You guys blowing out your accounts left and right

[syswizard]

every trader gets a "near death experience" and he just "hopes" that they had experienced that before he hired them.

Indeed, I've already had one:
This occurred over 20 years ago when I was trading options in a Brown & Company account (remember them ?).
After one huge long option bet that went well (+$10,000), I got tired of losing in my subsequent long options positions. So I said to myself, "why not go short premium ?".
That's exactly what I did with 3 NDX put options at-the-money.
The Nasdaq was sinking at the time and I put on the trade on a Friday. By Monday afternoon, the trade was up $2000 as the Nasdaq rallied from an oversold condition !
Stupid me (I was a novice at the time) said to myself "No way am I bailing out of this position...I'm holding it till the premium is zero".
What a dumb idea that turned out to be. Then I got a call from a Brown & Company broker who said I needed more capital to cover the margin requirements of a naked option sell position. He also congratulated me on the current trade.
I was too stupid to know at that time that I should have entered the trade as a credit spread...thus avoiding the huge margin requirement.
What happened next is nearly prophetic: over the next 10 days, the Nasdaq started to go back down. Within a week, my profits vanished. Over the subsequent week, I was starting to lose....and then one Friday, the market swooned and I was down $2000. At 3 pm I closed the position fearing that the put options would be valued at open on Monday at an exhorbitant price. I was right. On Monday, the options opened at 60...and if I had held, Brown would have gotten me out at that price....an $18,000 loss !!!
Funny thing: Brown never really enforced that margin call. In retrospect, I wish they had.
That's my story boys...true as it is.

 

[Scataphagos]

I think that it really sums it up.

Balderdash!

 

[southall]

As Peter Borish of Quad Group (also known from being a founding partner and second-in-command at Tudor Investment Corp) said: every trader gets a "near death experience" and he just "hopes" that they had experienced that before he hired them.

Agree, if i was looking to hire a profitable trader, i would prefer one who has blown up, or came close to blowing up, in his formative years as a trader but is now profitable.
I would be suspicious of anyone who claims they have never even came close to losing it all.

 

[Neuroway]

I've done a ton of reading on this forum, and one thing that strikes me as a bit odd is that so many people talk about blowing out their accounts left and right. Almost like its trendy or stylish to do so. Seems a bit odd to me, so I would appreciate some clarification on a few things.

When someone says they blew out their account, they mean it literally dropped to zero correct?


Thanks!

Not really. It means all your positions were closed by your broker, because you had a margin call and didn't take action on it. Most likely you will be left with 50% of your capital, perhaps a little less. Sometimes nothing (especially with Swiss banks who also act as brokers).

If the volatility of your account is so high that it can blow up, then you should definitely split your capital into dozens of sub-accounts, sized proportionally to their volatility.

Remember that most retail brokers actually don't hedge your positions. They take the other side and run it naked because they know that statistically 90% of retail traders go bust real fast. To them, you're no more than a statistic, they operate the same way a casino or an insurance company will. They bet on facts, statistics and mathematics. Not on feelings, psychology and self-confidence.

 

[archeolog108]

I never blew up any account because from the beginning I did not risk more than 1% on the trade with hard stop. I wasn't chasing unrealistic big returns. I tried to become rich slowly.

 

[Neuroway]

1% without a context has no meaning in risk management.

1% of what? 1% of the capital of the account running the trade, 1% of your total portfolio, 1% of all your trading accounts, 1% of your total wealth, 1% of your margin, 1% of all the assets which you manage?

If your total wealth is 10 millions and you have only 25k in your trading account and you're only risking 1% of it, then your risk is only $250, which is totally insignificant, you're losing your time with peanuts (unless you're only trading in a learning context) and considering the size of your wealth, you are absolutely not profitable and nobody will be interested in doing business with you unless you grow up a bit and make a decent portfolio manager and risk taker out of yourself, or definitely quit a line of business which might not be your forte.

 

[archeolog108]

1% without a context has no meaning in risk management.

1% of what? 1% of the capital of the account running the trade, 1% of your total portfolio, 1% of all your trading accounts, 1% of your total wealth, 1% of your margin, 1% of all the assets which you manage?

If your total wealth is 10 millions and you have only 25k in your trading account and you're only risking 1% of it, then your risk is only $250, which is totally insignificant, you're losing your time with peanuts (unless you're only trading in a learning context) and considering the size of your wealth, you are absolutely not profitable and nobody will be interested in doing business with you unless you grow up a bit and make a decent portfolio manager and risk taker out of yourself, or definitely quit a line of business which might not be your forte.

Capital for the account. This is the most used %.

 

[Neuroway]

Well in that case if you have a dozen accounts 1% of one of them is really an insignificant risk, and your tolerance to volatility is too small. You will never blow up your account, but you'll never make any interesting gain neither.

 

[archeolog108]

It all depends on the size of the capital. Why dozen accounts? I have 3 brokers with access to hundreds of markets in all asset classes.

 

[Xela]

your tolerance to volatility is too small. You will never blow up your account, but you'll never make any interesting gain neither.

Respectfully, I don't agree with this part, at all (I agreed with your original comment that "1%", in abstract, didn't really mean anything).

It's possible as a retail trader to have one account, never have more than one trade open at a time, never expose more than a maximum of 1% of the account-funds to risk at a time, and make some very "interesting gains", if you trade often enough (and obviously if you have a genuine edge in the first place.)