I have gotten some constructive criticism on the topic of worst case scenarios. I said I do not think about it, I accept it and move on. I will admit I am not always a very effective communicator. So let us revisit it. The worst case scenario in trading is to blow out. To run out of money or to owe money you do not have. To not be able to trade tomorrow. I am also making a huge assumption that a worst case scenario does not happen in an instant and that you are an active participant in its fulfillment.
If I lose 2 handles on a 10 lot that is fine, if I lose 100 handles on 10 lot I am screwed, if I lose 100 handles on a 50 lot I would start sending out resumes. In the first case, I will recover financially within a few trades and mentally in a few minutes, the second will take a while but manageable. The third scenario I would be so fucked mentally and my cushion would be deflated. The spread sheet math would happen instantly. 100 days of $2500 to get back to even.
So why do I not think about the worst case scenario? It is not because they are not possible, it is because the path is riddled with warning signs. First, there is nothing I can do about losing in the first scenario. It is built in, I cannot prevent it from happening. In the second scenario many things will have had to happen. I did not cancel a stop or use a stop, I did not check the audit trail, I did not look at my statement, ignored my clearing firm calling, a major geopolitical event happened, I made a mistake executing, refused to admit I was wrong. A combination of all of those events. For the third thing to happen all of the things will have had to happen, plus a nervous breakdown and writing checks to keep the position of alive. That is the reason I do not keep more than a bad month worth of money in the trading part of my account. If all of those things happen I should retire anyways. Whether you can see it at the time or not, worst case scenarios generally require more than one thing to happen, to be realized. There are warning signs. For the third scenario to happen, I will have had to take action.
If your worst case scenario is to get stopped out I would recommend trading smaller or saving some money. If you are approaching a worst case scenario you still have time to act. Will the trade turn around? Maybe. Will it prevent you from risking it all in the future? Probably not.
Thanks for the feedback CJ and Canadian Sean.
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