Today I thought it would be a good idea to talk about the bad losses that we can experience whilst trading or dabbling in the markets. I think everyone who has traded the markets for long enough has probably experienced a loss that was painful, maybe even so painful that it started to affect their wellbeing. It isn’t a topic that is the most comfortable thing to talk about but experiencing bad losses can become really serious for traders. Especially traders who are a bit naïve and new to the markets, like I myself was once upon a time.
The first ever stock I brought was Afterpay. The Australian buy now pay later company, I put $400 into the stock and 1 hour later I was down 30%, that $400 was literally $300 in less than an hour! I couldn’t believe what had happened, I thought it must have been an error with the trading platform or some sort of glitch, but it definitely wasn’t. That super quick drop didn’t affect me mentally, but it was still quite a shock and it was an important lesson that made me realise how quickly shit can hit the fan when you are invested in the markets.
Fast forward a year and it’s February 2020, at the time a friend of mine was telling me that lower priced stocks (stocks trading at less than a dollar, otherwise known as “penny stocks”) tend to appreciate more than regular blue-chip stocks and I should try trading penny stocks for profit. I did indeed invest into a few penny stocks in a reckless fashion without much thought. My best reason for buying them was that motley fool were suggesting them as buys at the time (LOL), no technical or fundamental reasoning whatsoever. Believe it or not I surprisingly made $10,000 in 4 weeks, suddenly I was in dreamland! I thought I was going to be able quit my job within a couple of months and soon enough I would have my own penthouse and a Porsche 911 to go with it. Now this is happening just before the February/March 2020 covid crash, I did actually lock in that $10,000 profit before the covid crash, but I started to think I was a lot smarter than what I was (big trouble). Being new to the markets I wasn’t sure how to trade during a crash like the covid one. As the stock market continued to plummet, I eventually discovered I could short or bet against the stock market by buying a bear ETF (an ETF that goes up if the market goes down). I think we can all remember that the onset of covid was a really hysterical moment in modern history. And so there I was watching the markets plummet while everything around the world was shutting down, I thought it was certain that the stock market would continue to fall for a good while. So, me being the “genius” that I was I decided to put a stupid amount of money into a bear ETF, with NO stop loss… Yep you read that right NO stop loss. At that point I’m thinking it’s a certainty, it’s a global pandemic, everything is shutting down, the world is on the brink! The market can only continue to go down, right? Nope. Only a couple of days later I’m sitting on a $5,000 loss… Half of my initial earnings gone in a flash. It took me 4 weeks to patiently realise the original $10,000 profit that I made and then I lose $5,000 in 2 short days. I quickly realised I wasn’t so smart.
You can be down a lot of money on your investments but if you know that you’re invested for the long-term and have conviction for what your invested in seeing “-$5000” on your share holdings is no big deal. It’s when you lose (big) money so quickly and realising you have made a real stupid and impulsive decision, that is when a loss can really hurt. It’s not necessarily how much you lose but it’s how you lose the money that can make it really hurt. That’s what happened to me in early April 2020 when the markets made a sharp rebound and I had to cut my losses before I lost all my previous earnings. It was basically the reverse situation of the blowoff top in a bull market (think bitcoin bubbles in 2017 and 2021). It may sound a bit silly or melodramatic but it was actually a really dark moment in my life. Realising a loss like that so suddenly can be really scary, especially if you’re new to the markets and very naïve like I was. The loss shook me like a bad car accident, I couldn’t even bear to think about putting $500 into the stock market for the next 18-months. Even though I knew the loss that I made was an impulsive error at the height of the covid hysteria. I just couldn’t bring myself to put anything into the market after that. That devastating loss set me back a long time and what I went through is an example of how brutal the markets can be to traders who are not emotional stable. “The market would target me like a heat-seeking missile, and find any emotional frailties or weaknesses I had”. That’s a quote from my favourite trading book “The Zen Trader” written by Peter Castle and it’s so true. If you are out of touch with your emotions and running high on fear, greed, and desire the market will drop you like prime Muhammad Ali. It is really that simple.
So, what are the takeaways from this painful story? Well below is a list of the lessons that I learnt from the painful loss I experienced in early 2020:
- Have a plan; if you are trading or investing make sure you have a solid technical or fundamental reason for making a trade/investment that you could explain to someone else.
- Only risk what you are willing to lose (workout your stoploss and the amount that you could lose if you get stopped out)
- Be extra careful or step aside during big emotionally fuelled market events like crypto bull runs, market crashes etc.
- Read good trading books that cover the topic of emotions like the “The Zen Trader” by Peter Castle. That is the one book I wish I read before I started trading.
Remember, if you are a trader the market will target you like a heat-seeking missile and find any emotional weaknesses that you may have. There is no mercy when you are in the market, so be sure to take good care.
Till next time.
Disclaimer: The analysis and commentary found on this website is for educational and entertainment purposes only and does not constitute financial advice. Always Do Your Own Research and assess risk independently before making any trading or investment decision.