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Bulkowski's Trading Catastrophe

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As of 02/15/2019
  Industrials: 25,883 +443.86 +1.7%
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Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners.

This article discusses how to recover from a trading loss so devastating, you've nothing or almost nothing left.


How to Survive Trading Catastrophes

A picture of my survival kit.

I live in tornado alley. That means several times during the spring, nasty storms will threaten to spawn tornadoes and send me scurrying into the bathroom for shelter. In that bathroom, I have built a survival kit. I bought a large plastic container than holds a hatchet, ramen noodle meals, cooking utensils, a whistle, batteries, flash lights (2), and so on. I show a picture of the kit on the right.

Every trader should have a survival kit, too. The following takes a closer look into what it might contain.

Preparation and Risk Evaluation

A trader I know placed a $1.4 million bet in the futures market that went bad. It so bruised his confidence that it took almost a year to recover. I'm not talking about the money he lost, but about his ego. He used 100 to 1 leverage, didn't fully understand the risk, and buried himself by losing more than six times his largest lifetime loss up to that point.

Did his trading system prevent the loss? No. Did his trading plan warn of disaster? No. Was he prepared mentally for the loss? No.

Losses in the markets are the cost of doing business. If you trade markets long enough, a large loss will occur or even a series of smaller ones will add up to a substantial amount of money. Change your systems and procedures to help prevent or limit such losses. Throw "what if" scenarios at your trading system to see how it copes. Then tune it when it shows weakness.

Another trader I know quit his job to trade full time using a system he developed. In his first year, he made $100,000 (according to one study, only 4% of traders make more than $50k, so he did very well). The second year, his system quit working. It suffered the largest draw down in 25 years of back testing.

How did he cope? Let's just say he put his house on the market and leave it at that.

Was he prepared for the nightmare scenario? No. Could he have been better prepared? Yes.

Trading involves risk, so have plans in place to limit that risk. Your trading plan should have a check list that examines not only the potential profits but the losses as well. Prepare for the risk of loss and have a plan, including a mental one, that deals with huge losses. Review that plan often so you know instinctively what to do.



I remember reading about a trader that had her T-1 phone line cut and she had to scramble to find phones to cancel trades.

What if your trading computer goes down during a trade? Do you have a backup? Do you have multiple ways to contact your broker in case the land-line dies? Have written contingency plans in place to handle the "what if" scenarios. That way, you can open the book and deal with disaster instead of having a gun pointed at your head while you scramble to cope. When you are under stress, your ability to make correct decisions is limited. Have a plan to which you can refer to guide you through a crisis.

I was watching the movie, Flight 93 which, according to the jacket cover, "...details the heartbreaking true story of the heroic passengers and crew aboard United Airlines Flight 93 on September 11, 2001. Trapped onboard a hijacked flight, these ordinary citizens disregarded their own personal safety to bond together and overthrow their terrorist captors."

What impressed me is that the operator handling one of the calls pulled a binder of contingency plans off the shelf and started flipping through it to find the right plan to deal with the scenario. Traders should not have to think of what to do next. Rather, the plan should tell them.



A picture of my dog.

If your broker goes out of business and it takes 9 months to get access to your money, how will you cope? If your net worth is large enough, do you have accounts with multiple brokers just in case? Do you have broker statements on file to help prove what you own in those accounts?

Is your brokerage account insured by SIPC? Do they have extended coverage to protect large accounts like yours? If they have $100 million of coverage and 1 million customers and the CEO takes your money and runs to Rio to see the Olympics, does that mean each customer will only get $100 ($100m/1m)?

What happens if you log into your brokerage account to discover some hacker grabbed your account number from last week's trash and transferred your money out of the account? When was the last time you changed your passwords? How many of you have the sequence of numbers "123" or words a dictionary would recognize in your password? (That means, all a hacker has to do is throw an electronic dictionary at your password and they are in).

How many of you have amounts over the FDIC limits for bank accounts?

Ask anyone that invested with Bernie Madoff if they should have diversified among many investment advisors.

Spread your wealth around so that a problem at one financial institution does not cripple you.



Do you have an emergency fund to help you through the bad times? Many that are suffering in this economy wished they had spent less and saved more.

Cultivate relationships to give you a sympathetic ear. Perhaps they have a solution to your problem that you didn't think of. Their words of encouragement can help you through the lean times.

Thoroughly test and believe in your system so that you don't abandon it when losses occur.


Location is a weird title for this one, but it means being in the wrong place at the wrong time.

You are more likely to suffer a loss when...

