Be Prepared

July 1, 2008 – 12:00 am Cross ref: www.awanginvest.com

As the mantra of the Girl Guides or Boy Scouts go, Be Prepared. http://www.pinetreeweb.com/B-P.htm

Having a contingency plan is a form of trade management, I am re-calling an incident I had last year. There was an electronic failure on GLOBEX, and it affected my exit for ES. However, I was lucky to exit later with just 3 pips off.

This is a good lesson in having contingency plans in place, and while this is still fresh in my mind, I would like to share some good lessons here.

When electronic systems fail: Is your Disaster Plan up to date? With big volatility hitting the market, as we are seeing lately, a key electronic trading execution conduit can shut down.

On July 25, 2007, around 10:25 a.m. EDT, the Globex trading application that matches trades for the Chicago Mercantile Exchange shut down. So anyone trading e-mini futures through that conduit could not place or cancel orders for about 15 to 20 minutes.

This would be a problem for any trader, especially day traders. However, this outage happened in the middle of a 20-point drop in the S&P index! So it went from being a problem to a potential disaster.

The setting was in reaction to a strong down move, as the market was making a relatively weak rally when a double dose of bad news hit: the Chrysler leveraged buy-out and existing home sales were much lower than already reduced estimates, so the market started tanking.

Trying to take profits off the board was not nearly as stressful as trying to get out of a trade that was going against you. But not having any control is stressful in itself. I had my stop in the market and was just moving a profit target order when Globex died. Another good reason why we must have our stops in, as my mentor emphasized many times.

It was time to hit the disaster plan:

  1. I disconnected and reconnected my execution platform – order rejected.
  2. I picked up the number from inside my phone log to dial direct – line
    busy.
  3. With the market still moving in my direction, I could afford the time to
    shut down and restart the whole trading platform – order rejected.
  4. I finally got a pop-up message that Globex was down. That was why
    I could not get through to the broker – thousands of others were in the same pickle.
  5. So I had to keep hitting the exit button and hope that Globex would come back up ; after an eternity, “order filled”.
  6. About 5 minutes later, the system finally gave a pop-up that Globex was back online.

I really learned several useful lessons from this episode.

By having a Disaster Plan in place:

1.It will give me a sense of calm as I can follow the steps than if I were to come up with the steps when disaster strikes. The direct line to our broker should be at hand.
2. It does not mean that I can avoid the consequences of the disaster, but I can take actions to limit the effects of the problem.
3. With the exchange’s communication conduit down, no trader can get through.
4. Because we cannot always avoid disasters, position sizing has shown its importance especially for highly leveraged instruments like futures, forex or options. ALSO our stops should be in the moment the order is filled.

I hope to use these lessons to prepare for the next hiccup that comes along; come it will as the market chops around.

ANA aka IDKIT

Ag Moderator

4 thoughts on “Be Prepared”

  1. From the page of Van Tharp:

    You don’t trade the markets, you trade your beliefs about the markets. Thus, it is important to recognize the beliefs you are trading and determine whether or not they are useful.

    There are optimal mental states for trading and there are very detrimental states for trading. The first step is to recognize your mental state so that you can determine whether or not it supports you.

    In order to trade, you must know who you are. And when you know who you are, then you can develop or adopt a trading system that fits you.

    You must know yourself before you begin trading. And when you know yourself, you can develop objectives that fit you and you can then use position sizing to meet those objectives (and it is position sizing, not your system, that you use to meet your objectives).

    Remember that beliefs are your filters to reality. They shape your reality. So it is important to continually look at your beliefs to see if they support you.

    ANA aka IDKIT
    Ag Moderator

  2. Thanks for sharing that experience, Ana. Anyone who’s been trading long enough will experience something quite similar, and it will more than likely happen when something else dramatic is happening in the markets.

    I’ve been on the losing and winning end of this situation before, and neither of them feel very good. If I am locked out and end up with a windfall profit once I can exit, I still feel pretty awful.

  3. Jeff the Pilot

    Good of you to taxi down from the sky!

    When disaster strikes, whether you come out winning or losing, without a contingency plan, the adrenaline could have given you a near heart attack.

    However, if you win knowing you have a high probability of success, that is a different gratification.

    ANA aka IDKIT
    Ag Moderator

  4. From Traderfeed page on Jul 3 08

    http://www.traderfeed.blogspot.com/

    * Good Question – The Big Picture asks if the pundits are too optimistic, or if the public is too gloomy.

    * Triple Bottom? – Trader Mike finds this and other worthy topics among his link updates.

    * Missed Opportunity – GlobeTrader offers unusual insight into the dynamics of missing trades.

    * Being Prepared – Ray Barros, with an excellent post on the value of contingency plans.

    * Trading Multiple Timeframes – Great trading lesson from Brian Shannon.

    * Market Wisdom – Chris Perruna offers choice quotes from Bernard Baruch.

    * Messy Market – WSJ MarketBeat notes the beating in the coal sector and cross-currents on a down day.

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