Wednesday, August 17, 2011

Ooops, I "blew up" my account, again...

Back in a prior life, I used to work in credit risk management, where we would analyze and implement account management strategies on loan portfolios that were billions of dollars in size.  It's not as exciting as it sounds, since managing a big bunch of loans would be similar to driving a big 18 wheeler, vs. trading at a hedge fund which would be like driving a Ferrari.

Through dealing with the analysis of large numbers, I learned that it's not necessarily the absolute value that's important.  Instead, many of the metrics for comparison were based on basis points or percentages.  So as I began down this journey of learning to trade, I wanted to make sure I kept the proper perspective on my progress, and to also find a way to minimize my overall personal financial risk.

Primary way I measure performance

First, I knew the absolute dollar amounts that I would be trading would be considered random daily P&L noise for experienced traders.  So I wanted to measure my key performances, such as P&L and risk size, by basis points of my portfolio or the R-Multiple.  I find this to be the purest way to measure your performance, especially if your portfolio is small.  This way, as I scale up in size, it's not whether I'm betting $50 or $5000 per trade, it's just the same 'ole 50 (or whatever) basis points of my portfolio.

Yes, I do admit, for all the work I do, when I look at the absolute dollars I make or lose, it sure doesn't seem like much.  But measuring your performance based on percentages helps to keep a better perspective on how you're truly doing. 

You'll likely wreck the car (or your account)...

Second, I wanted to make sure that I'm not putting too much money on the line as I learn.  When a teenager is just learning to drive, there's a good possibility that they're going to get into an accident and wreck the car.  So even if you could, responsible parents just don't go out and buy a Ferrari for their child's first car!

Although I could open up an account significantly larger, it just would not be financially responsible.  I know from past experiences that I will initially lose money.  So my intention is to minimize the absolute dollar size of my account, so that I can use the $25k minimum pattern day traders requirement as my backstop to force a time-out.  This is similar to how you would get locked out of your account at a prop trading firm after you exceed a certain loss for the day. 

So what now?

After such a volatile day yesterday where I was very lucky to end the day slightly profitable, I was hoping to take it a lot more easy and be much more focused today.  But I learned quickly that trading with a lack of sleep can be very hazardous to your trading P&L.  That's no excuse for my lack of discipline.  I wasn't so lucky today with a SODA trade to bail me out.  I exceeded my $25k backstop oh so slightly, so now it's time to take a break, spend extra time evaluating what I did wrong, dust off, and refocus on my goals. 

In the meantime, I'll take the humiliating and embarrassing action of sending a little more money to unlock my account.  Nope, I admit, this isn't the first time I've had to do this in the past 4 months. I also admit, it's not like I really blew up my account, but it sure does feel like that to me.  However, this is the first time I'm telling the world of the shame and disappointment I feel.  This will motivate me to do better.  On the bright side, I look forward to the days when I'll be withdrawing money from my account on a regular basis.


Greg Reinacker said...

I do something fairly similar. I have a max daily loss limit, which is roughly 0.5% of account value. This is pretty conservative, but works for me at this stage of my trading. I'll relax this up to another 0.2% on a discretionary basis, only after taking a break and walking away, but rarely (I've only done it once).

Then for each trade, I'll have a max risk that ranges from 10% to 40% of my daily loss limit - 40% for the absolute most amazing setup I've ever seen, and 10% for the opposite extreme where I'm not at all confident (and probably shouldn't even be in the trade).

Grove Under said...

That's a great way of setting up rules for managing your overall account risk, makes a lot of sense.

At this point in my learning cycle, I wish TradeStation or some other retail broker had a way to establish rules mechanically to lock up your account per your criteria.

However, not sure how many would be crazy enough like me to really want this kind of leash on their accounts!

joshua said...

grove, call tradestation i betcha they do have lockouts. i prided myself on being disciplined and never losing much per day. well, one day i lost my mind. i remember shorting FCX, only to hit out a penny from the retracement high and then watch it drop. i think i was down $600 or so. i decided to leave the office for the day. in the afternoon, i turned on my computer at home, saw FCX making the same setup again, and i thought "i'm going to get you, you S.O.B". well, this time it went the opposite way. needless to say, i lost all discipline, and hit the alt-F7 key, probably 50 times super fast. i didn't give a f***. i lost over double that within the next 2 mins. the funniest part, i went to trade FCX the following day, it had just a gorgeous setup. i press alt-f7 buy some, and it wouldn't purchase any stock. i couldn't figure out what was happening. it turns out, i was about $9 under the 25k barrier, and wasn't able to trade. i literally could have made all the money back had i not gone under the 25k limit. after that day, i had lightspeed put a lock on the account for $300 loss limit per day.

i have the chart with entries/exits somewhere but i can't find it right now. i'm beat. speaking of 18 wheelers and ferrari's, i'm working up at pebble beach for the concours d'elegance. we brought a mockup of a jet in an 18 wheeler for my client. i have never seen so many high priced vehicles in one spot. saturday night, gooding and co is auctioning off some special ferrari. the british auctioneer guy was talking with us today saying that it is expected to go between 13-18 million. freakin nuts!

Grove Under said...

Great advice for me to just call TradeStation to find out about the lockout, instead of just wondering or guessing whether they have that feature.

I'm still amazed that all it takes is a split second for some neurons in the brain to fire in the wrong way, that then leads you down the wrong path, causing an internal "flash crash."

It's like those stories you hear about zoo animals, or your neighbor's dogs, that lose it one day and go amok. In some ways, we humans are not all that different.

Wow, now that event is THE place to be! With all those incredible cars, that's one really good way to get the mind off the markets.

Thanks for sharing, good stuff.

joshua said...

so, the car went for 14.9M. here is a link to the FCX trades. the top is the day after (the day my account was locked by $9 or so) and the bottom is the "fat finger" where i went bonkers and hit the buy button as rapidly as i could, ha.

Grove Under said...

WOW! That's some big bucks for a car! Based on my "In-N-Out" burger index, that'll sure buy a lot of Double-Double meals...

Looks like the link for the FCX trade didn't come through on your prior comment?

Very frustrating when you were only locked out by just a few $'s, and per Murphy's rule, right before THE trade to get you back.

But at least it's good to know that there WILL be many more great opportunities in the future. That's a given and a fact!

joshua said...

oops! here you go

have a good laugh.

Grove Under said...

Thanks for sharing the charts. Ugh, I see that setup the next day that got away, believe me, I know just how you felt.

And your chart of the trades the day prior, looks somewhat similar to my TNA scalp trade day!

Seems like everyone has "one of those days"...just shows that we're all human.