To prevent major losses, dont hold large positions overnight...if u keep your largest position to < 20% of your account, if your largest position drops 50% overnight, it will "only" be a 10% loss on your account, survivable. Still doesnt prevent you from risk of multiple positions tanking or broad market risk (eg crash scenarios). The other way you can incur major losses is by getting a losing streak, reducing positionsize as you lose can prevent major losses in this case.
If you tell me what are your many ways of making money, I'll probably tell you what you should do not to lose it. But I personally don't understand how would someone know the ways to make money if eventually he's going to lose it all - since this knowledge should not be worth much.
I agree with you that there are many ways to make money. The easiest classification system works on the basis of the time period used (fractal in my parlance) Losing money is fairly narrowly defined and has much to do with a person's orientation to his responsibilities. Winners do not have major losses so they are excluded from consideration and so is the vast spectrum of how they continue to make money. Most people operate in the borderline arena as they make money. This is the mainstream investment community that de facto cannot beat the indexes becuase of the basis of operation of their "experts". They use the party line so to speak. Preventing major losses is a narrow topic and it devolves around the passage of time, primarily it turns out. Creating major losses is a multistep process and there are many convenient sayings and myths that surround this important rarely discussed topic. One of the best ways to delve into this topic is to follow in detail typical losers. In ET they arrive, stay a while and then leave. you can do a "backtest" on a loser by just following the posts that lead up to another blow out. chose a three or more blow out person for gaining the best understanding of the way major losses are generated as a multi step process by these people. Yahoo is another good resourse as well. The best examples are slower fractals and bad rules. Mr. Market had that combination down perfectly and he did three blowouts over time as well. He is a trivial case, however and what you would learn there is brief and almost just a truism. The best examples are from people who are earnest instead of just bungling types. The bottom line is not what you would expect, however. There is a spectrum of losers who use rather neat compensators that do sustain their presence in the market for longer periods between start and finish of their careers. You can skip the deep initial one time loser group as well; they just didn't know what they were doing. Some of the best loser examples do turn around their game and, they as a group, have been fairly clear about it all in books that they have written. These are good reads as preventitive maintenance sorts of lessons. You want to focus on the uncorrigibles. You will find several streams. But the solutions do converge. Since it is around the new year and people are making goals and resolutions, this thread is a killer for the people now here who will be leaving in their own good time after they defeat themsleves. People early on, branch into two classes of learners: the gamblers and the rationalists. Your targets are mostly found in the gambler groups. The gambler group does a process of odds making using maths usually. The rationalists approach making money largely from the vantage point of problem solving and its companion opportunity seeking. Deep losses are the result of repeated gambles using low odds or moreso, unknown odds. they also come from poor solutions in problem solving and finally not recognizing lost opportunities. "I trade with price only" is a great search phrase to start you on your way. There are others. Try "intuition" as a search word as well. The focus I ultimately came to on this trip is the same as the classic environmental problem called "brittle environment" ( I am translating losely from the Spanish) where the ecological cycle is not completed. Failure to complete reasoning cycles is the base cause of deep losses. If an opportunity, problem or gamble is to be dealt with, there is also an inherent requirement to complete the effort in a manner that is predetermined and has efficacy for the participant. Deep or major losses all stem from the breaking of the cycle (or not completing it). You can add the parallel failure of not realizing optimum profits as the mirror imagine to major losses. Oneis a LOSS of TIME and the other is the LOSS of CAPITAL. Capital can be recovered but time cannot. So you are running a thread on the lessor of the two major trading problems It may be difficult to understand that a person must use a complete cycle of activity to make money. This is a truth. People either do not complete the cycle or they only do part of the cycle repeatedly for certain reasons that they make up. This is like a fork in the road. Left is going on to complete the cycle. Right is repeating just the first part of the cycle over and over. By going left you take a small loss, naturally, because you act to terminate a bad bet, an irrational play or recognize there was not real opportunity. Going to the right is called the "restart phenomena". Time has passed the trade is on and the trade is "restarted mentally from a less advantageous position that is actually mistaken for a "better" initial position. This is repeated more and more easily until a rupture occurs based upon another criteria. The other criteria is the criteria ordinarily found toward the end of the completion of a normal cycle of trading. In other words the person finally goes on to complete his normal cycle of trading and quits the trade at long last. He takes a major loss. Obviously you can see that the repeated partial process has one very big screw up. The repeat does not start at the normal beginning of the cycle. It skips the crucial calm rational assessment of all the elements that go into making an entry from the sidelines (the person is not on the sidelines, even, attitudinally speaking) OR FOR SOPHISTICATED MONEY MAKERS THE REVERSAL that collects earned profits (no profits to collect is the situation) and then begins the next earning period. There is a myth that people cannot make money right from the beginning. Losses are something that occur as you learn (what?.. to take losses). Major losses must by this measure be big learning experiences. This is irrational stuff and not part of understanding about major losses. Major losses are a consequence of persons departing from the completion of their operating cycles for making money. The departure involves doing a smaller loop of operating that is from the near beginning of their normal cycle of a trade. This repeated looping can only be broken by finally and tersely recognising to go through to the end of the normal trading cycle and EXIT to the sidelines. A person sits in front of his monitor and observes (and gets an emotional recharge as part of sensing); he does not collect the data and then step away and compare it with his "truths"; instead he jsut goes back to take another look to get ready to compare and maybe decide; but he again does not compare nor since he hasn't compared, he cannot decide yet once again. He loops and loops on the periodicity he trades upon and does not use the four steps of completing a cycle.: monitoring (emotions appear here); analysis; decision making; and acting. I differentiate between acting from intent and not acting from being unoperational by looping over and over. When you see a poster talk about boredom; he is just pissing into the wind about his inempt laziness. when you see guys say they trade on price only, they are just inept as well. When you see posts that say making above the ET 1 point long term average you are hearing from a person who is sloppy in carrying out the repeated four steps of monitoring, analysis, decision making and acting. These are just turds in the punch bowl so to speak who will never step up to the line and go to work to make money. These types are the kind who have 10 years experience repeating what other did only for the first year of trading. A blow out or deep loss or several deep losses is just the symptom of not knowing what is going on to be a trader. You can easily see that deep losses of money are the mirror image of deep loss of time as in exiting too early. There is no difference in sitting and holding a loser and sitting on the sidelines after exiting too early. It like looking at a putt and either putting too far or too short the same distance. You learn to trade by putting the ball in the hole. In trading it is learning to hold and reverse and be in the game all the time. The antidote for money losses and timing screwups is repeating monitoring, analysis, decision making and acting in a timely manner over and over. this is the rational approach to participating and sharing responsibilities with the market. One thing is for sure. If you see an edge and bet on it, you DONOT have a game plan for taking profits from that point on unless it is an arbitrary guess that is NOT related to monitoring, analysis, decision making and timely action. Betting wrong on an edge usually results in a small looping of looking and emoting and looking again and emoting again and looking again and emoting again. Finally an emotion overwelms you to get the hell out to the sidelines as you watch price only or some partial picture of the market.
The main way to lose money is by trying to get rich. Try instead to learn your profession with tuition money, that is, money you can afford to lose. What profession can you learn in less than 2 years and compete at an international level? Silly things like order execution can wipe you out. Failing to confirm data from at least 2 sources. Entering a futures contract when you meant to enter a stock. Entering at the high of the day. Not understanding crashmetrics, a kind of recurring judgment day. It goes on and on. After a year full-time I still learn of new ways to wreck my account. I practiced perfect money management and system discipline 95% of the time; the other 5% put me in the red for the year.
The above is only true if one takes small profits, and attempts to ride out losses. This is a losing strategy: in the end, a few large losses outweigh many small gains.
my observation is that when you learn how to enter a stock/trade properly - you are able to control losses a lot easier. i am only taking trades out of consolidation. so when you are wrong (quite frequently) there are still a lot of of buyers/sellers to bail you out. also, preserving your mental capital helps. i am finding as a result of always taking small losers - i am never reacting or trying to "kill it" because i am in control. it took me a few years to figure out that you can only trade within your comfort level. forcing trades with more shares then you are comfortable with doesnt work (for me). best in 2006
Stocks and Commodities mag has three straightforward and practical articles that set my feet on the right path to avoid losing money. As they say ... "The longer you stay, the longer you can play." I learned from these how to max my 'heat' at a tolerable level while staying well back from the statistical edge that guarantees blowing out....or the "Risk Of Ruin". Mar93 - "Determining Optimal Risk" 94 - "Your Crash Potential" 94 - "Fine Tuning your Money Management System" (Reprints at traders.com) You can Google "Risk of Ruin" and get some nice articles too. If you have the discipline to follow the MM methods...you have a good chance to succeed...even though you will still most likely have to live with wide variances in profits produced each year. I normally run winning selections 40-60%...cutting losers unmercifully (viewed only as a necessary trading expense) keeps me in the pink. My worst year ever was a real statistical outlier. Almost everything I touched turned to worms. I stopped, re-evaluated everything...and I still couldn't manage better than one win out of four. The only part that made it tolerable was that my money mgmt let me break even for the year and not have a loss. That would have turned me off from trading entirely...if it wasn't for the fact that I really rang the bell the previous two years to the point that my wife almost choked with surprise. (No more nagging about stock study time each night :^) 20% of trading is what you pick...80% is money mgmt. Good luck to you!
Diversification. I try whenever possible to not get tied up in just one instrument, but to hold multiple positions. I've had many days when the overall market, and many of my positions, we're showing red. But my account equity was up because of one or two stocks that were fighting the daily trend.