There is a great chapter in Market Wizards about Bill Lipschutz the “Sultan of Currencies” who finds himself on the wrong side of a 2 Billion dollar USDJPY trade to the the tune of a -60 million dollar floating loss. Mind you that up to that time Lipschutz had been making about 250,000 dollars per day trading FX for his employer Solomon Brothers. That single bad trade threatened to wipe out a career’s worth of earnings.
Lipschutz’s colleagues were amazed at his cool approach to the situation. One of his deskmates remarked that if this had happened to him, he would have just got up and walked out the door since he was doomed to be fired anyway. Lipschutz on the other hand remained stone cold calm as he tried to reign in the position. His lack of panic allowed him to ride out the worst of the squeeze and bring the whole trade back in at a 12 million dollar loss. “By the time it was over,” he remarked, “a loss felt like a win”.
I had my own Lipschutz-like moment this week that was considerably smaller in size but no less painful psychologically. I made a series of mistakes that nearly wiped out two months worth of profits in a matter of hours. Family obligations and a variety of psycho dramas pulled my attention from the screen, leading to a number dumb decisions that not only resulted in losses, but in losses in size.
So several takeaways from the experience.
- Don’t trade when you get into a fight with anyone, friend, family or foe. Trading is like surgery. It requires your complete and total dedication. When you are agitated you will make mistakes.
- Don’t compound the problem. If you are going to lose big, do it on small size. My final losing position was two times my normal size and it was the trading equivalent of rubbing salt on wound.
- Now that you messed what next?
That is ultimately the critical question. As human beings we will inevitably make mistakes. The key is what we do next. The single most important thing, in my opinion, is not to try to get the money back all at once. The only way to recover from bad trading losses is to follow the original strategy that worked in the first place. I my case it took forty trades to recover the loss at an effective rate of 2.5 pips at a time. That was a long slog, but I did it. Much like Lipschutz I didn’t curl up and quit. More importantly by recovering properly I now have more confidence that I could overcome such obstacles again. So yes, sometimes in trading as in life, a loss recovered can be sweeter than a win.
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