The biggest one-day loss in history

Last Friday I was having lunch in my favourite Malaysian restaurant, slurping on a delicious beef laksa soup, when I saw the news…

Facebook founder Mark Zuckerberg saw his fortune drop by more than $12 billion USD in less than 24 hours.

The biggest one-day loss in history.

Not a good record to have.

I’m not sure what % of his total net worth that is, but 12 yards is a big chunk of money to lose in most people’s books. That’s one heck of a drawdown in absolute terms!

As I reached the bottom of my soup, making sure I devoured every last noodle, I wondered what he’d be feeling. How would this loss affect him?

I’m sure he won’t go hungry, but me thinks there are 2 options here:

Option 1 – Ignore it, pretend it didn’t happen
Option 2 – Acknowledge it, and come up with a plan to address it

Now, you and I may never be in a position where we lose billions, but what if your trading account suffered from heavy losses, how would you react?

Do you ignore it, crack open a beer and some Quaaludes “Belfort-style” and pretend it didn’t happen?

Or do you accept it, learn from it and address it?

In 2008 I lost a big chunk of my trading account. The markets were volatile. There was a lot of uncertainty and it looked like the whole financial system was on the brink of collapse.

I was over-leveraged, and over-optimised.

The trading losses hit my account hard. And they hit ME hard too. So hard I had to stop trading.

I felt like a failure, so I tried to ignore it.

I then got angry and blamed others.

I blamed the markets. I blamed my broker. I blamed the neighbours barking dog – anything to divert the blame from myself.

But over time I learned to acknowledge the loss. I took full responsibility for it and turned it into my motivation to build strategies that better matched the drawdown I can handle.

In the private Breakout Masterclass forum, we’ve been discussing personal drawdown tolerance. It’s clear that everyone has their own tolerance to risk. And what some traders say they’re prepared to withstand, other traders think is bat-shit crazy!

But I see a commonality amongst traders too…

We all want SMALLER drawdowns and LARGER returns.

Nobody goes out looking for huge, ugly drawdowns.

Sure, some may be willing to accept larger drawdowns for a higher return, but surely no serious (sane?) trader sets out to intentionally achieve big drawdowns for the fun of it.

I suspect excessive drawdowns could be the #1 reason most traders quit too. They blow up their accounts or can’t handle the losses and so they give up.

That’s why we’re always excited to hear Trading Market Internals students applying knowledge from the program to reduce drawdowns.

Last week on the BTA trading podcast, we shared an interview with global stock trader Craig Peters.

Craig is an algorithmic stock trader. Every day he scans about 10,000 stocks globally, looking for trading opportunities. Using the knowledge from the Trading Market Internals program, he applied 1 specific concept in a unique way. The results?

A reduction in drawdown AND an increase in returns, improving risk-adjusted returns by almost 40%.

And his out of sample performance over the past year has continued to impress.

If you’d like to discover more about Craig’s approach and his results, check out the podcast interview here.



30 July 2018