Low probability trading

The trader behind ‘High Probability Trading‘ loses $31 thousand (around 80% of equity) over the long weekend. Warning: this video contains pretty much nothing but the f-word:

trader-blow-up.jpg

Stock Futures Trader Having Rough Day

In his blog entry, the High Probability Trader says:

Good Bye………I hope you all have a nice life. I need to be to work in 2 hours, and I can’t manage this position, I have to sell out. About 40k in 2 days,,,,,,,,,,,,gone. Speechless. One bad trade, is all it takes. 2 and a half years of trading thrown down the drain on 1 trade. Who would’ve thought the Futures would tank as much as -500pts on YM with the US markets closed. I didn’t, and I never really wanted to be in this position, but I couldn’t accept the small loss.

And so it is that the High Probability Trader (HPT) gets wiped out by a low probability event.

I can relate to HPT on several levels:

– Before I started this blog, I had been trading full-time for over a year and was experiencing a peak-to-trough drawdown in the region of 85%. While I had a strong edge over this period, I simply pressed to hard and too often as a variety of psychological problems took hold.

– See how HPT shouts at the market to keep going against him? I also experienced similar feelings of self-loathing and have willed self-harm after taking positions (the market obliged). When all hope is lost we can turn on ourselves. (Remember ‘Billy’ in the film Predator? Midway in the film Billy says ‘we are all going to die’, and toward the end he stops running from the Predator and sacrifices himself on the bridge.)

– In the first few months of the recovery process, there was a very strong chance of getting completely wiped out. I also took outsized risks but I was lucky. Now, If I get hit by a tsunami that blows a hole in my equity, I feel I am psychologically ready to deal with it.

What can we learn from HPT’s experience?

The longer we stay in the trading game, the greater are the chances that we will get hit by unexpected, low probability events. Looking at the history books provides some guidance on what to expect, but history provides only the finest slither of the infinite possibilities that could have occurred. So it is that traders must tread extremely carefully, always balancing the upside with downside, appreciating that extreme, unexpected events will probably net out over the long term. Its all about navigating through these squalls and staying alive to trade another day. These days, I am more comfortable with my relationship to trading uncertainty. My risk per trade is still too high by most standards but it is much lower than it used to be. I don’t hold FX positions overnight and based on current risk taking, a 200pip gap in an exchange rate shouldn’t cost me more than 25% of my equity.

horsement.jpg

It can serve us well to imagine that the horsemen of the trading apocalypse are just behind us.

(Hat tip to Trader Eyal for pointing out this story)

Advertisements

5 responses to “Low probability trading

  1. Thanks for the mention.

    We all put our money on the line every day. There’s no way to avoid an unforeseen calamity, but that calamity is sometimes unforeseen only by ourselves. What is perceived as a low probability by one person isn’t by the other. IMHO I think that this was a clear case of putting on a position way too large for his account and not using proper money management rules, risk control, stop adherence etc. We’ve all done that and sometimes still slip and commit these mistakes. Kudos to HPT guy for sharing his video, not many people have the balls to do that.

  2. I fully agree with you Eyal. Reminds me again of Hemingway’s Old Man and the Sea and ‘going out too far’.

    It will be good to HPT back again one day. There is much he can learn from the experience and 2.5 years is only a medium size hill of beans for the life of a trader.

  3. Why did this ever happen? A trader knows to limit losses by cutting them short and waiting for the next trade, this shows me the characteristics of a very new traders, not an easy mistake for experienced traders to make unless they find discipline hard, if so then they do not belong in the trading worls to start with. What happened here then exactly? Did he not cut the loss short, or have a stop loss or anything that makes sense? I don’t trade your market so please elaborate on why this ever would happen to futures traders…..I trade higher risk market and have low drawdown. Thanks.

  4. All I can say is that, at times, Vegas and Wall Street aren’t all that far apart.

  5. No, he did not use a stop. As seen in the video, he was ‘hoping’ the market would turn around. I am glad I’m a scalper and do not trade overnight.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s