How To Know When You’ve Had Too Much To Trade

I have a really cool drink for you to try at your next cocktail party.  It consists of vodka, gin, tequila, vermouth, peppermint schnaps, creme de menthe, scotch, bourbon, Baily’s Irish creme, Campari, grenadine, and Kailua.

The recipe is very specific and it must be made exactly as I describe it.  Start with an over-sized plastic cup, then pour just enough out of every bottle in your parent’s liquor cabinet so that they won’t miss any.  It’s called a “Dumbshit-14″, named after my intellectual level and age when I first made it.

If you share this drink with friends it’s probably best not to get too detailed about the ingredients or you are likely to get a response similar to Socrates last words……

“I drank what…????”

This magical elixir of fun and eventual pukeattude was invented by me on the occasion of attending my first real high school party; and not just any party mind you, but a senior party.

Attending this type of party as a freshman presented a number of problems.  If you know anything about the laws of survival in high school you know that a freshman has almost no chance to come out of a senior party in tact.  In addition, selling this type of activity to my parents was likely to elicit a “you’re not old enough to go to a party” response.

Fortunately I had an multi-purpose ace up my sleeve in that of my best friend Ty Thomas.

Ty was a starter on our frosh-soph football team which already gave him some gravitas, but the clincher was that his older brother was in fact a starter on the varsity team, and thus he by extension was “OK”.  By a lesser and more tenuous extension it meant that I was “semi-okay”.

I knew there was no way that my parents would let me go to a party at fourteen, but I also knew that they idolized Ty who was a straight A student.  Because of that they would certainly let me spend the night over at his house, thinking of course we would be studying the night away while drinking soda and eating popcorn.

Here’s a tip for all you kids out there (except mine); when you have a friend who all the parents think is a well-behaved teacher’s pet type but is secretly a party animal, don’t be jealous or bitter, instead, leverage them.

“Hopefully some of Ty’s good scholarly habits will rub off on Brian,” no doubt was what was going through their parentally concerned heads when they said “yes” to my request.

Of course I never promised we would be studying.  And I never promised that the drink of choice would be soda pop.  Oh, and I did leave out the part about his parents being out-of-town and us planning to go to a party.  Oops….!!!

That first time drinking was a real trial by fire as I basically went from one extreme to another.  From feeling the beginnings of a nice buzz to ending the night by puking my guts out on the bathroom floor.  I had no experience with drinking and hence no ability to gauge or moderate my level of intoxication.  I didn’t know when to call it quits for the night.

The same experience can happen when trading, both on a micro and a macro basis.  How do you know when you have traded enough for the day, or the week, or the month for that matter?

Take the example of day trading.  Have ever started that day off with a big win or two, adding a nice percentage gain to your account equity, only to see it get chipped away on trade after trade the rest of the day?  Maybe you even ended up losing money at the end of the day.

What if you just stopped trading once you were up?

“But Brian,” you say.  “I am Johnny trading guy, I have to trade.  I can’t just stop when the market is still open.”  Yes you can, but you have to know when and when not to call it quits.

You do that not by looking at your P/L, but by objectively evaluating how you are trading.  My good friend Phil Ivey* has spoken of this concept in poker, and it applies exactly to trading.

Once when asked how he knows when to get up from the table, Phil remarked that if he was playing well, even if he was losing, he would stay at the table.  But if he was playing bad, even if he was up, he was more likely to leave, re-group, and play another day.

If you are trading well, i.e. following your methodology, taking good risk/reward setups, and correctly managing your trades, you should hang in there as long as there are valid opportunities, even if you are down.  Eventually you will make some winning trades and have a better chance of breaking even or even turning the day into a profit.

And the converse is true as well.  If you are trading badly, no matter up or down, you should pack it in for the day.

In the example above, if you are up big and trading good; keep crushing the market.  If you are up big but trading badly, either hit the eject button for the day or trade smaller for a bit, and then if you trading doesn’t improve, shut it down for the day.

*By “good friend” I mean that I have never actually met the man, but I feel like I have.

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13 Responses

  1. Pingback: 10 Things I Wish I Knew When I Started Trading | The bclund BlogThe bclund Blog

  2. Aaahhh, the “Brunski Special”. That’s what we called it when we raided my friend Scott Bruner’s Dad’s liquor cabinet. Looked like iced tea.

  3. I can’t tell you how many times I have started up money, and left in the hole. Especially in computerized trading.

    There was a year there where I left every day when I was up 2G. Made around 600k that year. But, the markets were so good I felt like I left a lot of money on the table. Probably could have doubled my income with better discipline.

    I trade much smaller now. Today I was short a few, when in the old days I would have been short 100. But, I am learning to ride a bike again.

    • It must be a totally different feel, trading “upstairs” after being in the pits. Somebody should write a book about it (hint, hint).

  4. On a serious note, I dig the trader angle of your blog, but as a more long-term investor, sometimes I struggle with balancing trader-oriented lessons with my longer time horizon. Any tips?

    Oh – please keep the poker player (and other off-Wall Street) wisdom/quotes coming! I swear, most of those guys would have been great in our game, because they have such a grasp of human nature, and self-awareness/control of their emotions. Great stuff.

    • FWIW, one of my fav gambler/poker nuggets of wisdom is from Puggy Pearson. It, like a lot of what you hear these guys talk about seems very applicable to trading/investing to me.

      I believe when he was asked the secret to his success, he said, “Ain’t only three things to gambling: Knowing the 60-40 end of a proposition, money management, and knowin’ yourself… Any donkey knows that.”

      I’m not sure, but I think he only got as far as 7th grade in school. But man, you wouldn’t want to underestimate him.

    • No tips Karl. All I can say is you just have to practice the lessons until they get internalized. There is not easy way to do it, although some get it quicker than others.

  5. Nice! Great post. It brought back some memories for me. In fact, it reminded me why I still cannot drink Ouzo, even after 20 years have passed!

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