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Don't bet the farm

Tuesday, May 10, 2011 12:43

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As you have noticed lot of traders and investors have suffered huge losses in silver. For some it has ended their trading career. Wall Street Journal had a big story about this recently

Silver-Mad Small Investors Fueled an Epic Rise and Fall

When silver prices hit a three-decade high last week, David Zornetsky decided to do some buying. Searching for a job, the 31-year old in Beacon, N.Y., hoped to use gains from silver to finance a move to New York City and to pay down student loans. “I had been hearing that silver could go up to $150 an ounce this year,” says Mr. Zornetsky.

Instead, silver has suffered its worst one-week drubbing since 1980, when an infamous alleged attempt by Texas’s Hunt brothers to corner the silver market came undone. This week’s brutal tumble sent silver-futures prices down to $35.28 an ounce from nearly $50 in just five trading days, and has left Wall Street pros and individual investors dazed, some dealing with sudden losses.

“I don’t understand,” says Mr. Zornetsky, whose silver investment fell about 25%. “Silver is supposed to do very well this year.”

Behind silver’s historic collapse is a market that came loose of its moorings, fueled by speculative traders, many of them small investors who may have jumped in at just the wrong moment.

http://online.wsj.com/article/SB20001424052748703859304576307380172271272.html

As I have said constantly the most important thing you must learn in the market is to cut your losses short and never ever take too big a loss.

Betting the farm on sure thing and not cutting losses are the reason why traders end up with big losses. Traders hold on to losers, hoping they will bounce back. They enter a extended setup.

They consume too much financial media and start believing in stories. They start trading stories instead of setups.

Sometime back there was a member who was fixated on uranium stocks. He used to send me pages and pages of research on why uranium stocks present best opportunity. I told him repeatedly, that trade setups not these kind of macro themes. After the Japanese disaster the member just vanished having taken catastrophic losses.

Everyday I look at this table:

Stay in the game. Keep drawdowns low. If you preserve your stake then you can play the game. Else you are out of game. If you stay in the game long enough you make lots of money.

I have been actively blogging for last 5 years or so and talked to lot of traders in last five years. Very few have survived beyond few years. The reason is pretty clear large drawdowns. One day they just disappear.

Don’t let that happen to you. It is ok if you don’t make money for few months, but if you lose your stake , you are out of game very quickly….

Read more at Stock Bee

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