Hi guys, hi from Andrea Unger.
I’ve just exchanged some emails about virtual losses.
It was an email exchange where the topic was about the virtual losses, which meant a loss is not a loss when a position is still opened.
So I don’t have a loss if I’m still in position.
This might be true from some point of view, but it is also very false from other points of view.
First of all, if a position is losing, I’m losing some money, of course.
It’s also true that that position can go back into positive territory and end up with a good profit.
This was also an example that this guy wrote in the email, he said: “I was losing on Friday and on Monday when I was supposed to close the position I had gains”.
Perfect, I’m happy for him, but to what extent could we consider the loss a virtual loss or a real loss?
Of course, when we plan a trade we should have a stop loss level, and it’s true that if a stop loss is not hit, my position is opened and I could even ignore the loss because I know that there could be a loss, once the stop is hit, but when it’s not hit and it’s not approaching that level, my position is still there alive and kicking.
The problem is when my account, my equity, is too small to cope with an open position loss.
Of course, this is an extreme example, but it might happen.
So when, for example, my losses are too high to cover even, I mean the equity remaining, to cover the margin requirements for the trade, I might get in trouble and my broker could compel me to close the position, in spite of the stop-loss not be hit.
This is an extreme example, but it might happen.
For example there are many option traders, they develop strategies and these strategies, mostly because of the type of historical data available, are based on the option close value of the day and based on that, they show all their nice backtests, and they say: “Look I would have survived even the February 2018 crisis as well as the August 2015!”.
It might be true, but the big question mark is: “Yes, but what happened “during that time” to your position?”.
For those of you who were sitting in front of the monitor in August 2015 and in February 2018, you know how crazy the market went and you know how crazy the option prices became.
So it might happen then, in that case, in spite of an end of day close in your favor during the day, you accumulated such a high virtual losses that you are not able to sustain them or not to be able to keep your account opened, because you could even exceed your existing funds in some cases.
So the real question is: what’s up “during”?
Ignoring the “during” period might be very very dangerous.
So, this is obviously again an extreme example, but it shows you how dangerous it might be to consider virtual a loss, only because the position is still opened.
Another danger is for those who are investors or became investors because of a wrong trade, and who both some stocks, maybe in 2000 or so, you know how prices dropped afterward and some of the stocks lost a significant portion of their value.
The excuse is: “Ok, but I keep it because until I don’t close the trade I have not lost anything!”.
This might be true, maybe you get the value back in 10 years, but it is not a way to manage the losers.
I mean, it’s completely wrong, because you might need that money.
The same thing in Bonds. You invest in Bonds, you know that at expiring you will have 100% of the nominal value, so you don’t care about the fluctuations of the prices during the Bond’s life.
Ok, but what if you need that money?
What if all of a sudden, for some dental surgery, you need that money?
You have to disinvest, you have to close the position and obviously you get the losses into your pockets.
This is dangerous, so obviously there is no secret to avoiding losses.
As said, most of the positions once opened go into losing territory for a while and then might turn into winners.
It’s very difficult to have all trades that immediately go in profit and end up in profit.
So we have to have some borders, but we have always to keep an open eye on the position sizing and on evaluating properly the worst case scenario, which is not only the close of a trade but also during the life of the trade, what could happen and if I could survive that “during”.
Take care of the “during” period.
This is my advice for the week and waiting for next time to meet,
I say ciao from Andrea Unger.