MONEY
Do You Have a Hard Exit Condition in Your Trading?
Is there a point where you immediately close all of your positions because something is wrong? If you don’t have one — you should.
We made a lot of money, only to lose it all eventually. Be better. Be smarter. Make your money and KEEP IT!
Reading the Market Wizards series by Jack D. Schwager a few years back, I noticed some of the best traders and investors in the world have a tactic I did not employ at the time.
A hard exit on the whole portfolio if things start looking dangerous.
When I started trading, I didn’t have this Red Alert number or percentage for closing my open positions. That was a huge mistake. I have built my portfolio up to a decent amount, but then I let the bear market rob me of everything. My friends, who began trading and investing in cryptocurrencies roughly simultaneously, went through the same ordeal. We made a lot of money, only to lose it all eventually. Be better. Be smarter. Make your money and KEEP IT!
Whatever the amount of your trading or investing portfolio, you have to manage risk somehow. I suggest you manage risk on every individual trade or investment you make. That doesn’t have to mean a stop loss. It can be anything. Scrolling through my writing, you’ll see countless ideas and examples of good and poor risk management.
Risk management is important because:
- You must account for the possibility that you are wrong and will lose or take a loss on any investment or trade.
- You have to ensure your survival in the market through the inevitable surprises, black swan events, and downturns.
- There is a threshold of losses that are difficult, if not impossible, to recover from. Losing 90% of your whole portfolio would be one such extreme example.
The hard exit trigger — no excuses, close all positions!
While you may employ different risk management strategies and techniques on any one investment or trade, you should also have a RED ALERT for your whole portfolio or trading account if:
- You suddenly lose more than XY % of your account or portfolio. It can also be a fixed amount of money. Your choice.
- You realize that your losses have exceeded the safety parameters you determined upfront.
- You become aware that something is wrong in your investment or trading thesis, and you’re massively on the wrong side of the market.
I advise keeping your losses as small as possible, but some of you are more open to taking on more significant risks. I get it. I’ve risked everything multiple times, and I have also lost almost everything on numerous occasions. From my experience, unfortunately, it wasn’t worth it.
Here are some facts to consider.
If you lost or are currently still in a position that is down a lot of money (say 30% or more of your whole trading portfolio, not individual investment or trade):
- You are holding on to the trade or investment on an emotional basis, not rational.
You can’t bring yourself to cut the losers because the pain of realizing such a significant loss is simply too much for you to bear. We all have this threshold (most anyway). Figure it out, and make sure you never allow yourself to get there! - Whatever you thought was going to happen clearly isn’t happening.
You’re wrong about your investment or trading thesis. You should get out and recess. Your ego isn’t allowing you to admit your mistake, so you’re going down with the ship. - You are arguing with the market.
If you’re down 50% on your whole account, you’re the one that is wrong, not the market. You can’t fight the tide.
How to protect yourself from significant losses on your whole portfolio?
By implementing a hard exit on everything if one of the three conditions are met:
- Your portfolio is down more than XY%.
Example: 10%. - Your portfolio is down a certain XY amount.
Example: 10,000 USD. - A large portion of your trades or investments are going in the wrong direction, and you are clearly on the wrong side of the market.
Example: 10 consecutive losers.
If and when that happens — you close all of your open positions and go into cash!
I would suggest you think hard about these three factors:
- How much of a loss can I mentally handle and still cut my losers ruthlessly?
There is an amount that is too much for you and me, and we will be unable to close the trade and take that loss. After that amount, we are compromised. We’re no longer rational traders or investors but emotional wrecks who hope and pray that the market will save us. Never let it get that far! - How much of a % loss are you willing to accept without pulling the plug?
What is the acceptable % downturn on your whole portfolio? 5%, 10%, 50%? You have to figure this out yourself but keep in mind that the bigger the loss, the harder it will be to make it back. - What is the clear indication that you are not seeing something, that you are wrong, and the market is punishing you for it?
That could be a set of 10 or 20 consecutive losses on your trading. It could be a steep fall in your profitability. Figure it out. Make it tangible.
RED ALERT HARD EXIT strategy
Set up a strategy, a set of rules, that you will implement and follow no matter how you feel about it! There is no point in having rules if you won’t follow them.
If your whole portfolio is down, let’s say, 20%, which is your HARD EXIT predefined percentage, you immediately CLOSE ALL YOUR OPEN POSITIONS: winners and losers, one or a hundred. Close, sell everything, and go into cash.
Something is wrong. You’re either compromised or not seeing something in the market you should be seeing. Either way, RED ALERT! Get out!
Then figure out what’s wrong! Take some time off, and try to become objective again. We manage risk to protect ourselves from the risk presented by the market, black swan events, and third-party problems, but most importantly, from ourselves!
Implement a HARD EXIT strategy in your trading.
That way, you will be spared the pain of losing all your money, having to live through painful bear markets with your funds tied in underwater positions, and will be able to keep a clear head through whatever turmoil the market can provide.
Surprises will come. Whether you survive them or not will depend on luck or risk management.
- How lucky are you feeling?
- What of those two factors can you control?
So, where is your line in the sand?
Whatever it is, you have to know it, and when the time comes, pull the plug and get the hell out! Live to trade another day, friends.
Good luck out there.
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