by speculative traders, many of them small investors who may have jumped in at just the wrong moment.


As I have said constantly the most important thing you must learn in the market is to cut your losses short and never ever take too big a loss.
Betting the farm on sure thing and not cutting losses are the reason why traders end up with big losses. Traders hold on to losers, hoping they will bounce back. They enter a extended setup.
They consume too much financial media and start believing in stories. They start trading stories instead of setups.
 Sometime back there was a member who was fixated on uranium stocks. He used to send me pages and pages of research on why uranium stocks present best opportunity. I told him repeatedly, that trade setups not these kind of macro themes. After the Japanese disaster the member just vanished having taken catastrophic losses.
Everyday I look at this table:
image
Stay in the game. Keep drawdowns low. If you preserve your stake then you can play the game. Else you are out of game. If you stay in the game long enough you make lots of money.
I have been actively blogging for last 5 years or so and talked to lot of traders in last five years. Very few have survived beyond few years. The reason is pretty clear large drawdowns. One day they just disappear.
Don't let that happen to you. It is ok if you don't make money for few months, but if you lose your stake , you are out of game very quickly....

3 comments:

saf said...

Hi Pradeep

I have a little trading story to tell about my experience.

My trading journey began sometime in 2009 when I got interested in the markets.

I open up a managed forex account with fxcm but they later closed that service.

Then I started to learn about trading from Investopedia and few other places and then thought I was ready to trade and win. I put in $10k which was reduced to $5k or below (I do not remember correctly) basically trying to buy stocks when they reached their climax (swing high) or buying when they reached their swing low. Technically I had NO IDEA what I was doing.

Then I gave up for a few weeks and started searching for "short cuts" meaning all these signal providers. Found tradingmarkets.com and nearly bought all their subscriptions. Wasted atleast $10k on it (I was part of their Chairmans club) which basically means if you pay $2k per year you can get holy grail strategies.

Put in another $10k into the account and then lost some and won some but mostly lost because I DID NOT learn what swing trading was all about until my account nearly hit another blow.

I could afford all this because of the business but my interest always remained for learning.

Pulled the money out and really started learning the game and especially trading without indicators (had to take an expensive course from mike bagdaddy). It opened my eyes to trading and then spent hours and hours learning.

Some how found your website and read every thing on it. I scan 500 to 1000 charts every day now looking for range breakouts or momentum and maintaining market monitor data.

My paper trading results have increased and I am ready to get back into trading full time. Things I have learnt

1. Do NOT depend upon others to give you signals. Learn the method yourself. You cannot trade in your past time. Its a full time job requires hours of work to build rhythm which then becomes your second nature and you only trade setups IF they build up.

2. There are no short cuts. To be the best in this game you have to put continuous effort into it AND you can only do it IF you enjoy doing it. You cannot excel at it if you take it as JOB.

3. Cut your losses. Its always a good idea to cut your losses and be wrong to win another day then to keep going through the mental agony of being wrong.

Thank you and I will keep reading your blog posts.

Safvan.

Pradeep Bonde said...

Good learning strategy.

Papir said...

SLV looks horrible here, but if you think about it right now it is where it was 1.5 months ago. This is a potential long term top, but I suspect it will give a signal to get back in 1-3 months from now because there is a commodity bull market right now.

Generally, I've noticed that momentum stocks break and take out 1-2 months profit in a week or two when they top out. The right move in this situation would be to wait and see in case of SLV.

Personally, I would skip trading commodities altogether and focus on stocks whether they are commodity stocks or not. And high momentum commodity stocks should outperform commodities themselves.