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Since we are on the topic, let me give you a real story about unforeseen risk and RISK management.
I'm in my final semester in college (3rd year of trading). After losing all my money the prior 2 years, I finally managed to develop into a good trader.
I'm in my final semester in college (3rd year of trading). After losing all my money the prior 2 years, I finally managed to develop into a good trader.
I turned less than $5k into $50k by grinding it out everyday during that third year. (p.s- There are people that follow me on twitter that can validate my performance, I used to post trades in a chat with other traders from twitter back in the day)
As good as the performance looked, I was not managing risk correctly. I had a solid strategy, good discipline, an understanding of what I was trying to do, and what I "thought" was good risk management. Silly me was not accounting for the "unforeseen events".
I grew up pretty poor, my best friend did as well. Christmas time was never really the best holiday for us. Every year as teens we would dream about being able to buy real Christmas gifts and actually enjoy the holiday.
That year I made money and I vouched that I would take him Christmas shopping. My intentions were to buy a few things I wanted, buy my mother and my baby sister a few nice gifts. And for once attend a Christmas event or something like that.
Christmas was almost here but I had my eye on one final big play before the year ended. $CZR owed a few billion dollars in debt and I assumed they would go through with a debt to equity swap in order to pay the debtors. aka Share dilution, which means short it....(right?)
I spent hours upon hours researching the potential for this deal before the trial date..digging into filings..calling bankruptcy lawyers,reaching out to debt traders etc.even took out $3k of my trading money to pay one lawyer to review my case for 30 min.Everyone said it was a go
I believed it, I shorted a ton of $CZR stock a few weeks before the trial date anticipating the market would begin to sell it off before the trial.
It was finals time and nerd me was focused on keeping my GPA at a 3.9...I was studying in a study room when the news broke.
It was finals time and nerd me was focused on keeping my GPA at a 3.9...I was studying in a study room when the news broke.
BREAKING NEWS: $CZR HAS PLANS TO CONVERT INTO A REIT - STOCK UP 25% AFTER HOURS
I was sized so much, I gave back half of what I made that year on one play. I panicked, covered the position, put my head down and just let the tears flow.
I was sized so much, I gave back half of what I made that year on one play. I panicked, covered the position, put my head down and just let the tears flow.
Not only did I drawdown 50% of my entire year. I now had to go back on my word to my best friend, and my mother.
I took a picture of the P&L loss and stuck it on my wall & screen saver on my desktop. It was a lesson I will never forget.
I took a picture of the P&L loss and stuck it on my wall & screen saver on my desktop. It was a lesson I will never forget.
As traders, we understand these events take place. We just undermine the frequency of them and the chance that they will occur when we are trading the name.
This was not a "left tail event" but it was a scenario of a trader undermining the potential for the unforeseen to occur
This was not a "left tail event" but it was a scenario of a trader undermining the potential for the unforeseen to occur
Many lessons can be learned from this.
I hope my mistakes in my early days moves you enough to account for unforeseen events in your portfolio.
I assure you, many of you aren't really as "hedged" as you think you are.
I hope my mistakes in my early days moves you enough to account for unforeseen events in your portfolio.
I assure you, many of you aren't really as "hedged" as you think you are.
