I sleep well at night.
No, this isn’t a non-sequitur; it actually is relevant to my trading. Bear with me while I get to the point in my customary roundabout way…
I recently had the misfortune to have to change doctors. My first encounter with my new doctor started with him asking whether I traded options. (This seemingly insightful question may have had something to do with the fetching Successful Options Trader hat that I wear everywhere now, though I’d prefer to think that it’s just a general aura of success that wafts about me wherever I go. In all fairness, though, it’s probably The Hat.) Anyway, once I confessed that I did, indeed, trade options, he immediately said that it was clear that I was a highly stressed out person and while he certainly COULD prescribe something to help me cope, he’d really prefer not to and have I thought of trying meditation?
Well. How do you respond to something like that, particularly when you’re sitting mostly naked in a paper gown on a cold table in front of a guy wielding cold metal instruments? I did what any sane person would do; smiled sagely, completely ignored him and switched to a new doctor. After all, if someone makes immediate assumptions based upon one small fact (while ignoring things like my absolutely perfect blood pressure reading), do I really want him advising me on my health?
But it emphasized the point that most people find trading (especially options) particularly stressful and yet I’m not entirely sure why. When I was an undergraduate in Engineering, the college was fond of playing some great engineering disaster movies (the Hindenburg, the Tacoma Narrows bridge, etc.) during finals week. As if we didn’t have sufficient stress in our lives with upcoming finals, they liked to remind us that when we had REAL jobs, people’s lives would depend on us. To continue the doctor example, if my doctor makes a mistake, I could die but if an engineer makes a mistake, many, many people could die.
One of my first jobs was in aerospace, working on the Space Shuttle Challenger. And yes, I spent many sleepless nights after the explosion wondering if it were something I had done or should have done. (It wasn’t.) On 9/11, I was part of Cantor Fitzgerald. And a few years ago, I had a merry little bout with cancer (I won, thankfully!).
So trading, to me, isn’t particularly stressful. After all, at the end of the day, I’m up money, I’m down money… but nobody died.
In all fairness, though, I do know where my doctor got the idea. We’ve all heard (and some of us have KNOWN) of options traders who traded successfully for many years and then lost it all. (The ending of the story usually has them flipping burgers somewhere in the seedy part of downtown Chicago, but I’ve always thought that part, at least, was just urban legend.)
But the truth is that it DOES happen. Which brings me back to my opening statement – I sleep well at night. Would it hurt if I lost my entire options trading account? Of course! But it wouldn’t be a catastrophe because only a very small percentage of my assets are in my options trading account.
And that’s the point (yes, I actually did have one!). Every day, we leave our trades overnight in a configuration that we think is most comfortable for us. We can’t remove all of the risk entirely, though, or we’d never make a profit. As John says, “No risk, no goodies”. Trading will never be risk-free. (What is? Nothing worthwhile, certainly!) What we can and should do, though, is manage the risk appropriately. We do that by following our plan, by making our adjustments, by taking into consideration whatever technical factors we use, by watching our max loss and a myriad of other things… but the single most important thing we can do to manage risk is to trade an appropriate amount of capital.
There are a lot of ways to define “appropriate”; John and others often recommend no more than a certain percentage of assets and that’s definitely a great place to start. For me, though, it was an easier question – “What is the maximum that I’m willing to lose?”. That makes it simple.
If you’re stressed out over your trade, if you’re not sleeping, if you find yourself muttering under your breath “PLEASE have the market go up tomorrow, please go up, otherwise, I’m in trouble!”, if you’re concerned that if your spouse knew what you were REALLY doing with your money you’d be dealing with a divorce attorney or if you’re one standard deviation away from living in a cardboard box, it’s time to rethink your trading size.
Trade only what you can afford to lose. And sleep well at night.
Written and contributed by Cynthia Sarver, Successful Options Trader of the Month – February 2016