There are times when I am required to give a mentoring student some tough love, because it\u2019s important for me to convey, immediately, to a trainee when I spot a trading quality that is so destructive that he has virtually no chance of surviving as a trader unless he rids himself of that trait.<\/p>\n
I have a mentoring student named Robert who is a very good guy and deeply committed to improving himself as a trader. Robert is an interesting guy in a lot of ways. He is a psychotherapist from Wisconsin (and a die-hard Packers fan\u2014something he reminds me of when he knows it will be particularly painful for me\u2014like this past Sunday\u2026.). Robert has a busy schedule providing therapy to his patients and thus chose options income trading, as it allows him to be away from his screen for extended periods of time (with the proper precautions in place, of course).<\/p>\n
In a recent mentoring session, I was surprised to find out that he had allowed a trade to get completely out of hand, way past his maximum permitted loss on this particular strategy. I asked him to explain why he decided not to act, and take his stop at the required level. He answered, \u201cWell I was hoping that the market would come back to me\u201d. I was a little flabbergasted at the answer and so, to make sure that I hadn\u2019t missed something, I asked, \u201cWhat caused you to believe that the market was likely to reverse\u201d? He was honest enough to tell me that he had no basis for that hope.<\/p>\n
It was time for me to dust off my \u201cHopeville\u201d speech that I give any trader who rationalizes that it\u2019s okay to ignore a stop. Robert\u2019s rationalization was actually the most honest I\u2019ve ever heard , by the way. He admitted that he had no basis for his hope. I actually admire that kind of honesty.<\/p>\n
Most traders will be disingenuous when answering such a question\u2014offering some preposterous \u201ctechnical\u201d reason why they think that blowing through their stop is okay. If you look at any chart hard enough, you can find some reason to justify just about any prediction. And most of the time you\u2019re going to be wrong. The fact is that there is never a justification for blowing through your planned stop. In any kind of trading. Ever. It\u2019s pretty simple.<\/p>\n
I told him that by making that \u201cdecision\u201d to do nothing , he had moved out of his neighborhood and into another fantasy town known as \u201cHopeville\u201d. Hopeville, I told him, is where traders go when they just can\u2019t accept that they have lost on a trade but they are unwilling to close the trade, as they should. Traders who move to Hopeville, sooner or later, realize that the only thing in the town is a graveyard for traders and their accounts. The market is more than happy to take even more of your money while you hope that it will give yours back.<\/p>\n
Making matters worse, the trader, pre-occupied with somehow salvaging a hopeless trade, ties up his capital, and emotional energy, into a losing cause when he could be focusing on another use of that trading capital on something that has a high probability of success. So the loss on the \u201cHopeville\u201d trade goes beyond the doomed current trade\u2014it\u2019s also the lost opportunity cost on another potentially successful trade.<\/p>\n
Please traders, don\u2019t move to Hopeville\u2014you will die there. Ask anyone who has blown up his trading account and is out searching for another career.<\/p>\n
No relevant positions<\/p>\n","protected":false},"excerpt":{"rendered":"