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Controlling losses and learning from mistakes

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I thought I would write a piece about losses, and how to control them.


Last week I took quite a hit on a stock. Having looked back I see that I did not follow disciplined rules so wanted to write up what I did wrong and what I think others could learn from my mistake. This is also chimes with similar themes that occur in Jesse Livermores ‘reminiscences of a stock operator’


Equally I’ve seen some soundbites recently from Robbie Burns, a.k.a. Naked Trader. These chime with my errors, so I have respectfully re-used these quotes in the below:


“Coffee Republic was my worst mistake. I initially bought it because I liked the coffee. I remember quite clearly buying them at 28p, and then at 22p, more at 13p and then at 8p. But it was one of the best things ever because I remember feeling so happy when I finally cut it at 3p. I felt like I’d been released.


Here RB talks of the perils of averaging down. Buying more into a losing position *can* work if from the outset you know you are buying a sound and long term position. This is slightly different to ‘Cost Price Averaging’ IE buying a certain amount each month/period despite the price, because the buys are specifically made due to the fall in price, rather than the periodic purchase.


“I’ll start small with something and as it goes up I get more confident and average up. I would never average down now. Instead of averaging down it’s best to just get out.


Robbie makes the case for commencing with a ‘starter position’ perhaps not the whole amount you intend to invest, of course this means that if the price drops and trade trade goes against you, the losses are never as great as they could be.

The converse of this is you have to be ready and prepared to buy more if the price has risen, and pay a higher price than you initially had. I think psychologically this is counter-instinctive and something many would find difficult to do.


“If it doesn’t [rise], and it starts to go down, I have what I call my ‘get out quick’, and I’m just out.


“..on a new trade I’m much more likely to get out really fast. Then I’m only going to try two more times, a bit lower down. If I’ve tried three times with a share and it’s still not working, I just stop.


Finally, these points make the case that one should be ruthless about taking small losses early, to stop them compounding. Perhaps get out, have another shot at the trade, and if that too fails, move on, and recognise the error. Know when you have it wrong is the message here.



Where did I go wrong?


This share had risen from an IPO of 140p-ish to around 220p, however September last year released a weak trading statement which saw the price drop sharp. My initial buys were £1.05p and then sub £1 at 99-95p. I thought I had a bargain on a price that had dropped by half. Way overdone, way my thinking.

A week later the price had not improved and I was prudent in decreasing the position marginally, selling half the initial position at 96p, because the share had not bounced and found a floor which was my expectation.


Over the next five weeks I sat and watched the price fall another 25% from 99p to a new low of 77p. This is the point where my principles were not followed. I could have (should have) reduced further in these five weeks, but instead held tight and bought more shares averaging down with buys sub 80p and even at 77p. I felt I was getting a bargain.

The stock then saw an apparent change of direction and started to rise. I then bought even more at 93p, buying into the rise, thinking this was the turning point I had been holding out for.


This turned out to be a false breakout, and really I should have been selling into this rise but I didn’t. I held on and saw the price then fall back, from £1 back to 80p.

I’d now been in the share for 3 months, and witnessed a slow erosion of the price and my holding.  In January 2018 I sold 1,500 of 5,000 shares. Unsure why but I presume just nervousness about being overweight in the share.

By the end of January I had bought back those 1,500 shares I previously sold - so stupid, buying into further weakness, selling at 79p and buying back at 66p

Finally the trading ups ate and profit warning came early February seeing the price plummet to new depths, to less than 40p. Only now did I see the writing on the wall and sell out



I initially bought a stock that had plummeted on profit warning, and having done my initial assessment felt that the drop was overdone and it now represented a sound initial entry point.

I was not strict with my stop loss. I use alerts to inform me when the price has p=broached, and on these occasions moved the alarm further lower.


Equally, I felt I was getting even more of a bargain no white price had dropped further, so started buying more. Instead I should have halved my position or exited completely and booked a small loss.



