Mitigating risk factors to trade loss

In this post, I shall do a brief on what factors can result in trade losses.

Risk factor 1: Fundamentals of a company

- CEO change

This is not exactly a black swan event as most likely employees and board of the company would have gotten wind before the news is officially out. However, to retail investors who don't or can't really scuttlebutt, it is sometimes hard to react in time.

One fine example was the IBM CEO change which strongly enhanced sentiments and caused a major spike in share price this early Feb. I was forced to cut loss on my short position then.

- Operating margin / revenue changes

That's why market is very sensitive to earnings report. Just take a look at how the US stocks fluctuate when the season is in. You don't want to be longing or shorting one day before the earnings come out, unless you are an insider.

- Debts to Assets ratio

Sometimes a company may take on more debts than it can manage and that should send a warning sign. Debts could be used for business expansion, share buy-back (yikes!) or financing current operations.Thus, it is important to analyze a company's capital structure and balance sheet periodically.

Risk factor 2: Black swan events

This is one risk factor beyond our control. We can only at best mitigate it by cutting losses or limiting our position size.

- War and pandemic

They are the 2 most feared black swan events and we have experienced both of them in just a short span of 3 years. 2018 trade war that was started by Trump set the market in a tailspin and market plunged in the winter of 2018 followed by a quick rally.
This year's Covid-19 instilled fear that can rival SARS period, and its ramification on businesses and economies far exceeded that of the trade war (man-made events can be controlled but nature's wrath cannot be easily tamed) causing a market avalanche that started since end of February.

- Financial fraud or rumors of it

Some years back, Silverlake axis (SG stock) was being accused of corporate tunneling fraud, which hit its share price hard.

Recent case of the US-listed China stock, Luckin Coffee, saw its share price plummets from a high of $50 to around just $5 in a short span of time. Luckin Coffee shares sink after COO accused of financial misconduct - Reuters

Those who are not quick-footed would find themselves caught in the selling frenzy with heavy losses.

Risk factor 3: Time in position

The longer a person stay invested in a stock/bond/derivative, the longer you stay exposed to those risks and so higher the chance of meeting one.

So staying abreast of news and developments of company / market situation is important, even though some may regard them as 'noises'.

Those who have slept on their Hyflux investments earlier had gotten the most unpleasant wake up call.

If you don't want to spawn sudden big losses, avoid going all in for any one investment and keep your portfolio well diversified. Of course, in the event of a mega black swan you will still see red but at least you get some buffer here and there.

Day Traders don't hold positions overnight.
A side quiz: What do Day Traders like the most?


A long candle / wick, to reap good profits within the same day.

Amidst the volatility, my realized gains from stocks are mostly via swing / day trades.

Risk factor 4: You psychology / emotions

FOMO (fear of missing out) and greed are the two greatest sins of trading.
Been there, done that. #Mind

The Chinese saying “见好就收” resonates well these days when a winning position can v-turn in the blink of an eye and becomes a losing position.

Lastly, if you need cash urgently, trading platform and casino are the worst places to be at. 
Counting on odds beats counting on luck, but remember, both tend to run away when you need them the most.

Risk factor 5: Position sizing

When the risk/ reward ratio is high, either don't invest or put up small position size to mitigate large losses.

When the risk/ reward ratio is low, put up a big position to maximize the gains. 

That's where exercise one's due diligence comes in, so that one can better estimate the risk / reward ratio.

Position sizing in trading

We can position size based on

1) % of portfolio to risk

2) Maximum amount to risk per trade

"Waiting for the right signal to ENTER is about as important as waiting for the right EXIT."

"The more challenging and potentially lucrative the waters you fish in, the more likely they are to have attracted skilled fishermen."
- Howard Marks


Facebook makes a pretty good case in point.

I longed FB on 27th Feb and capitulated on 8th Mar.

Big mistake for holding too long (in time) in a highly volatile market. I have managed to recoup my losses from other CFD trades but this is one darn costly bad trade of the year.

As we navigate the unpredictability amidst the pandemic, do stay safe and be socially responsible wherever we are. Fighting~

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  1. Thanks for sharing. Yes waiting the right signal to enter the market is much important at this moment.


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The contents of this blog are author's personal opinions and do not constitute advice to hold, buy or sell any securities, commodities or assets mentioned. I do not guarantee the accuracy and reliability of any information provided, and shall not be liable for any losses incurred from reading my posts or using the materials herein. This blog may contain affiliate links to external sites.