Sitting here in front of my workstation and having endured some unusual events recently, I have been starkly reminded of something I preach almost incessantly to my students when I teach.? Mark Douglas, author of the outstanding ?Trading in the Zone? refers to the unpredictability of the markets with a simple idiom, ?anything can happen?.? Indeed it does.
Since we are constantly reminded that we are not in control of anything that happens in the market except what we can lose, risk management is essential to our success. If you are looking for the Holy Grail like most active participants, it lies within this often overlooked skill set.
On October 18th I was sitting here watching a fairly solid morning rally take place when at approximately 11:30 AM? CST, a rather large extended red candle appeared on my 5 minute S&P futures chart. ?Usually, a rally or decline does not suffer such a precipitous about face without an outside influence. Knowing full well that there were no major economic announcements expected that day, I did the unthinkable.? I turned up the sound on CNBC!? What I discovered, which is now well documented, was that RR Donnelly (Google?s partner in these matters) released Google?s third quarter earnings early. And they were bad. So bad that the stock itself went into a 60 + point tailspin in the middle of the day, dragging the broad market down with it.
I spent the rest of the day amused listening to the gaggle of pundits and anchors on CNBC whine about the injustice of it all!? ?Oh the humanity!?? Jim Cramer called it ?ridiculous? The CNBC team even went so far as to interview former SEC chairman Harvey Pit to ask him if there were some sort of SEC violation committed.? Of course there wasn?t.? Most of the participants on CNBC are too young to remember a time when earnings could be released at any time of day.? As a market maker on the CBOE between 1974 and 1990, it was common practice during earnings season.? Imagine trading options on a stock whose earnings were going to be released at some point during an 8 hour window. We lived in fear of a Reuters News bulletin announcing that trading in XYZ was ?halted, dissemination of news.?? As a matter of fact, most company news was announced during regular market hours without any regard to the financial well being of the regular market participants.? ?Front running?, the unscrupulous practice of those in the know, taking advantage of an imminent earnings release or material information disclosure was rampant in those days.? Talk about ?anything can happen?. ?This is the reason most old time options traders are spreaders!
So today, we have just come off another unusual event. A calamity that only the ?Big Person? upstairs could have predicted the amount of devastation it would bring.? Industry leaders are mixed in their support or opposition to the NYSE closing shop for two days because of Hurricane Sandy. ?Most of those advocating staying open have greed as a motivating factor. ?As a trader, who cares? Yes, I have been denied the opportunity to trade stocks and stock index futures but there are plenty of other derivatives out there to play. And for those of you who keep overnight positions and did not factor in Douglas?s well known axiom have no excuse for your misery if you were adversely affected by Sandy or Google. ?We will never be able to prevent losses in a certain percentage of our trades or investments. We can, however, make sure we control what that loss might be. ?The plain truth is this. That is the only thing we can control in trading. ?As I constantly exhort to all of my students, the sooner you get your arms around that one simple fact, the sooner you will succeed at this wonderful game.