My mistakes summarised:

  • Not sticking to my stoploss
  • Buying more on the way down
  • Moving my stoploss further down into a declining price
  • Thinking ‘this can't go down any more’
  • Selling part then buying back
  • Thinking to myself ‘this is now long-term investment’
  • Losing sight of the reasons I initially purchased in the first place


Crushing reality is I exited at the bottom. And it will take some trading to recoup that loss.


Strategy improvements:

My strategy is to be far more ruthless with initial positions. Upon opening they will be monitoed and cut on any weakness. Initial positions will amount to no more than 50% of total expected position, and I will only increase holding on an improving price, not a falling price.


New holdings that do not perform as anticipated will be cut early, (or at least reduced) to restrict losses..


Stop losses will be a strict 5-10% of entry price, which I expect to trigger more annulments, but save from price deterioration. - this will depend on Average True Range, to determine a suitable stop.

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Happy to take peoples views on this trade. It is clear I from the image I was not following a plan strictly, and on several occasions, sold, only to buy back again. 

I violated many of my own mistakes and certainly those soundbites I included from Robbie Burns you will see I have made bad judgement in the share price chart.


How do you control your trade entry and size positions. What would you have done differently?

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Hi  thanks for the post, everyone has been there but few go through the honest soul searching to identify and rectify mistakes, it's much easier and less painful just to blame the market.


I am reminded following a thread on a forum long ago about buying Woolworths' shares as the market was going down "they will never be this cheap again" was the rallying cry and in a way they were right :smileysad:


You have done a good job of identifying what went wrong but I could add 2 points if I may.

- When trying to 'predict' a market you become attached to a bias which is difficult to let go of. Waiting for a market to turn and 'reacting' means missing out the first part of the move but is measurably safer not to mention less stressful.


- You mention sticking to a stop eg 10%, but consider that there should be a 'reason' to enter a trade (not just that price is going in the opposite direction to my planned entry). So for example, I plan to enter if price turns at that significant level on the chart and is accompanied by an increase in volume. Whatever the reason, having one means that if that specific reason is invalidated then the trade is also invalidated so the stop will be placed just behind the 'reason', in the case of the example the stop would be behind the significant level.  


Worth thinking about anyway, good luck for the next trade.

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hey , thank you for your comments.


Yes, you add a couple of important points. First is to assess the fundamentals and the macro picture. For example, Woolworths, cheap but essentially a 'trap' because the business was structurally challenged. Cheap and Value are not synonyms in this game.


Your point about confirmation bias is also correct. People find it hard to admit to themselves they have got it wrong, and that's wen people shirk and go "oh well, now I'll treat t as a long term buy"! If it doesn't respond you you anticipate: cut and sell - I agree.


Your second point is something for readers to heed too: be sure of your trigger or 'reason for the trade' In your case it is a significant chart level, as you say. 


It is also worth bearing in mind this..:

A share that drops by 50% has to then double to return to its previous level.

eg was £1 and is now £0.50p has to double (eg £0.50p x 2) to return you to your original position of £1.


Hence why to be ruthless with cutting positions that under perform.

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Thanks for your comments. I have not read any of those books. If you had to recommend one, first off, which would it be?


Your strategy seems to very much chime with the good principles I have outlined above. Buying into the overall trend, and in the direction of the market. 


I do think that to 'pyramid' a trade is the right approach: to get the initial lower-risk confirmation then add as the trade moves in a favourable direction. Do you have rules abouot how you scale in and add? How do you determine how much to increase position size by?

Your point sums up the warning I am trying to point out here, that "When you average down ... and the price keeps going against you then you need some mouthwatering and staggering returns just to breakeven. "




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I don't know the film or the book, so may watch the film, and perhaps get the book too.


The points you make all seem to adhere to good practice, buying on the way up and adding to your positions. Do you have any posts on the forum that demonstrate your approach of building up a position? I think it would make a good compliment to this thread..


this is very important to instil in good trading >> 'For me the key is to minimise losses and to take them quickly.'


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