In these plans, I look to prepare for Murphy’s Law: “if there’s anything that can go wrong it will’ (BTW did you know there is a whole web site dedicated to Murphy’s Law? www.murphys-laws.com).
The important point here is to prepare for these contingencies before they happen.
Let’s take the most difficult problem first.
- What happens if your internet connection goes down? Now that may be from a baby inconvenience from ‘my modem’ has stopped working to a granddaddy of a disaster where ‘your whole country’s ISP service goes down’. Don’t say that can’t happen – it happened to me when an undersea earthquake brought down all of Hong Kong’s connections. In my case, my contingency plans swung into action. I told a colleague of the problem and he placed interim stops and profit targets and the next day I was in Singapore where there was no problem.
- In the same vein, let me ask you if your broker takes phone orders? If he does, what types of orders will he accept? IB, for example, will take only market orders.
- This brings me to the next major problem: what happens if your broker’s platform goes down? Or worse still if his access to the exchange goes down. Allied to this is the problem of what will you do, if the exchange on which you are trading goes down (e.g. as a result of a terrorist attack)?
Think about this. It may be your account size does not warrant precautions, but then again it might.
The three ‘disasters’ above head my list because to a large extent, the ability to protect yourself depends on others: a friend, having other accounts, hedging on a different exchange etc. The next two on my list are more within our control to remedy but are no less stressful:
- Having the market gap against you, big-time! I am not talking about say a 2% gap on the ES but something extraordinary like Oct 1987. If you have a 10% gap against you, what will you do?
- The last one: you find you have an open position, an open position you were unaware of and it’s against you by 5%, 10% or more, what do you do in the circumstance?
My solution to both problems is to cut the position. This leaves me free to decide on my next course of action.
By the way, problem (2) did happen to me. I forgot to cancel a GTC stop order when I went on a holiday. Though I have someone who checks my positions daily, he, unfortunately, was having marital problems and failed to check the open positions during the break. I came home and found I was short the Hang Seng in raging bull market and down 10%. I cut the position and I was thankful I did: it finished lower the day I cut it and again the next day. But three days later, I’d have been down close to 13% and the loss would have increased the longer I held it.
The solution to major and minor disasters is preparation. Think them through and then rehearse them in your mind so that your responses are automatic. In the long run the preparation you put in may save your life.
Tomorrow I’ll start the posts on trading plans.