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Hedge Fund Market Wizard

Joe Vidich: Harvesting Losses

Traders face a common dilemma when the market moves against their position. Vidich offers a solution to this situation. He advises traders not to try to be cent per cent right. While facing a losing position, he begins by liquidating a part of it. Taking a partial loss is more convenient than liquidating the whole position. Instead of delaying, it helps traders to act. Liquidating gradually helps mitigate the damage. 


Traders make a common mistake of letting greed influence their position beyond comfort level. When positions are large, the trading decisions are fear-driven instead of judgement and experience.


Flexibility is an important trait of successful traders. Vidich is bullish on energy markets but he does not let his view influence his trading decision. In 2008, when there was an excessive upside in prices, he gradually moved from a long position to a short one. Thereafter, crude oil prices collapsed to $90, he again moved to the long side of energy equity. However, he soon discovered that the change in market sentiment and fundamentals indicated lower prices and again switched to the short side. He was flexible enough to change his trading opinion and turned a devastating loss into a massive profit.


Trading decisions should not be taken based on the entry of the position. When a stock had fallen to the price where Vidich entered and was going lower, he immediately got out of the trade.


While controlling losses, there will be times when the market will just turn around after your stop-loss is hit. This annoying experience cannot be avoided while effectively managing risk and hence you should get used to it.


Vidich is very disciplined in cutting losses because of which his maximum drawdown has been in single digits. He was always ready to accept that he would liquidate losing position just before the markets turned around. This approach helped him to achieve this impressive risk control.

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