Transcription
Trading Risk: More Than Just Losses!
Risk in trading. Do you really know it? So many people talk about risk, and sometimes there is a misconception about risk. Risk is considered just to limit losses, which is fine of course, but it's not the only way to see it. Or at least losses have to be considered at the different points of view.
And one of the most dangerous approaches is the classical mindset of - Well, that won't happen. - That kind of worst-case scenario which you don't consider, because you think it's so far away from possibility that you don't include it in the possible events that might happen.
Major Market Meltdowns
And this is dangerous because I don't say it the right way, but bad things happen. Bad things happen, just go back in mind. Go back in your memories and go back, for example, to 2008. 2008, fall of 2008. There was a fall in the fall. Markets went down, the subprime crisis, and it didn't stop. I mean, we thought, we because I was there, trading, we thought there should be an end: there wasn't. It seemed there wasn't. It was continuing to go down and down and down. So that was an event which was really not possible to be considered before, despite of what happened before in the bear market of 2001, 2002.
The Porsche-Volkswagen issue
That was different, unexpected, unexpected in that proportion. But in the same period, there was another event, I think it was in the same period, completely different: the Volkswagen Porsche story in the German market. Explosion up to never considered levels of price. Of course, it seems to be a positive thing because market went up crazy, the title itself and the index, and therefore the future, Dax future in that case.
But we are traders. We trade long, we trade short. So, if you were short, what would have happened? You have to consider that. That was unexpected, but it happened. It was not even in the mind of anybody. Nobody could even imagine such an event. But it happened, it took place. So you have to be prepared for that.
The 2015 Chinese Market Crash
Then let's go on. 2015, August. This was the Chinese crisis, things like that, okay. That was a shock. It was about the end of August. I was there. It was in European morning, so it was in the night session of the States. The mini SP fell down. It was stopped, halted twice, if I remember well. You know what? I was shorting options, naked options, put. I was protecting the position selling futures in that case.
What happened? I was ready to sell, I remember that because I remember the number. I was ready to sell futures at 18,30. Exactly, that was the level I was planning my entry. And market was halted at 18,31. So, I imagined, well, when it starts again, it will open and get down because it did that already before. I will be entering with a slippage, and then I don't know what will come next. I didn't know once I entered the future, where should I stop the future if it bounces back.
I was really in panic. I must admit it. I was lucky. If you check back the prices with no back adjustment, of course, you will see that from that 18,31, markets only went up. So, I was extremely lucky. But I don't forget that because I made money that day, but only out of luck. And the worst could have happened. And in that case, I didn't consider it because I said, okay, I'm selling options, but I'm protecting with futures. It's not always that simple. And when markets go crazy, options are untreatable, but also futures become untreatable. You really risk accumulating huge slippage entering the markets. It's nearly impossible when volatility is at its high.
Forward again, 2018, February. You remember, sixth of February, I think, markets went crazy. I don't know how to call it. But we saw things that we never seen before, but they happened. And I know that many people had serious trouble in that occasion. I also had trouble. You have seen probably in a contribution here on YouTube about the Swiss franc happenings when they removed the cap at 120, if I remember well, Euro-Franc. I was on Franc against Singapore dollar.
I had trouble because the broker recalculated my exit, my stop loss exit, and I woke up with 100K low account. Then after two years, I got the money back, but it was a problem, and I didn't expect that. So it was a risk. It happened, I didn't expect it. I couldn't imagine that it happened.
How the Coronavirus Shook the Markets
Then forward again, just let's go to the coronavirus crisis. You know what happened in the market? I mean, you can see it in the chart. It was crazy. If you were wrong in the markets during that descent, I'm sure you would have serious trouble. Nobody could imagine such an impact.
We didn't know when it could end, but it happened. And many other, many other occasions, and many others are maybe there to come. So, we cannot get rid of these cases because they will still be there, when they happen. What we can do is never to over-expose in the markets. Because, in that case, if we are properly sized in our positions, we might suffer a loss, of course, but that loss will not kill us as traders. Because even though it will never be pleasant, we will still have enough money to go on and to reconstruct our business.
While if we are eager and we overexpose ourselves just out of confidence, then we might find serious trouble if one of these things happen. This is unfortunately a misconception of risk because these rare events do happen and we have to be ready. Ready not to fight them, against them, but at least to absorb them. Then there are even other kinds of risk.
Hidden Dangers of Brokers and Crypto Exchanges
One is broker risk, I mean, you have your money at a broker, and if the broker goes nuts, if they go bankruptcy, you lose your money. It happened to me once. It happened recently also in other environments such as cryptocurrencies, you know FTX, and even more, the Terra Luna story. I don't want to go into details because maybe you are not familiar with it. But just to let you know, Terra was a perfect environment where you were making money with apparently nearly no risk, because you were investing in these pools and you had a percentage coming out, an interesting return, and there seemed to be no risk. The risk was in the system, in the environment itself. And the environment collapsed, and having collapsed, people who were there lost mostly all their money. Some people were able to quit limiting the losses, others lost mostly everything they had there. And FTX was another example, of course.
Essential Tips for Mastering Risk Management
So, I mean, you cannot know if these things are going to happen, but what you can do is to diversify your exposure at different brokers. Trading is an interesting opportunity, I don't want to frighten you, of course. I'm a trader, first of all. What you have to do is not to put all your eggs in the same basket. I mean, you have to consider that if you open an account at the brokers, you have to put the money you can afford to lose in case of trouble. If you want to be more exposed, better diversify between different brokers.
You will not maximize your potential in terms of money management, but you will minimize the risk of bankruptcy in case one broker has trouble, which we hope not, but it can happen. So, we have to consider that. So these are risks that most often are not considered. And eagerness leads us to expose ourselves too much, either on a position or, as I said, all in at the broker. This is something that we should really avoid because we want to be traders today and we want to be traders even tomorrow.
I didn't tell you about the risks of internet blackout or power shortage, whatever. Also, this could happen, of course. I don't want to be too dramatic, but I want you to be aware of the potential risk of everything and to be maybe pessimistic, which helps in this case because being pessimistic leads you to be conservative and being conservative allows you to be conservative today, but also tomorrow, because we want tomorrow to be there.
That's it, guys. Hope it helps. See you next time. Ciao.
