Thread by @SubhadipNandy16

Some excellent responses to this thread on how people manage risk. Let me outline my process. I will write it step by step, break it down and explain my logic. Not necessarily these are iron rules, feel free to understand and then add/modify what suits you.

https://twitter.com/SubhadipNandy16/status/1464617316700672000

So let's repeat the scenario again. You are with an overnight position, the market opens huge against you ( long or short does not matter). What do you do then?
Step 1 : start the relaxation technique as outlined in earlier thread.

Now these are your choices :
1. Double the position, averaging with hope that a slight favourable move will reduce your losses
2. Totally reverse the position, say from long to short
3. Cut the full position
4. Cut half ( "when in doubt, cut half position ")
5. Keep holding

Frankly, choices 1,2 and 5 are gambles. May or may not work. If they do not work, your losses go up.

Remember, the aim is to stop and reduce losses. Taking more risks does not work towards your aim

So we are left with choices 3 and 4 only. This is very good that we are left with only two choices. As such under pressure deciding from 5 choices is a nightmare. 2 choices are better.

Choices are simplified. Both decisions either stop the loss or reduce risk

What I do is I immediately cut half ( 50% of positions) . Reduces risk by half, one gets time to breathe and think, one buys some more time.

Next depending upon the unfolding scenario, I might cut full position or keep holding this 50% with a stop in the system

On Friday, after sometime, as all systems were negative I cut the other 50% also and went to zero positions.

Now, this is more important. DO NOT START TRADING IMMEDIATELY
Take a 15 min to 30 mins break minimum, 1 hr also if required.
You can also take the day off

If you do decide to trade after the break, trade on a different scrip/instrument. Again, here the question is how you trade and manage risk.

Time for a story from which I picked up this technique

In 2003, the sports psychologist Sandy Gordon was roped in by BCCI for the Indian cricket team. He was also associated with the 1999 WC winning Australian team . Post his appt, the Indian team started chasing down big totals.

The technique he taught the Indian batsman was simple. Say the target was 300 runs in 50 overs. He asked not to concentrate on the total target, but target every 5 overs. So the target for 5 overs is only 30 runs. This is psychologically comforting.

Now when you start trading again, DO NOT TRY TO TRADE BIG and cover the loss in one go. This will cause more trouble. Think of the target in chunks, and you have the full day in front of you. You can set a mental target every hour

Next important point, once again, DO NOT TRADE BIG. Your position size should be max 20% of your normal size /risk. Means of you normally trade 100 qty, now trade 20. If your per trade risk is 5k, now risk should be max 1k per trade.

I normally divide my loss into 4 parts. After covering every 25%, I take a small break. After covering say 75% ( if you can), take a longer break of an hour or take the day off. In fact, after covering 75% , get down to 10% of normal position size

If you can cover 100% , either on same day or after a few days, only then allow yourself to go back to your normal position size.
These rules helps me in tough times by continuously dialling down my risk when the going gets bad

I have outlined the process, read - study and finalise your own process. Don't wait for the day when you will get trapped, plan and practice earlier

I drive a car and I am sure many of you do. Have you ever given a thought how to stop the car in case you have a brake fail scenario?
I have and have practiced the same
( never had an actual brake fail so far). I repeat the practice every 3 months

The way this helps is in case of an actual brake fail, I won't have to think of solutions under pressure. I will be ready because of my previous practice

So, make your plan what you will do and write it down. WRITING DOWN IS IMPORTANT. Then paste is somewhere around your trading terminal. When that day comes, simply follow the process. Thinking of solutions when in trouble will be bad decision making.
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BTW, this is how you stop your car if brakes fail wikihow.com/Stop-a-Car-wit…