Excellent Money Management Advice, via Karl Denninger at The Market Ticker
Money Management: The Key To Survival
Many people have had some horrifying punishment meted out to their accounts the last couple of months (and especially in the last month), just like many did in late 2008 and early 2009 (on the other side of the trade.)
This is what happens when you don’t use sound money management:
As you know, during the crash of 2008 I was away from trading due to an accident and I was fortunate to have someone like Atilla to take care of my account which was worth about 350K at the end of August 08.
Market crashed and the person I trusted my account when I was away turned out to be one of the very few in financial world who called and traded the crash of 2008 timely. Later when I reviewed my statements I saw ES and option trades that made more than 70 points in less than 20 minutes on September 30 or October 1.
When I was back, I had an account worth near 4M and I decided to open a restaurant in NYC. I quickly found out that even Manhattan wasn’t immune from financial tsunami, so I was back to trading. With a larger than ever account. With a gross confidence, with a pride to be in the other class. A new player in a new game. However learning process became expensive.
When I switched from short term to intermediate term trading, I thought the only thing that matters is time frame. No I was wrong. This was completely a new game.
Yesterday was the day I could not hold on to my mistakes. I called the person who made me millions during the crash, who I tried to follow after the crash.
That’s $350,000 -> $4,000,000 -> $0
Look, we all take losses as traders. I don’t care how right you are today, some day you will be wrong. Badly wrong.
Leverage + too big of a bet + failure to segregate speculative accounts from core capital = you will eventually die.
Every time.
Not some times.
Every time.
Jesse Livermore blew himself up more than once, failing to protect fortunes he made trading that reached as high as $100 million during the 1929 crash, and ultimately committed suicide.
Money management folks.
Key rules:
- Segregate your speculative account and core capital and never have more in your speculative account than you can afford to lose. If you blow up your speculative account, so what? You have a nice loss carry-forward for your taxes down the road, and you’re still alive.
- Never meet a margin call. If you get one, you blew it. Liquidate out and then rebuild from what (if anything) is left.
- Never use more leverage than you can stand to see blow up in your face. If you can’t sleep take off positions until you can.
- If you find yourself trading on emotion, take some or all of what you have off, irrespective of profit or loss. Take a day or a week off – win, lose or draw – and clear your head.
Those are the basics.
The move the last few weeks has been parabolic, and it will end in tears. The people claiming otherwise are wrong – this sort of move is never sustainable. Examples can be found in 1929 ("Stock prices have reached what looks like a permanently high plateau"), 1999 (Pick an Internet bubble stock – the entire Nasdaq doubled that year!) and more.
Every single one of these ramp jobs has ended in destruction for those who stayed at the party for too long.
Something to think about.
