Monday, August 11, 2008

Preparing for Trading Disasters

I thought this New York Times story on the topic of how people are unprepared for crises and emergencies has particular relevance to trading.

How many of us have "disaster plans" that we've actually walked ourselves through for the following situations:

1) Outlier moves in the market against our positions;

2) Series of losing days/weeks/months leading to unexpected outlier drawdowns;

3) Failure of equipment (online connection, computer) or inability to reach a broker when a position is moving against us;

4) Incapacitation when we have positions in markets;

5) Financial failures of our banks or brokers, tying up our money unexpectedly.

The interesting message from the Times article is that people are most likely to act upon their plans if they've actively rehearsed them. I suspect this is as true for minor disasters--such as a market blowing through your mental stop-loss point--as for large ones.