Yesterday’s blog post by a West Coast trader caught my attention (Dynamic Hedge).
I often hear about a trader who sticks with trades for a really long time. Even adding recklessly as the position goes against him. Eventually the trades work and they credit their conviction. They point skyward and thank their conviction as if they had just won an Oscar.
This happens a few times and word gets around. Conversations at the poker table and the coffee room center around exactly how much conviction this trader has. Rumors swirl that the trader has never capitulated — due to excessive conviction. When faced with the trader on the street, others give a wide berth; fearing the radiating conviction.
Then a few months later the same guy gets into another position and holds on; citing his conviction. This time he gets blown up. Now they refer to him as, “that stubborn asshole.”
That’s an appropriate name for this possible ex-trader.
One of the reasons that I feel so strongly about exercising skillful risk management is because I was a stubborn (insert any of numerous appropriate nouns) for many years. However, I eventually saw the light and hope that I am able to convince readers that none of us is smarter than the market. We can hold all the charts, positive attitudes, and the ‘winning position’ for a limited period of time. We can be certain that the market is going our way. However, markets can remain irrational longer than we can remain solvent (as John Meynard Keynes said).
When our bankroll is finite, we can run out of time. It’s not all that difficult to blow up a trading account. There are two major ingredients in the recipe:
Recipe: Account blowup
- Large sized position
I remember. It was the market bottom of August 1982. 1981 had been by best year and I believed I could do it all. I was bearish. Why? I believed in Joe Granville. who once said that “I don’t think that I will ever make a serious mistake in the stock market for the rest of my life.” I knew he was a blowhard, but his predictions had been known to move the markets and he was still bearish.
The amazing thing about the whole thing is how I was willing to remain stubborn until my large trading account had disappeared. I get it now, but now is too late. I want YOU to get it before you find any trouble. And I’m very pleased to state that a number of readers boast of how conservatively they use the options market. How very wise of them.
To each of you: Congratulations for understanding risk before you had to see it for yourself – up close and personal.
Risk management is the name of the game. And if you don’t believe it, then ‘stubborn asshole’ is not a strong enough term.
I wish you good and safe trading.