A trader\'s money management system

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c02 JWBK182-McDowell April 25, 2008 15:39 Printer: Yet to come

Confidence in Your Plan 17

Health insurance for everyday illnesses and routine check-ups, as well as

catastrophic and terminal illness


Life insurance protection for the devastating loss of a loved one that may

be a provider, so that the family can deal with their grief and have their

monetary needs provided for


Disability insurance if one becomes unable to work due to physical or med-

ical complications and can’t generate income to provide for necessities

In the final analysis, by implementing an insurance plan, you are protecting

yourself from the worst-case scenario. You are limiting your risk and ensuring

that you will not be completely devastated in the event of a catastrophic event

that you have little or no control over. Basically, it means you can come back to

play the game another day instead of being completely wiped out.

Yes, if you are affected by any of these devastating accidents, illnesses, or

account drawdown, there are certainly emotional and financial issues to recover

from, but they are set at a stop-loss limit that controls your risk of ruin.

THE “AMAT” TRADE THAT GOT AWAY

Many years ago when I was trading Applied Materials, stock symbol AMAT,

I placed a trade that went out of control and completely got away from me.

Ironically, the financial loss incurred was the most expensive lesson I’d

learned by far, and yet it provided me with my most valuable lesson in risk

control and in controlling my anger at the markets.

Applied Materials was range bound for quite some time on the daily

chart. News on the stock was negative, and my forecasting analysis indi-

cated a shorting opportunity, so I shorted Applied Materials by selling call

options. Over the next week, Applied Materials began one of its biggest

upward moves it had seen in the prior three months.

I didn’t exit the trade. Instead, I rationalized (or should I say, fanta-

sized) that this upward move was just a quick move to the upside be-

fore selling off. After all, my forecasting analysis was still indicating lower

prices, and there was no new news event that could account for this up-

ward bullish move.

So, I just hung in there while attempting to calm myself down and hop-

ing it was still okay. The next week, I watched in disbelief as Applied Ma-

terials kept moving sharply upward. There had not been a move this strong

in years on this stock. That is when the shock, fear, and anxiety set in.

I was currently down about $25,000, and did not know what to do. I

wanted to get out, but didn’t want to take a loss that large. It seemed the