What to do with unrealized losses other than a stop-out
Hello, this is Gesan.
To traders,
This year, 2019, were you able to earn?
This year, the Nikkei average did not continue to fall drastically,
nor was the market situation bad for many people.
However, even so, in this market environment,
some people suffered substantial losses.
Rather than a single massive loss, it was more like
a frantic rush of trading with continual small stop-outs,
until you realized the losses were quite large, in the end.
For example, the Nikkei Stock Average
this June and August fell into the 20,000 yen range,
In such moments
you might have thought,
“Perhaps it will drop below 20,000.”
but since it did not go below 20,000,
you tried to recoup the losses by re-entering long,
and again…
However, when the market started to turn down again,
you thought,
“Ah, this might really be bad this time,”
Like this, being excessively fearful,
repeatedly cutting losses, totalling
a fairly large amount of loss, for some people.
There are those who end up in “loss-cut poverty.”
“Poverty due to stop-outs.”
But why do we feel so much fear?
In short, because we cannot foresee the future.
What will you do if the price falls?
If you have no plan for dealing with it,
you will feel unnecessary fear.
Humans feel most fear when the future is unclear.
Therefore, as I always tell you,
think about the future properly, and even if prices fall,
if you have a plan to deal with it, your fear will no longer cause
unnecessary losses.
However, unfortunately,
in the world of stock trading generally,
the only coping method taught for declines
is to cut losses.
“Just cut losses quickly.”
That is the kind of instruction you get.
If you follow that, you will accumulate useless stop-outs,
and just become poverty-struck by stop-outs.
So today, I want to tell you again
about coping methods for drawdowns other than stop-outs,
to help you manage unrealized losses.
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Setting a target amount too high makes you unable to earn!
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Before telling you about coping methods other than stop-outs,
there is one thing I want to tell you.
That is the “trap of goal setting.”
When you start trading, you surely have the ambition of
“I want to earn this much,” and begin.
Few people think,
“If I can earn 10,000 yen a month for now, that’ll be enough.”
Most start with grand goals like
earning tens of millions to billions per year.
In general society, the advice to “dream big” is common,
so many people in investing
set large goals.
However, setting grand goals should be avoided.
Do you know why?
There is research from
Gabrielle Ettinger,
at the University of Pennsylvania, (Hakubunkan Publishing)
P.33
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Setting goals that are far from the current reality and lacking grounding
will make the distance to the goal too great,
and your seriousness will fade.
That goal will feel unreal,
and your actions will slacken.
Therefore, you should avoid overly grand goals.
Then how should you set goals?
I will share one piece of advice.
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Regarding this, imagining “specific near-future success” is effective for achieving goals.
It is a short-term (small) goal for a long-term (big) goal,
a visualization of success.
Hamai Eiichi
“Why Do Successful People Have ‘Strange Habits’?” (Taisho Sha)
2013 Aug 16, First edition
P.33
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If you apply this to trading,
it is good to set
short-term trading goals,
for each trade,to have a goal.
Rather than aiming to make a lot at once,
think of accumulating profits gradually.
The “Wave Riding Investment Method” taught in Stock Academy
also emphasizes accumulating profits, not quick big gains,
and it aligns with the above advice.
Now, when using that Wave Riding Investment Method,
how to handle unrealized losses
will be explained.
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Coping methods for unrealized losses besides stop-outs
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First, stop-outs are an act that eliminates possibility.
Many traders think
“Since the price has fallen this far, unrealized losses cannot become unrealized gains.
I want to be done with this quickly.”
and tend to cut losses, but
doing so eliminates one potential profit.
Perhaps the price could have surged, and if you had left it alone,
unrealized losses could have become unrealized gains.
In fact,
you’ve likely regretted,
“Oh, I should have waited and not cut losses.”You have had such experiences, right?
That valuable possibility
is wiped out by stop-outs cleanly.
Isn’t that simply a waste?
You might think,“But if I leave it, the losses may grow,
so I must cut losses.”
That is correct.
The wounds should not be allowed to expand further.
Then, while preventing the wound from widening,
is it possible to also preserve the potential?
You might think, “That’s too convenient to be true.”
but yes, it is possible.
You can do this by placing a hedging trade.
Assuming you are dealing with margin trading, you can hold a selling position against a long position with unrealized losses.
That way
the unrealized losses become fixed at a certain amount temporarily,
and since the position has not been settled,
the possibility remains.
How to deal with that fixed unrealized loss?
For example, you can temporarily leave the unrealized loss as is and use another position to generate a profit exceeding that unrealized loss
and then settle them together at the end.
If there is a 100 yen unrealized loss,
you can offset by making more than 100 yen in profit with other positions.
Also, in some cases
there are other ways to use those unrealized-loss positions to convert into profit,
but I won’t go into that today.
Now, I’ve explained the coping methods for unrealized losses besides stop-outs,
and this topic is something I have discussed before.
However, in general society, you might not often hear such discussions,
so it may take time to understand.
Therefore, I will tell you again and again.
Please, with risk controlled, and while not reducing your possibilities,
consider the idea of holding a hedging trade.
Please continue reading until the end today as well.
Thank you.
Keizo Shimoyama
