An expensive lesson in Risk Management
We often hear that “Risk is the price of opportunity.” But seldom does one realise that taking additional risk may turn out to be a double edged sword. Consistent success in trading lies in effective management of risk & sticking to your system even through prolonged periods of drawdown.
I would like to share my nerve wracking experience that forever imbibed in me the importance of risk management.
On August 2016, I suffered my highest intraday loss of 18 lacs due to a hithero unknown risk. I had short sold Just Dial CE 500 and was in a profit of 1.3 lacs at 3:19 pm. But to my dismay, at 3:20 pm, I saw a whopping loss of 18 lacs. In less than 60 seconds, I had lost over 20 lacs. Illiquidity risk had hit me real hard!
I failed to realise what had happened & was compelled to write an email to my broker Zerodha. (Screenshots of which are shared below)
I was extremely distressed as I never thought that I would be a victim of illiquidity risk. Neither did my system fail me nor my risk management skills. What didn’t succeed was merely my lack of awareness of this risk!
Post this incident, my belief in the importance of risk management was further strengthened.
I was undeterred by this huge loss & continued to follow my system after learning a very expensive lesson in risk management. In the following three months, I made 75 L ,my highest ever profit in percentage terms in a single quarter.
Drawdowns are a part & parcel of the game. They are not a matter of if but only a matter of when.
Market & market related risk must be respected at all times. At no point of time, should you take the market for granted. It is extremely prudent for a trader to keep a check on his losses so as to ensure that it doesn’t get so big that it effects him/her emotionally.
My advice to my fellow budding traders would be :
1)Keep a check on leverage & manage all risks at all times!
2)Backtest your systems & have the courage & conviction to follow them
3) No trading system in the world can make money all the time. Drawdowns are inevitable – stick to your system & follow it with discipline.
