“I spotted an irresistible option trade. It was a no-brainer – almost as if the guys on the option-trading floors were holding up signs announcing, “FREE MONEY.” So I backed up my wheelbarrow and loaded up. It was the most profitable trade of my career. But it almost bankrupted me first.”
The above quote is an excerpt from an interview with a trader posted in a well-read financial newsletter. Often, one of the biggest problems in our industry is unrealistic expectation. The lure of “Champagne wishes and caviar dreams”, as Robin Leach used to say, causes even experienced traders to act irresponsibly. Here is a fact; any trade that almost bankrupts you is by default A BAD TRADE. The stories of pain turning into massive pleasure are the ones people want to hear. They follow the ebb and flow like plot lines of the best movies Hollywood can churn out. But just like Hollywood films are fantasy, so is the idea that successful traders become successful by going to the brink of bankruptcy with every trade.
There are cases, like the trader above, where this happens and the story is sexy, no doubt. There are many more cases, however, like Long Term Capital Management, (LTCM) which in less than one year, lost $4.4 billion of its $4.7 billion in capital on a no-brainer and went bankrupt, exposing the U.S. financial system to almost $1 trillion in defaults. The founders and traders in our firm work on trading floors for over 40 years and can tell stories of traders making obnoxious sums of money in minutes and days, but can tell more stories of the opposite.
Homes lost, lives shattered and families destroyed by the perceived “FREE MONEY” that they saw. Successful trading is boring analysis and disciplined trades and the best job you can ever have when you understand what it’s all about. Forget making a million dollars in an hour. Focus on being able to take care of yourself and your family on your own terms and know that it will take time and work, but there is nothing in the way of your dreams except your own acceptance of reality versus fantasy; responsibility, versus greed.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results