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Sage Advice

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This is probably the most basic piece of advice I can give but I also think one of our best.

Brazilian Spread

We have noticed in our data that when a trader gets past a certain threshold of drawdown the prospects of recovering becomes statistically improbable. The trader feeling desperate, thinks the only way to recover is to place a massive bet to try and win back the loss. That is why I call our Trade Size alert the “Brazilian Spread”. The trader typically bets what is left in the account to make it all back, if it goes wrong then buggers off to Brazil (this joke was funny when all the criminals escaped the authorities by hiding in Brazil because they didnt have extradition laws – don’t know if it still like that but I like the joke ?).

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The takeaway from the chart is to notice that the deeper the drawdown the bigger the trade size concentration.

Sage Advice

If you find yourself in this unfortunate circumstance then my advice is to do the following:

                                          OPEN A NEW ACCOUNT

When you fall into the trap of ridiculously increasing your position size you are falling for a mental accounting bias. Let’s say you have a $10,000 account which is now worth $1,000. You are now about to bet $1,000 as if you have already written the $1,000 off because a 90% drawdown feels like a “blown up” account, and you are now desperately clinging to hope. But here is the interesting thing, ordinarily you would never just spend $1,000 carelessly on a reckless clothes purchase. In fact you are typically quite prudent with your spending. What is happening is quite common, you have been captured by the vice of the drawdown G-ds and your common sense has been thrown out the window.

When this alert is triggered, you need to start playing mental accounting games.

Open a new account so that the constant reminder of your losses is placed out of your immediate line of sight. Yes it is true you have still lost $9,000 or 90% of your account value, but there is no value in shoving it in your face all day reminding you of your previous failures and triggering the defence mechanisms activating your bias’s.

With a brand new account of $1,000 you need to address this account with the goals and money management you would as if this was the start of your trading career. Banish all thoughts of your previous mistakes and start again.

 

 

Talking Trading Radio Interview with Caroline Stephen Industry Spread Interview