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I have certainly found myself with 10% to 15% losses on positions overnight.
The control is position sizing. I size my positions such that 4*ATR = 1% of
total equity. Even if I take a larger size loss due to a gapping move going
past my stop, the limit to the overall size of the position keeps the
portfolio out of trouble. These are occasional, annoying losses, but they
will happen. Price changes in securities markets are not normally
distributed, and these are the moves that show it.
Andrew
-----Original Message-----
From: equismetastock@xxxxxxxxxxxxxxx [mailto:equismetastock@xxxxxxxxxxxxxxx]
On Behalf Of sebastiandanconia
Sent: Thursday, June 30, 2005 1:13 PM
To: equismetastock@xxxxxxxxxxxxxxx
Subject: [EquisMetaStock Group] Re: CATASTROPHIC LOSS
My definition of "catastrophic loss" is different from yours. A loss
of -15% on a single position in a diversified portfolio isn't
serious, IMO. If it was a -15% loss across the board for my whole
portfolio, that would be significant. (And, somewhat ironically,
during the conditions under which this might occur, good money- management
wouldn't protect my portfolio from a major loss.)
But to answer your questions:
1) I rarely have a large loss on a single position.
2) Good stock selection and understanding of market conditions
(favorable or unfavorable) is better protection than puts, position-
sizing, stop-losses, etc.
3) Large one-position losses don't have a major long-term impact.
4) When it happens it typically it happens to one position. I try
to be out of the market during times when my entire portfolio can
take a hit.
5) The psychological effects (I assume you mean "negative") are very
intense in the short-term, but quickly fade.
Luck,
Sebastian
--- In equismetastock@xxxxxxxxxxxxxxx, "metastkuser"
<andysmith_999@xxxx> wrote:
> I understand from time to time, a position will take a huge loss.
>
> Perhaps something happens after-hours and the stock opens 15% lower,
> well below the stop. One way to avoid this is to not hold over
> earnings. But a plunge can still happen for reasons unrelated to
> earnings.
>
> I have found very little in the money management literature on this
> subject, so can a few of the experienced traders please provide some
> guidance:
>
> 1) How often has this kind of catastrophic loss happened to you?
>
> 2) Are there cost-effective and practical ways to protect against
it?
> (eg. buying put protection for long stock that is held for a few
days
> is not practical).
>
> 3) How have such losses affected the long term return of your
portfolio?
>
> 4) When these catastrophic losses happen, is it isolated to one
> position or does it affect all your open positions?
>
> 5) What were the psychological effects?
>
> Thanks!
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