February 2018 Incident Report (Part 2)

Today I conclude documentation of catastrophic losses suffered earlier this year.

February 2018 was not the first time as a full-time trader that I seriously contemplated going back to find a corporate job [perhaps as a pharmacist]. I felt “too old for this”—like I might not be able to mentally survive another bout of catastrophic losses. At the same time, I realized that unless I changed my trading strategy the only thing practically guaranteed was that I would run into a similar (or worse) situation at some future date. Those are some painful working conditions, indeed.

Many articles cite a statistic like “90% of all traders fail.” Although I have questioned the validity of this claim, I can definitely believe it. Over the last 10+ years I have realized that traders rarely talk about losses. I believe many people who suffer catastrophic loss throw in the towel for good and go quietly into the night. I think I know the feeling because contemplating career change means being on the precipice myself.

After February 9, I sat on the market sidelines for nearly three weeks before slowly starting to dip my toes back in the water.

Seven months have passed and for the moment the market trades within normal limits. Bid/ask spreads are pretty much typical. VIX is trading within a range. The market is not crashing.

I did make some changes to my strategy. One big change was to decrease the likelihood that I will have to deal with so many losing positions at once. Increased granularity is better with regard to diversification but worse with regard to execution complexity. This is bad in fast moving markets because slippage increases dramatically.

A second change was to shift positions out in time. I thought this would also give more time to adjust when the market goes against me. In addition to decreased liquidity, I have since realized this approach will require closing positions due to margin concentration. While I haven’t completely resolved this, I know two things: (1) the market can trade “normally” for long periods, which allows me to think about it; (2) I better figure it out ASAP because despite (1), the market can crash at any time and thrust me right back into February conditions. “Up the river without a paddle” would be a very bad outcome.

Reliving traumatic events is a very difficult thing to do and these have been difficult posts to write. In effect, I have taken seven months to document this. It’s always easier to reflect on the painful past in times of plenty and I do think “better late than never.” The downside to delay is fading memory of events experienced in the moment but I think I have done a pretty good job remembering the salient points here.

And I certainly know what needs to be done next.