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Don’t Bring Band-Aids to the Trading Desk

“When you are in a boat that springs a leak, you don’t drill another hole to let the water out.” – Tony Saliba, from Market Wizards

I read a blog post a few months ago about how to deploy an options “repair strategy” on a commodity futures position that was losing money. I don’t think the author had any clue about what trading is about. He called it a band-aid strategy. It occurred to me that the whole article was written to help his clients (and probably the author) avoid the feelings around taking losses.

There are no band-aids in commodity trading. Although written with extreme detail on how to overlay a few options to an existing outright position that was losing money, I would not try fix a position by adding other options or futures contracts.

The Best Ideas Are Simple

The best ideas are very simple to understand and simple to execute. If you have a losing position, get out when you start losing money. Adding an option to a commodity futures trade creates drama. What happens when your new “synthetic position” starts losing money? What will you reach for then?

If you have a losing commodity futures position, don’t try to create a spread by buying or selling a deferred contract. This creates drama too. Unless you are familiar with spreads, it will also create more drama. How do you know that the spread is not trading near full-carry?

If you have a losing position, get out of it. You will be able to see more clearly and without emotion while you don’t have the position still going against you. By doing so, you won’t waste valuable mental energy on a losing position. You will cut the opportunity cost by getting out of the loser and finding another trade. Most importantly, you will conserve your capital.

Don’t bring band-aids to the trading desk. Leave them at home. This goes for systems traders and investors also.

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  • Manuelbravochico

    Taking losses should be a reflex. If you find yourself stressing over taking a loss, something wrong. Get help,stop trading.

  • Ykmehra

    Mike – nice… Simple clear thinking…

  • LMTentarelli

    Many traders obsess on entry points but have no idea when to exit…stops/exit points will keep you intact to trade another day.

  • Anonymous

    exiting a profitable trade is often the hardest thing to do for the
    professional. Taking the losses are much easier. That flies in the face of
    what the public thinks.

  • praetorian

    I wonder what your opinion is about equity traders using protective puts

  • Anonymous

    I support you in your feeling of wonder…? Right answer?

  • LMTentarelli

    praetorian, the answer lies within this entire post:

    “When you are in a boat that springs a leak, you don’t drill another hole to let the water out.” – Tony Saliba, from Market Wizards

    “What happens when your new “synthetic position” starts losing money? What will you reach for then?”

  • Anonymous

    I, Claudius…?

  • Kshitij

    So very right !
    “exiting a profitable trade is often the hardest thing to do for the
    professional.”

  • LMTentarelli

    Michael, unfortunately I am not well versed on the literary classics! My skill set is more quantitative.

  • Anonymous

    Roman Translation: “Watch your back…”

  • Adam

    I feel your post goes to the heart of the issue. Traders with a high degree of self mastery are acutely aware of their limitations, deeply self-confident, and able to execute simple ideas. Freedom of choice begins with a deep understanding of our limitations. If a trader does not fully understand his limits, he can’t control himself. It’s as if he is invisible to himself.

    “Smart decision making requires a kind of intelligence that can realize and enforce it’s own limitations.” – Warren Buffett

  • Tim Thomas

    Great article Michael, in reading it I noticed you mention the cost of carry. This is something I don’t understand a great deal about and from my research it seems knowing the spot price of a commodity is necessary when calculating it. Is this correct and how much awareness does one need to have of carry when trading spreads?

  • praetorian

    There is no right or wrong, only sharing feelings.

  • Anonymous

    Yes, you do need to know about carry. I’ll write something up about it
    shortly.

  • Anonymous

    Protective puts are for equity investors, not traders IMHO. This is of
    course, unless you have set up a synthetic position. We share feelings when
    make and lose money.

  • LMTentarelli

    My journey has taken me down the road to where there are no feelings in trading…no highs, no lows, nothing. It is what works best for me. I paid a large tuition to get here.

  • Anonymous

    I feel mine. But I have a “diet of the mind” to not take action on them.