  • You are getting a separation or divorce;
  • Have had a big win (you get careless);
  • Have had a big loss (you double down to make up the loss);
  • You don't trust your trading system (so you violate the trading rules, resulting in bigger losses);
  • Market volatility increases (you are not accustomed to large and rapid swings);
  • Markets are unusually quiet (this often leads to wild swings);
  • Hung over or you abused your body in other ways (don't smoke, don't drink, and don't do drugs);
  • You loosen your stops to give the trade more time to work (hope will not save a trade).
  • To avoid a margin call, you throw more money into the trade.


Weak Will

How many times have you watched the news and some disaster survivor said, "I kept thinking of my son/daughter/wife and what my death would mean to my family. I vowed to survive." Sometimes they want to survive to see an unborn child. You'll hear variations of these themes. People with high self-esteem survive. People with low self-esteem give up too easily.

Determination keeps you alive. A trading psychologist I spoke with observed that people in nursing homes have several clocks in their rooms. Why? They serve as reminders of the passage of time, how precious it is. When a visitor says "I'll be back on Tuesday," the old folks watch their clocks, counting down the hours and minutes to the visit.

To me, it sounds as if they are bored stiff, that they need a distraction, something invigorating to power them each day. If you are busy, have you noticed how quickly time passes? If you are bored, time passes slowly.

If you're not in a nursing home yet (or even if you are), here are three things to strengthen your will to survive.

A picture of my dog.

1. Build self-esteem.

Are you a glass half-empty type person (pessimist)? Consider cataloging the positive aspects of your personality and your life. Write them down. The revelation that you have numerous good qualities and a life that is the envy of others may help improve your self-esteem.

Sometimes traders have guilt, unresolved traumas, anger and other psychological issues that shape their judgment and hamper their ability to succeed as traders. They may even question the value of living and that doubt helps kill their trading. Professional counseling may be needed if you're really screwed up. If you're just bent or slightly twisted, then perhaps you can straighten yourself out on your own.


2. Get friends.

If you live alone, are divorced perhaps, with no social life to speak of, then you may have less will to survive than others. When I was dating Susan, I imagined being held up at gun point and feeling comfortable taking a bullet for her to ensure her survival. That wasn't a death wish, just a reflection of how important I viewed our relationship. Of course, it didn't help when she ran off and married someone else, but that's a different story.

The point of this is to build relationships with friends and have a support system to help you over those trading speed bumps that damage your undercarriage.

3. Set Goals

I've written before about the importance of setting goals. Increasing your will to survive as a trader is much easier if you have goals to meet. One trader that is new to the markets wanted to make 50% in three months. That turned out to be easy so he raised his goal to doubling his money in 6 months. Three months into his new quest, and he is just 20% away from achieving his goal. Whether the markets will be kind to him in the next three months is anyone's guess, but he continues to improve his methods and learn from his mistakes. Having realistic and reachable goals are powering his success.

Try setting your own goals. They need not be monetary. You can try to improve your technique. Fewer trading mistakes, keeping emotions in check, and stress reduction are just a few goals that will help improve your trading success. Focus less on money and more on technique to help improve your trading.


That's a Wrap

If you don't understand the tools you use, then confusion may cause mistakes. One novice trader thought his software was broken because moving averages remained well above price. He didn't realize that price had gapped down at the day's open.

Almost every time I talk to him, he's complaining about his software, how the price bars aren't properly rendered or how he wishes there were time scales more frequent that 1 minute. He's gone though several platforms trying to find one with the right fit as he continues to lose money. It's like he's blaming his cars for the dozen accidents he's had. Here's a clue: it's not the car's fault.

When a trading disaster strikes, traders should have the flexibility to adapt or die. I have told you the story of a trader that made $100,000 in his first year of trading. Then his system stopped working. Did he fold up his tent and shrivel away? No, because he couldn't sell it in this economy. He continued to struggle. Fortunately, he had other trading setups, and was always on the lookout for new approaches to augment the ones in his toolbox. That flexibility has served him well. After giving up his career to trade full time, he had not only the desire but the need to survive trading. Failure was not an option, so he kept pounding away until the breaks came.

It reminds me of a scene from The Dirty Dozen, I think, when Lee Marvin shoots off the bottom of a rope that a soldier is struggling to climb. He scrambles up the thing. All traders should have that kind of survival instinct powering them up the market's rope.

-- Thomas Bulkowski


See Also

Written by and copyright © 2005-2019 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Some pattern names are the registered trademarks of their respective owners. Gravity is a myth. The earth sucks.