W O R S T - C A S E S C E N A R I O S

As with everything in life you should always be prepared for the worst that can
happen. As part of a game plan try to think of everything that could go wrong
with your trades, whether you can control them or not. At least by knowing the
risk factors involved, you could be prepared to do something about them. If you
haven’t thought them through, then should the worst happen, you will be in for
a shocker and may freeze up not knowing what to do. You can have everything
planned so nice and perfect and then a rumor of a terrorist attack drops the
Dow 200 points in a heartbeat and the whole market dynamics change, not to
mention your P&L. There is little you can do about it; just know that anything
can happen in trading. When I was a foolish know-it-all 22-year-old trading on
the floor, I took a big hit when the market nosed-dived one Friday. My game plan
at the time was solely to try and make $1,000 a day. I had no real plan for what
to do should my trading go haywire. And there was one day when I got off to a
horrendous start and it kept escalating and I kept increasing my size hoping to
make it up on the first correction. Being on the wrong side of a really bad trade
and over-margined, I didn’t want to take the loss, so my solution was to take
the position home and then hide from the clearinghouse on Monday morning,
hoping the market would bounce back. My $8,000 loss from Friday escalated on
Monday as I did nothing, and it eventually grew to $13,000 when the clearinghouse
liquidated me at the market lows on Tuesday and wiped out half my account
and barred me from trading on the floor until I came up with more money.

I’ve seen some really incredible things over the years and though it may
not happen often, you should always be prepared for the worst. Stuff like unexpected
rate cuts whilst you are taking a poop and stocks go $13 against you,
terrorist acts, a CEO dying in a plane crash and a stock crashes with the news.
A computer geek puts out a phony report about a CEO quitting, which makes
the stock drop 50 points and gets halted. The power goes out in your office and
you can’t exit trades, the Dow is down 150 points at 3 P.M. only to close up 150 after an incredible late day rally and you go from a $10,000 profit to a margin
call. Lumber goes limited up for 15 days then reverses and goes limited down
for the next 10 days, while you are stuck in the position.
In the back of your mind you should have a worst-case scenario strategy
prepared if anything extraordinary does happen. This doesn’t mean you should
constantly fret about the worst that could happen, but do know what you will
do if you are ever on the wrong side of an unexpectedly bad trade without
a stop.