Money
Investor shares how three standard deviation move wiped out 90 percent of portfolio
Heresy Financial
I Lost 91.4% of My Portfolio Making This Mistake
"During my first year of trading, I experienced my first blowup where I was playing this game. In other words, I was placing trades that had a very, very high probability of success, and therefore I made a little bit of money on each trade. Because I looked at what I thought the odds were or what the statistics said the odds were, I said, 'Look, my probability or my odds of me losing on one of these trades is so small that I'm comfortable executing a ton of these trades and taking on more and more leverage.' So my portfolio in the beginning started to grow very, very quickly. I felt like a genius. But because I was playing a game where I couldn't control the odds, an unexpected move happened in the market, a three standard deviation move happened that I thought was virtually impossible, and I blew up. 90% of my portfolio on one trade that went the wrong direction."
An investor reveals his catastrophic first-year trading experience where he lost 90 percent of his portfolio on a single trade despite using what he believed was a high-probability strategy. He describes how leveraging multiple trades with supposedly low risk of failure led to a devastating loss when an unexpected three standard deviation market move occurred. The confession illustrates the danger of assuming control over market odds and the compounding risk of leverage.
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Heresy Financial