FINANCE

How I Lost 20% of My Net Worth — My First Trading Loss

Learn from my trading mistakes and become a better trader. How not to buy the dip in trading? Why managing risk is so important in trading?

My first significant trading loss was a clear indicator that I was doing something wrong. There was an error in my trading strategy and trading mentality. One I was yet to identify and take seriously.

My first trading strategy — specialized knife catching

The thing I now advise everyone against, unless you know what you’re doing. Here is the basic premise:

• You first identified significant support levels on the chart. Then you predicted a probable maximum drop below the level in one short burst (big red candles indicating panic, not slow bleeds).
• You set alerts all over the charts and waited for the opportunity to buy the blood when everybody was losing their heads.
• When the market was panic dropping, you layered buy orders lower and lower down the price range.
• The lower the price, the more you bought, lowering your average entry along the way.
• The idea was that when markets panic, they are irrational and will go to extremes, but since that was an overreaction, they will inevitably return to test the lost support level at some point soon.
• When you filled your order and the price bounced, you would begin selling your position below previous support level, which has now presumably turned into resistance.

It was a fantastic system for a beginner trader to play in the market, and it seemed like you almost couldn’t lose. Everything suddenly made sense when watching the charts. The win rate was absurd, something near 95%. It was indeed easy money.

But it had one fatal flaw — there was no way to protect yourself

The deeper the price fell, the more you were buying, and the risk kept getting bigger the more you were wrong on the trade.

The only way to manage risk on these trades was by limiting your exposure, which also meant limiting your profits. So, the silent rule was that this would be played with small money. Every layered buy a tiny part of your predetermined position for this trade. And honestly, if you had adhered to this simple rule, you’d be okay.

Greed consumes us all in this game

We’re all bloody under the skin, and when we see and experience a trading strategy that doesn’t seem to lose we tend to play it more loosely with risk management.

In all honesty, I haven’t even heard that term then. All I saw was profits, profits, and more profits. I played it carefully the first couple of times, only trading with 10, 20, or 30% of my portfolio, like a good boy.

But soon, I was completely overtaken by greed and carelessness, and I went all in (100%) on every trade!

Big risk, small reward

The other caveat of this strategy was that you were making a relatively small percentage in profit on every trade while risking everything. The expected profit was between 5% and 20% at best. But you were always risking 100% if something went wrong.

Be ruthless with cuting positions

There was one other thing that made this suicidal trading strategy work, and that was the ability of the trader to take profits extremely quickly, react with perfect discipline in real time, and manually close all positions at the first sign of danger.

The awareness, discipline, and emotional distance required to do this lie beyond what most inexperienced new traders can handle. As a newby enthusiast, my fate was doomed the second I made my first paycheck’s worth in profits.

My first significant loss was actually in XRP in 2017

I bought the panic dip like always and went in heavy. XRP, while being an absolute turd of a project, was exemplary reliable in trading this strategy. It doesn’t hurt having a billionaire and his company having your back.

The price dropped like a stone, and all my buy orders were filled effortlessly. But then the price continued to dip lower and lower and lower.

I had lost over 20% of everything I had

I finally caved in and sold. That was two month’s worth of profits lost on one trade. I lost the equivalent of about three monthly paychecks from a job I had just left to become a full time trader. My first significant loss.

The market reversed a month later, returning perfectly to my target, and I felt like an idiot for having sold. Such events only reinforced the idea that this trading strategy was a God send and simply couldn’t miss.

The only variable was time. If you had the patience to give it enough time, all would be well, and you would be counting your money sooner or later. That cemented my false sense of security and confidence.

In the following months, I would be piling onto all panic dips I could find that fit my criteria. I tripled my whole portfolio in about six months. Coincidentally, my portfolio top was also the 2017 bull market top.

Picking up bad habits and learning all the wrong lessons in a forgiving bull market while making you feel like a genius tends to bite you in the ass when the bears come out to play.

The bold all-in trading approach worked insanely well until I stepped on a mine. And then another one and another one, which I rode to absolute oblivion of the coin itself and my portfolio! But more on that one in the next post.

What lessons can we take from this episode?

• Never catch knives with large percentages of your portfolio.
• Don’t keep buying on the way down, and never exceed your predetermined position size.
• Always protect your money, and always manage risk in some way or another.
• Add only to winners, never to losers.
• Never let your emotions guide your trading. If you feel FOMO or FUD, step away and reevaluate.
• Always follow your trading rules to the letter! Never break them. They’re there to protect you from yourself.
• Anything can happen in the market, no matter how unlikely.
• There is no such thing as a perfect, flawless trading strategy that always works.
• Pick trades with a favorable risk-to-reward ratio.

My motto for you, dear readers, has always been:

Don’t be like me! Learn from my mistakes, and save yourselves some pain.

Oh, and learn risk management! Don’t give all your hard-earned money back to Mr. Market.

Related posts on risk management in trading:

1. Introduction to Risk in Trading and Investing in Cryptocurrency Markets
2. Trading Cryptocurrencies is Dangerous — How To Protect Yourself and Your Money
3. What Are the Greatest Risks in Trading Coming From the Market Itself?
4. How Well Do You Know Your Trading Tools? — Manage Risk of Cryptocurrency Exchanges
5. The Biggest Trading Mistakes: Why You Are the Greatest Danger to Yourself
6. Is the Market Acting Strange? — When in Doubt, Get the Hell Out!
7. Manage Risk on Every Trade — No Exceptions!
8. Where to Place Your Stop-Loss Order?
9. Alternative Risk Management Strategies to Using Hard Stops on Charts
10. Don’t Like Using a Stop Loss? Here’s a Quick Guide to Hedging