Losing money in investment and speculation is part and parcel of this business. However, most of the time, these losses can get carried away too far and too big for anyone of us to handle. When we see negative returns on our investment, we tend to just forget about it and ignore all the pain that this financial disaster brings to us. This would not help us and in fact it might just compound to the problems that we have. So, in this blog post, I would like to talk about when the exact moments that these huge losses come knocking at our door. If we would just learn from our experiences and take heed on the advice of my experience, we would save ourselves from big losses. Are you ready to know when are the 3 moments of time when our investment and trading capital are at huge risks?
3 Critical Moments of Time when Investors and Traders Lose their Money
Most investors and traders will lose their precious capital at the bottom of a bear market and at the top of a bull market. If you think only the one that trade at the wrong side of the trend will lose money at this point, then you do need to think again. In my personal experience and also my observation of the public trading behavior, I would say that both the bullish and bearish investors and traders suffer financial losses here. They usually make a lot of money when the market is trending but give up all their profits and even their trading and investment capital at this crucial juncture of market trend reversal. At the market top, the bullish traders will still holding on to their long position. They still believe that there is a greener pasture out there and a bright sky above. However, trend pullback and market correction will be sharp, fast and violent here. This alone can take them out especially if they are highly leveraged and trade on margin. Those who are bearish at the market top seem to be the one that should make money here. Wait and think for a moment. Yes, it is true that they should be the one that makes the most money here if and only if they hold on to their position and wait for the market trend to unfold itself completely. Not many people can do that. Market tends to be very volatile and the bulls are still trying to push the market up. Try to pick the top of a bull market is just like catching the falling knife of a bear market. Don’t be a fool here. There is no difference between picking the top and catching the falling knife. Try to catch a raging bull by its horn and see what I mean. This concept goes the same to the market bottom of a bear trend.
The stock market basically either moves up, down or sideways. Now, remember that the strategies used in sideways market are different than when the market is trending. Most investors and traders losses money here is because that they are not very sure of what the market wants to do next. On the logical thinking, they should take a break until the market trend unveils itself. But because of greed and fear of missing the boat of the next big market move, they stick around and try to play the market. Remember that when the market is in corrective phase, it is the most difficult and confusing market to catch for most people. It looks like the stock market breaks out from the crucial resistance level up but it goes down the next day. Then those people who are bullish turns to short but the market shoot up again as though there is a gravity pull upwards. Now, both bulls and bears will be the most confused people on the surface of the Earth. The bullish investors and traders will long at the breakout which also is the market top before the short term trend reverses it course again. Those who short at the downward move will tends to be the one that short at the lowest point before the stock market rally up. All this happens at market sideways corrective move.
I don’t know about you but I do notice something about the patterns of my personal trade. I discovered 3 most important lessons about my personal trading patterns. Firstly, the personal ebb and flow cycles does exist whether you like it or not. Just as the waves from the sea ebb and flow in a repeating pattern, we also undergo a similar pattern in our life. As human, we will have our ups and downs. Remember that even the stock market does not go up straight in a bullish trend and it also does not go down straight in a bearish market. The same goes to our profit and loss cycle. Secondly, when you start to have a streak of losing trades, you will tend to continue to lose money until you break away from the pattern. Just like a car that moves in the prevailing direction will continue to move in that direction until an external braking force stops it. Like it or not, it does happen. Thirdly, if you track your equity cash value of your investment or trading accounts, you will discover that the investment monetary value itself has a support and resistance level of its own. Just like the stock market support and resistance levels, your trading equity would be usually drop when you reach a critical psychological level. Hard to believe but it is true. Just keep record of your own trading and plot it on a spreadsheet and see for yourself.
If you take heed and be more cautious during these phases of the stock market and your trading history, it would have saves you from huge financial losses. Identify these 3 moments of time when most investors and traders lose money. Personally I love when the stock market trend reverses and also when it is in the corrective sideways movement because this is one of the most profitable areas if you know how to fish from the financial markets. However I have to agree that most of my losses are at these crucial times. As for the personal ebb and flow cycle, if you trade or invest long enough, you will know what I mean. I will share on the tools and methods on how we can battle these crucial times of big financial losses in our trading or investing business in my future blog post. Stay tuned!!