I do not see a difference between a loss of 20% in one day or a loss of 20% in 6 months. It is a drawdown, in money terms. It is what to do after, which, for me is more interesting than to anticipate this rare event. Of course, I do not use margin, which is a way to avoid the big catastrophe. Being short, as some people suggested could be an expensive insurance policy (end of the 1990's).
Hello: The psychological impact of an immediate drawdown is much different than a slow bleed. So much so, that it is generally the case (for retail traders) that once you suffer a significant drawdown, you rarely come back. This is attributed to the fact that retail traders generally do not have an edge. Therefore they have no expectation of when they can replace money lost this way. In contrast, professionals are often able to replace money lost in one time events, because they have an edge and can forecast with some accuracy when they will get the funds back. Certainly there are exceptions. We all know of Neidermeyer and the folks at LTCM. I am speaking of the bulk of professionals who work, live and "orbit" around those flaming idiots. Steve
This is why I believe that psychology is "the" edge. Mental toughness is so important. It has to be developed, nurtured all the time, in any aspect of life.
Urban myth. In my opinion you either have a testable viable edge or you do not. A psychologically healthy person would not trade without it for the same reason you wouldn't repeatedly hit yourself on the head with a hammer. Steve
I think ACM and Steve are both right. A viable and testable edge is very important. I also think a good psychological makeup that will allow you to continually trade that edge without detracting from it when you are losing is important too. I know in my early days I used to revenge trade and my revenge trades at that time did not have an edge.
You are going to be looking in vain for an intraday black swan. Without checking and aside from pre-market gaps, so far as I am aware from my records there have only been, in the last 3 years, a couple or so days when the market (Dow) moved well over 200 points. On 17 March 2003 the market started with a 35 point drop followed by a circa 350 point rise bottom to top. In the last 3 years it is the only real biggy.
I use way out of the money puts (futures option puts) to hedge overnight longs, but I guess they could also hedge intraday crashes. I mean way out of the money, for example now I'm holding ES 1180 puts. Not a perfect hedge...but better than a stick in the eye....