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How to slow down your losses in a market crash

by , 19 May 2022
How to slow down your losses in a market crash
It seems that uncertain times are ahead of us.

On the one hand we have the main stock markets crashing to new yearly lows.
Since March 2022:

The JSE All Share Index is down 9.6%

The SP500 has crashed over 14.6%

The Nasdaq has dropped over 20%

Also gold is down over 10% and some of the main crypto's like Bitcoin and Ethereum are down over 50%.

Some believe we are entering into a financial crash as America enters a recession.

Others are blaming COVID for the damaged economies.

Either way we need to know what to do during these difficult trading conditions.

Here are some ways to preserve and protect your portfolio during this volatile time.

Let’s start with a recent question I received from a reader…

Q. “I have been trading for a few weeks and I am following the 2% max loss rule.

However, I am already down R10,000 on my R100,000 account.
I believe the stock markets and crypto-markets have entered into a very volatile period.

Do you have any tips to protect my portfolio when it enters these drawdown phases? I am starting to worry but with your tips I believe you can help me”.

Drawdowns are normal here’s how to manage them

A normal trading drawdown, just so you know, can be anything from 15% to 18%.

Before it reaches these levels, there are certain ways to slow down the losses.

-Drop your risk every 5% your portfolio drops
For every 5% my portfolio drops, I like to reduce the risk by 0.5% increments.

This means, if my portfolio drops 5% then I would drop the risk per trade from 2% to 1.5% (2% - 0.5%).

If my portfolio then drops 10%, I reduce the risk per trade further to 1% (1.5% - 0.5%).

And if my portfolio drops even further up to 15%, I continue to risk less per trade to 0.5%.

If the drawdown passes this level, I then follow the next step.

-Stop trading until the storm calms down
After I see a 15% drop in my portfolio, I tend to stop trading and go back to paper trading until the market rectifies itself or until the system starts working again.

But this isn’t where you just close your laptop down, and guess when the markets are back to normal.

No! You need to keep jotting down trades that would have given buy or sell signals.

Track them in a journal and see how your portfolio would have performed.

As soon as you start seeing decent winners again, where your portfolio starts to pick up, that’s when you can go back to live (real) trading.

However, if you don’t wish to stop trading yet then here’s another trick to limit your downside.

-Choose a maximum number of trades at a time
If you don’t want to lower your risk per trade to 0.5% and you want to stick to the 2% max risk per trade, then this might be better for you.

Choose a maximum number of open trades at a time, during a drawdown.

For example, once I reach a 15% drawdown, I do not like having more than three trades opened at any one time.

As my portfolio would be at risk of 6% at a time.

Let’s recap the 3 ways to limit your losses in a drawdown

1.    Every 5% my portfolio drops I drop my risk 0.5% more.

2.    I paper trade when my portfolio drops over 15%, until the market corrects itself and the system works again and shows winners.

3.    I make sure I don’t have more than three trades opened in a drawdown (Despite the fact there are more trades that line up).

There are other actions, but I think these three will give you a good variety of ideas of what to do to protect your portfolio.

Trade well, live free.

Timon Rossolimos

PS: If you want to protect your portfolio during these uncertain times,
in video #3 of the MATI Trader System Programme I go through each step on protecting your money and growing your portfolio through the 8th wonder of the world. Click here to read more…

How to slow down your losses in a market crash
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