The most predictable part of trading is the blow up.

I apoligize for the tone of this post.

As a trader your only job is to be able to trade tomorrow.  If you do that long enough you will be make money.  More specifically your job is to approach the next trade without the baggage of the previous trade or your life.  When you get by that you can trade the market and not the market and yourself.  I have been fortunate to see many people blow up and I have had my share of blow ups and mini blow ups.  I have taught about 250 traders at this point.  I spent most of the last 7 years at the MERC/CBOT.  I have seen and experienced countless ups and downs.

If you get anything from this understand that when you blow up it, it is your fault. You can’t stop slowly bleeding to death in this business but blow ups are preventable.  Corzine is a dick, what he did was shitty.  He messed with many peoples lives and livilihoods. He has shaken the futures and investment community.  The ripples will be felt for awhile.  He screwed up liquidity so bad today and the coming days.  Obviously, we all will get through this but on the other end it will be different.

Here is what I have read that has been reported, I do not pretend to know the whole situation and if I get something wrong let me know I will be happy to amend it.  He was trading is soveriegn debt.  With leverage, his position was about $6 billion and he got a margin call for $1 billion.  They discovered they only had about $200 million, not sure if that was before or after the credit lines were tapped.  Corzine as CEO, was acting as a trader with little outside input (this could have been reported this way to cover someone’s ass).  Apparently he was betting correctly and it accounted for 16% of revenue over a quarter.

From here on out I am going to generalize the anatomy of the blow up.  At this point, no outsiders know all of the details.  I am still leaving a little bit for the benefit of the doubt because I could be wrong.  If I am wrong, it is because his situation is completely different than all of the other blow ups and mini blow ups I have seen.

Getting off tilt.

No sane person bets all of their money on one trade or all of the shareholders money on one trade.  We are human and there are countless ways to in which we lose our trading environment equalibrium (TEE).  It could be greed, it could be desperation, it could be an argument with your wife, it could be because an idiot refused to turn right on red.  There are so many ways it can happen.  Those are the things we cannot control, but we can control if we do not trade.  When an alcoholic gets in a car and crashes, we can’t blame them for crashing but we can blame them for driving.

Ignoring the risks.

I do not care who you are, no one is above the laws of risk.  Risk is equal to reward, that never ever changes.  Even if you do not realize risk, you are still risking.  I guarentee people would trade less or consider the trades taken later in the day if they kept track of total risk, instead of realized risk.  There are many types of risk and as a trader you have to be completely aware of risk at all times.  That does not mean it has to cripple you but you have to be aware of it, it makes it easier to understand the difference between trading and gambling and probably equally important it makes it possible to move on /survive after risk is realized.  If I order a lobster at market price and it turns out it cost me $3000 I am going to pissed. It will ruin my appetite.

The give up.

At some point you say to yourself that it can’t get worse.  It gets to worse very frequently when you do not have TEE.  My mentor, Anthony, always told me that it is not the first day that ends careers it is the second.  I will be honest I did not know what that meant till I blew out and was forced to take some time off.  For the record, I think every trader should blow out at least once and probably twice.  It is easy to lose respect for this business, it can all be taken away from you at a moments notice.  I have seen the story played out several times.  When you finally get back you realize two things; that you love this business and that you can pick yourself back up.  When you give up thinking about a series of trades and the current trade is the one that makes or breaks you, you have begun to lose and chances are you aren’t coming back.  You start to think about how long it is going to take to make it back and you look for an easy way out like adding on or nor realizing the risk (loss).

Ignoring the facts.

The writing is always on the wall but we are often so buried that we cannot see anything else.  We know what the right thing to do is but we cannot force ourselves to do.  Being a trader means accepting the consequences and moving on.  You have to be comfortable admitting you were wrong and moving on.  The cover up is a 1000 times worse than the crime.

You can’t ignore the facts.

Eventually you can’t ignore the facts, the oversight finally catches up to you. This is the final straw.  You swung for the fences and missed.  It is almost a relief to be honest.  You knew for awhile that you were doing the wrong thing, even if you couldn’t stop it.  Finally, you do not have any more money to feed your habit. The gig is up.

Some advice on not letting it happen.

Like I said all of the blow ups happen because risk equals reward.  When you are taking too much risk when your aren’t in the correct mindset it happens more quickly.  Blow ups are the most perdictable part of trading but not from the inside looking out.  You can’t prevent yourself from being on tilt but you can prevent yourself from trading.  Do not take that first step because, especially if it has never happened to you, you won’t be able to do anything to stop it.  This is also a benefit of blowing up in the beginning, it should be with a less amount of money.

Advice for getting through a blow up.

Always remember life is way more important than trading.  I love trading, it is a large part of who I am but it does not define me.  I am also a son, brother, grandson, uncle, friend, etc.  It is not easy, you will have a conversation with yourself if this is really for you.  If you are honest, that answer could very well be no.  Chances are you will come back though.  You will realize what you did was stupid and hate that feeling so much that you never want to go back.  Coming back is hard, you will have to pay way more admission the second time.  Your feelings for trading will change from lust to love and that is a good thing.  You will be scared shitless and filled with so much doubt.  Take it trade by trade and get back on your feet.

Another thing.

Someone on twitter made a comment about how every one praised Paulson for his huge trade but villified Corzine for his.  I do not know exactly what happened in either case.  If you go by this year they could very well be right, he could have been lucky.  But he was around to be lucky.  Also, you do not get a massive trade by risking your trading capital.  You do it by risking the houses money and when the market proves you are right.  Yes risk is equal to reward but in those cases someone else has or is about to realize the risk.  These cases are rare and can only be taking advantage of if you are still in business.  Be able to trade tomorrow and the rewards will come.

To summarize.

Success and failure in trading is dependent on when you take more risks.  You can’t take any trades if you there is no money in your account.  Blow ups are predictable and preventable.  Admitting you are wrong is hard but much easier than having trading taken from you.

As for Corzine, I hope he gets what he deserves.  As of right now, if you cleared MF things are looking like shit.

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3 Responses to The most predictable part of trading is the blow up.

  1. […] Institutions just like individuals can go on tilt in their trading.  (TraderHabits) […]

  2. […] The most predictable part of trading is the blow up. | traderhabits.comThe most predictable part of trading is the blow up. Written on November 1, 2011 by Eli Radke in Uncategorized […]

  3. Rmiles says:

    Good article!

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