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What to do when I lost 90% of my speculative capital with a huge bet on precious metals?

May 25, 2012, 12:00 PM Przemysław Radomski , CFA

What should one do if, because of a previous unsuccessful trade that was done with a significant amount of speculative capital (90%), one's capital is now only a tiny fraction of its starting value (10%)?

Speculative bets should be small enough so that no single unsuccessful trade (or even several of them in a row) will make one emotional about one’s trades. Excessively large trades will destroy capital. This will happen regardless of our (or anybody else’s) making good or bad market calls. You can read more here: "Gold Trading vs. Gold Investment: The Universal Investor."

If one trade took 90% of the capital, then it was clearly many times too big. If one is determined to adjust the sizes of particular speculative trades, then we suggest starting "all over again," which in this case means once again dividing all capital into speculative and investment positions. The more capital there is, the more can be used for speculation. Let's say you choose to use 30% of your capital for speculation. In that case, each trade could take only a few percent of the capital if leverage is used. If not, then not using the whole speculative capital for a position is still suggested. Especially since positions were too big previously. In fact, we suggest starting “all over again” with very small position sizes (say, 1/3 of what you think is low enough) and then slowly increasing it from trade to trade until you get emotional about your trades. Then remember to use less than this amount percentagewise for all future trades.

We discourage increasing position size (like borrowing money to “get back on track quickly”) even further. This would increase the emotional tension and would likely lead to losses if not immediately then after a few trades.

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