On Friday July 15, I took my largest one-day trading loss ever. It was a position on the USD/JPY that was closed for -$11,182.39.

Needless to say, I was more than a little shaken up that day. What started out as a few harmless trades had snowballed into a big capital loss by the end of New York session.

As it turns out, there was a coup attempt in Turkey that fueled a sudden rush for safety into the Yen… and I was caught with my pants down — I was positioned in the opposite direction.

So there I was on a Friday night, staring at a -$11,000 hole in my trading account after less than 24 hours.

But that wasn’t the worst part…

You see, I wasn’t just trading on my own private account. There was also over $270,000 in funds that were following my trades.

So I’d not only lost over $11,000 of my capital… I’d also lost many times that amount which belonged to my friends, family, and a group of Inner Circle members.

It was… a very bad day.

That night, I couldn’t sleep

My heart was pounding, and I felt physically sick.

Adrenaline coursed through my veins as I lay awake in bed until dawn.

The next day, there was no appetite for breakfast or lunch.

I went for a walk to get a grip on myself

At the back of my mind, I realized I was probably over-reacting.

Despite this however, the situation still felt like an absolute catastrophe. Emotions are more powerful than logic… and no matter how much I tried to calm down, I couldn’t.

Was this a bad loss? Yes.

Could the damage have been mitigated? Probably.

Was the loss recoverable? I can’t say. There are no guarantees in the market.

Logically, this wasn’t the end of the world… but I still couldn’t help but feel terrible.

So there was only one thing I could do: wait for the cloud of emotions to subside.

Ten hours later, I finally calmed down and examined what happened.

How I lost $11,182 in under 24 hours

What actually happened isn’t nearly as important as what caused it to happen.

For the sake of context however, here’s the rundown:

  1. I was trading well with decent returns
  2. I got complacent and didn’t set a disaster stop loss
  3. Towards the end of the Friday session (when volatility is typically low), the Yen rallied suddenly and aggressively
  4. I was positioned in the opposite direction and was sitting on a rapidly growing paper loss
  5. I didn’t understand what was going on and eventually closed the position for a -$11,182 loss
  6. I later found out that there was a military coup attempt in Turkey which fueled a rush for safety into the Yen

So basically, market prices moved before news of the coup reached my ears.

For a good 20 minutes, I was sitting on a long USD/JPY position with absolutely no idea what was going on… and I assumed the market was just making an overly-aggressive correction.

By the time I received news of the coup, it was too late — prices had already collapsed and I was faced with the decision to either take the -$11,000 loss now or to gamble on a reversal over the weekend.

I decided to close the position and booked the loss.

Was it just a stroke of bad luck?

On the surface, it would be easy to attribute the loss to bad luck.

After all, no one could have predicted (a) the coup attempt, (b) that it would happen on a Friday night and (c) that the USD/JPY would react the way it did.

This is where the real risk in trading lies — in the potential for surprise events to happen at any time.

Consider the 9/11 terrorist attack in New York. The breaking of the Swiss Franc peg to the Euro. The British decision to leave the European Union. No one could have predicted these events… and the traders who didn’t protect their positions were the ones who got badly hurt.

So yes. On one hand you could say that I had lost $11,000 due to an unlucky event…

But on the other hand, it was my own fault for not “insuring” my position against such surprises.

Reflection

Throughout my trading career, I had experienced only a handful of similar situations.

In those prior times, I had either closed the position early for a small loss, or traded out of the position for a small profit.

This time though, I had reacted poorly and emotionally.

Why?

After some reflection, I realized that I acted differently because (1) the stakes were higher, and (2) my ego came into play.

You see, prior to that night I had been trading with decent results, and my trade followers were happy with my performance.

The perceived success got to my head, and led me to assume there was no way I could suffer a big loss on a Friday night when price volatility is typically low.

In my complacency, I had forgotten the most important characteristic of financial markets: anything can happen at any time.

An easy fix?

I’m sure you’ve heard of the saying, “always use a stop loss”. On the surface, this seems like a quick and easy fix to the problem.

However, like almost all generic trading advice, it is only effective in a minority of circumstances.

You see… depending on the trading method, a fixed stop loss might actually be counter-productive. Unlike what some people would like to believe, the Forex market is far too unpredictable to be trading with fixed rules. Sometimes, a fixed stop loss would be appropriate, while in other times, a mental stop loss would better suit the situation.

This is why I often urge aspiring traders to stop following popular trading “advice” and to start thinking for themselves. As the market changes, so too must we adapt our trading approach accordingly.

In my case, a fixed stop loss would be appropriate in just about 15% of the situations I encounter. For the other 85% of situations, a mental stop loss would be more effective.

Listen to the market, not the guru

My challenge then, is to set safeguards against such future surprise incidents without adversely affecting my typical trading performance. To do this, I’ll be modifying my trade selection criteria based on the ongoing market price action.

This is in stark contrast to the one-size-fits-all methods that most retail traders are taught to follow, like “do X when you see Y”.

Be wary of such “tips”, as they are merely platitudes that sound good in theory but are unprofitable in practice.

