Several events collided on December 14, 2010, to create one major headache and that got me to thinking about Murphy and his law. Simply stated for those who may not know it by name, Murphy's Law provides that if anything can go wrong, it will. As I think back over my years of trading I have to laugh how many times it, or one of its' corollaries, has humbled me. Murphy teaches quite a lesson to traders. For one, we learn that some trades are going to lose and sometimes there may be a few losses in a row. I remember once talking to a trader who had suffered 27 straight losses yet he was still in the game.
A number of losses in a row is sometimes euphemistically referred to as a drawdown. They have occurred in some fashion to every trader to whom I have ever spoken (though not at the 27 straight level). In this regard, I believe Murphy teaches money management, one of the important elements of ultimately successful trading. A trader who has a solid money management can prevail against a Murphy onslaught but one who has no such plan is quite likely to go down in flames.
I recall an early learning lesson at Murphy's needs when I was new to option trading. One important part of trading options in many situations is an awareness of the open interest; in other words, how many contracts currently exist (as opposed to the option volume which is a daily number). Open interest is an indicator of liquidity and lack of open interest often portends higher premium and/or wider spreads. In any event I have a minimum amount of open interest as a requirement before entering options trades. That is, if I remember to look. I always look now, but once years ago I found what looked to be a fantastic trade; all my criteria appeared to have been met and I jumped on it. Then it dawned on me that I had forgotten to check the open interest and when I did I was surprised to find that I was the open interest. I immediately went to pull the plug but found that the spread had widened and I would learn a somewhat costly lesson.
I guess all I'm saying here is that things do and will go wrong as we trade just as they do in every other avenue of life. There is no perfection in trading just as there is none in any other endeavor. When things go wrong, my advice is to stop and consider what went wrong. Did you make a mistake or did something completely beyond your control occur. If you see your mistake, you can fix it or at least not repeat it. Far too many folks beat themselves up when a trade goes badly or they make some mistake like I did with the open interest. It's OK and it is a great learning experience and it is in the past. The best thing about the past is that it is behind us.
by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
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