Going Down with the Ship as a Strategy: Should You Trade Chinese Assets Until Liquidation?

Broadly speaking, trade management options tend to be in a spectrum between two extremes when it comes to Chinese assets… or pretty much anything else, for that matter, with those extremes being:

1. On the one hand, the option of entering a trade and setting clear price points at which you will exit (stop-loss orders through which you set price points at which you exit if trades go against you or take-profit orders through which you set price points at which you exit a trade so as to book profits, options we’ve mentioned a fair bit in our trading-related articles). Think of this extreme as the ideal option for those who want to make decisions with a cool head rather than during the heat of (price action) battle, with them creating and implementing their plan right from the beginning of the trade
2. On the other hand, there is the option of being extremely aggressive so as to try to make the most out of each trade by not setting take-profit (because you want to ride the wave in question to its fullest) and stop-loss orders (because you do not want to be forced to exit a trade by what you suspect might be nothing more than slightly more aggressive short-term noise). When it comes to the latter, there are indeed traders who believe that hanging on to trades until liquidation makes sense

To elaborate a bit when it comes to #2… what is liquidation anyway?

In a nutshell, it is simply a price at which your entire trade is wiped out (the price at which you lose everything) and the liquidation level depends on whether or not you have borrowed money from your broker so as to trade with a larger position size than you can afford (using leverage, in other words) as well as how much you have borrowed.

To once again explain through extreme examples, you are only “liquidated” if the price of your asset goes to zero if you do not use leverage (if you let’s say buy a Chinese share). On the opposite end of the spectrum, there are brokers who even offer leverage options well north of 100x and as such, you can even get liquidated if the price moves less than 1% against you in instances where you are over-leveraged.

Needless say, riding a position until liquidation is risky.

Should you do it?

In most cases… no, not really.

There are instances such as let’s say trading already-volatile assets such as cryptocurrencies using leverage where it sometimes makes sense to ride positions until liquidations but for the overwhelming majority of assets (including Chinese assets), that is usually a sub-optimal option for a wide range of reasons, such as:

1. The fact that when riding a position until liquidation, you tend to get emotionally attached to the position in question and proverbially getting married to a position is perhaps the number one mistake you can make as a trader. Why? Simply because this tends to inhibit your rational decision-making process and emotions take over… let’s just say that traders who make primarily emotional decisions don’t exactly have staying power (longevity)
2. The fact that the very action of setting a stop-loss in no way means you will be out of position at the slightest price fluctuations… it’s all up to you. There are indeed traders who use tight stop-losses because their models warrant it but that doesn’t have to be the norm. You can set stop-loss orders as aggressive as you deem necessary so as to create a cushion for yourself that is as generous as you believe it needs to be. Therefore, if you are afraid of being wiped out by “noise” (prices only briefly going against you), why not simply set more aggressive stop-loss orders rather than ride your trade until liquidation?
3. The fact that there is unfortunately a very blurry line between trading and gambling, with many so-called traders crossing it without realizing that this occurred. Riding positions until liquidation tends to align with a gambling mindset more so than with a trading one and as such, once again whether or not you realize this, it could mark your transition from trader to gambler. As mentioned with reason #1, gamblers don’t tend to stick around as traders all that long
4. The fact that riding positions until liquidation can actually keep you from extracting the most out of the trade in question. Many market participants make the mistake of assuming that just because your stop-loss order was triggered and you have exited the trade, you need to stay out for good. Nothing could be more wrong and, instead, many successful traders actually do the exact opposite by using stop-loss orders to exit trades before they go against them too aggressively, with the intention of getting back in at a better price point

All in all, when it comes to Chinese assets at least, the answer to the question which constitutes the title of this article tends to be negative. More often than not, riding positions until liquidation is too aggressive as a strategy and as strange as it may sound, it isn’t even necessarily conducive to maximizing results if things do eventually end up going well for you, as illustrated though reason #4.

As such, the ChinaFund.com team recommends taking advantage of stop-loss and take-profit functionalities offered by pretty much any half-decent broker. The reasons behind our recommendation primarily revolve around the fact that through articles such as this one as well as one-to-one with our clients, the ChinaFund.com experts always recommend approaches based on reason and a meaningful understanding of the scientific method rather than emotion. Should you be interested in the latter, a one-to-one consulting session with a ChinaFund.com expert, we are of course only a quick message away.