Trade Follower Response

Over the next few days, I continued to feel bad about the loss. I was sure that my trade followers would leave in droves.

… so imagine my surprise when I received all sorts of encouraging words from them:

“No worries Chris. We are in it for the long run.”

“Don’t put too much pressure on yourself.”

“Nothing that can’t be recovered. Chris, I know u are feeling pretty crap right now …What happened last night does not in any way change my belief in you or my support.”

“Don’t be too hard on yourself.”

“Jump back on the horse Chris we are all pulling for ya!!”

“Have a great weekend and support to you continues!加油!”

The moral support immediately lifted my spirits… and it brought up the first big lesson I learned from this entire episode.

Lesson #1 | Group support is underrated

Trading is by default a lonely journey… but if you’re able to share your successes and failures with a group of like-minded individuals, their feedback will help keep things in perspective.

This is especially true when you’re down in the dumps, where having moral support can make a big difference to how you deal with the situation.

Lesson #2 | You can’t avoid emotions

I often hear people talk about trading “without emotions”… but this yet another one of those meaningless platitudes that doesn’t reflect reality. Because the truth is, there’s no way to avoid emotions in trading. We can only learn how to work around it.

In my experience, there are only 2 ways to deal with emotional trading:

  1. Learn to identify the physiological experience of emotional behaviour. It typically comes in the form of a faster heartbeat and feelings of thrill and fear. Once you catch yourself behaving emotionally, take a break and come back after your head is clear
  2. Set automatic safeguards that will minimize the damage during such times

We can’t avoid emotions, but we can shield our trading accounts from their destructive consequences.

Lesson #3 | Public accountability is the fastest way to get better

If you want to learn something fast, practice it in public. There’s nothing quite as motivating as the threat of public embarrassment to improve your game.

If you screw up in private, it won’t hurt nearly as much is if you screw up in public. Pain is how we learn.

The more painful the lesson, the faster we learn from it.

Lesson #4 | There’s always another level beyond

At each stage of your trading journey, you learn about an aspect of trading that you didn’t know before.

For example, a beginner trader usually starts with the basics of the Forex market and a few technical indicators. Soon after, he expands his knowledge to cover technical analysis and candlestick price action. Eventually, he learns about more advanced technical analysis techniques like Elliot waves and harmonic price patterns.

Somewhere along the way, he tries to trade the news and starts looking at economic fundamentals. He learns how the carry trade works, how to gauge market sentiment, and how the various currencies are correlated with each other, and with the equity and commodity markets.

This tends to also be the time when the wannabe trader gives up after a period of continuous losses.

If he sticks around, he eventually starts thinking for himself and figures out how to operate in market uncertainty. This is also when he begins to grasp the unwritten rules of the market. He finally understands why so many retail traders fail, and takes steps to avoid those pitfalls.

As he becomes marginally profitable, he inevitably decides to deposit more capital into his trading account. Instead of making $10 a day, he now makes $50 – $200 a day or more.

Now theoretically, a trader who makes $10 per day can also make $1,000 per day with little trouble. After all, the only technical difference would be to now trade with 1 standard lot instead of 1 micro lot.

But as you’ve probably realized, this is not so simple in practice.

In reality, the prospect of making (or losing) $1,000 a day will cause the trader to think and behave differently. When the stakes goes up, objectivity goes down. The main challenge for him thus, is to keep making objective decisions while handling increasing amounts of personal capital.

Once this hurdle has comfortably passed, the trader then begins to consider accepting outside investors because that’s how he can grow his capital base at a faster rate. This is the period when he learns how to manage investor expectations. At this stage, he is expected to perform consistently and maintain low equity draw downs.

This was the stage at which I took the loss on the USD/JPY.

There was a flaw in the way I was trading, and the market found it, pried it open and stuck a dynamite in it. That’s the market’s job — to seek out the flaws in your trading approach and punish you for it.

Now while it certainly hurts to take this loss, the consolation is that I’d rather it happen now than later.

The way I see it, it was the price I paid for the market to point out the potentially dangerous flaw in my trading approach. By paying for the lesson now, I can take steps to prevent it from happening in the future when I would have been trading on a bigger account.

This is the lesson I needed to learn before I can move on to the next level of my trading career.

[Update] It has now been 4 months since I first published this post, and the loss has been recovered:

Lesson learned: When everything seems to have gone to sh*t, keep your head low and just focus on putting one foot in front of the other.

A trader’s mind is his only asset

As an employee, your assets are your skills, knowledge, co-worker relationships and working experience.

As a businessman, your assets are your staff, property, inventory and business relationships.

As a trader, your only asset is your mind.

This is why I spend so much time writing about mindset, attitude and philosophy.

Your mind is the sole determinant of how well you do as a trader. There are no traders who are both profitable and mentally frivolous.

So if you want get better at trading, the first thing to pay attention to is the way you think.

Learn under what conditions your mind works effectively, and under what conditions it doesn’t. Understand its shortcomings, and create safeguards around them.

How can you do this?

Well, a good place to start is by learning from your failures.