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.
.

7 comments:

Jeff Pietsch CFA, Esq said...

Excellent article, particularly for independent traders. Would your spouse know how to trade you flat if you were hit by a bus?

Brandon Wilhite said...

I've experienced all of these except #5, and it sure can be stressful to be in any one of these positions.

Anybody trading serious money should take this post to heart and come up with the necessary plans to deal with these situations.

A few things that can really help:
1) More than one internet connection--sure enough the day your ISP goes out will be the worst possible day for it to happen.

2) Have your broker's phone # written down somewhere handy.

3) An associate in another part of the country, or world, can help you with a disaster plan. Obviously this needs to be someone you trust.

BW

IDkit aka Ana said...

Brett

I echo such measures now and then too and in my Idkit newsletter, especially to remind newbies to have a disaster plan in place.

Tavi said...

Totally agree, if you train for it, the mind and body will react automatically.

Michele said...

I can't speak to all of these issues, but I have given some thought to equipment failure. My computer (including monitors) is protected with an uninterruptible power supply to guard against power failures.

I have my trading platform loaded on a second computer in case the main machine breaks at a bad time (does it ever break at a good time?)

I have my local dialup number handy in case my broadband goes down. That's not really effective for active trading but should be enough to give a few critical orders. I have my broker's phone number handy as a backup to that. An independent network connection would be better. I'm considering getting satellite Internet to back up my cable.

Unfortunately, all of these measures really only protect against localized problems. If something really majorly bad happens (Martians landing on Wall St., etc.) and everyone tries to place their sell order at once, none of this will help.

GTC stop orders might help there, but it's very easy to get burned with those. I've no answer to that problem.

Brett Steenbarger, Ph.D. said...

Excellent perspectives; thanks for the comments on disaster preparation!

Brett

Eyal said...

Good points. Just to add to this, I think every trader or business owner should approach these from both the mitigation and contingency aspects. How to prevent or reduce the probability of a disaster and then how to deal with it when it does happen. There's lots of material on BCDR and such online which is applicable both to the techie and financial risks.