Trading on Borrowed Time - Part 1
Have you heard the one about the poor guy who ends up lost in a minefield? Having no clue what to do, he prays, covers his eyes and walks a straight line. Miraculously, he survives. Brimming with confidence, he is convinced that if it happens again, he will employ the same technique to survive. Well, you can figure out the rest of the story. Boom. It’s just too obvious. That guy was simply on borrowed time.
This ‘guy’ could be any number of traders, including you, who trade in the same style. Finding themselves in that proverbial minefield with huge intra day losses. In a fit of desperation, they put on crazy Hail Mary trades with double, triple, and quadruple the normal size just looking for that miracle. You also know the ending to this story.
The one word that injects fear into the heart of every trader is blowout. As in, “Honey, I blew out the account again…” and (Honey, please put the gun down..).
Control is the essence of good trading. You can’t control the markets, but you can control your actions. You either have the control or you hand it over. This is a multi-layered statement, which I will explain later. As a trader, ‘handing over’ control is putting it lightly. Realistically, you get beaten into a bloody pulp and have no other options but to submit.
Are you on borrowed time?
If you are doing any of the following actions, then you are trading on borrowed time:
1) You go ‘ALL IN’ on any single stock aka a Hail Mary.
2) You go all in on a stock position into an earnings report or an FDA meeting
3) You are constantly ‘praying’ for a position to go your way even though all your original premises and signals have broken down
4) You start justifying your trade position with a ‘longer term’ out look and decide to ‘invest’ or ‘swing’ the trade.
5) You keep trading to ‘make up’ the commissions
6) You keep trading to make up losses on the day, even through the setups are blurry
7) You go double, triple or more of your normal comfort level size on trades after each stop loss--- especially when it’s during consolidation periods
8) Your intraday losses are greater than 10% of your account
9) You can’t leave the screens for fear of missing an opportunity, not even to go to the bathroom
10) You regularly pray for just one more miracle trade! (several times a day)
There’s a fine line between having control and plunging head first into the abyss. This line can be crossed merely by a string of emotional stop losses. These losses can turn into a domino effect that gradually snowballs into disaster. The trader loses all sense of objectivity and pushes silly trades with size just to ‘get back to even’. As the trader continues to throw Hail Mary trades with too much size, he gets more and more desperate. Eventually, this trader is going to regain some of his senses and call it quits for the day, proceed to blowout the account or get real lucky as a miracle trade plays out, digging him out of the abyss. Every trader faces the abyss and recovers at least once with a miracle trade. Rather than considering this as a gift, consider it more of a warning. Just like our ‘guy’ from the minefield, if the trader doesn’t change his ways, a blow out is eminent.
After a miracle trade, a trader will come to one of two conclusions. This is where the fate of the trader is sealed.
The trader will realize how lucky he was, take a step back and reevaluate his methods objectively. He will take the necessary steps to get back in control and maintain control. Never for once will the trader mistake the miracle trade for some great feat of trading ability. He got lucky. He won’t be so lucky the next time.
In the absence of reason, the trader will chalk it up to skill and natural born talent. Lol. The miracle trade has now embedded a dangerous precedent in the mind of the trader. In the guise of a profitable trade, the market has placed a ticking time bomb into the mindset of the poor trader. The trader will go on as if nothing has happened. He will inevitably find himself in the minefield again. He may survive again, which makes it even worse. With each successive miracle trade, the trader gains more false confidence. Instead of avoiding the minefield, this foolish trader now actively seeks them out. It’s like a scene from some B rated horror flick where the victim is completely unaware of the psycho killer behind him. It doesn’t take a genius to figure out the inevitable conclusion to this story. Let’s just say, dead man walking. The best way to not get blown up in a minefield is to not place yourself in a minefield