One well-known market guru touts the importance of accountability when trading. He encourages traders to join or form a trading group whose members will call each other to task when they veer from their stated trading plans or start taking on too much risk. That market guru suggests that traders pull their spouses over to look at a trading screen. The maximum loss or risk in any trade should be pointed out to the spouse. A husband or wife who blanches at the sight might be a good indication that the risk is too high! I happen to agree with this market advice.
Graph of OEX Butterfly with 30-Point Wings, at Expiration:
On the freeware OptionsOracle chart shown above, I positioned the red dot along the horizontal line that marks the maximum loss that can be incurred for this trade. This reflects the difference in the $3,000 margin - the $1,562.50 credit taken in to establish this iron butterfly version of the butterfly, leaving a potential maximum loss of $1,446.50 on this theoretical trade. We all have been taught how to calculate those maximum losses, but this is a visual setup that may have more resonance for some traders and especially for their non-trading spouses.
Your trading partners or spouse may want to know how much you can lose at some particular price point on each day. The following chart shows the potential profit or loss on the day this theoretical trade was set up.
Graph of Same OEX Butterfly's "Today" Line on 3/21/12:
This chart illustrated the danger if the OEX had zoomed up too much too soon. The bottom part of the chart was too scrunched-together to include when the chart was narrowed to fit on this page, but that legend showed that if the OEX had jumped to about 672.28 on that day, an unlikely but not impossible 5.09 percent gain, the loss would have steepened to about $1,000. Maybe your trading partners or spouse would have suggested that you add a call debit spread or an OTM call to that iron butterfly trade if that potential loss seemed likely or too steep for the trading account.
However, two things happened this week that warned me of one of the dangers of trading groups, too. Think-or-swim offers a chat called "Global News." A guy with a delightful British accent comes in and announces important developments but is silent otherwise, so there's not the constant mosquito buzz in your ears that you get with some news sources. Chat is available, too. I had signed on to listen for news from Europe that particular day, and forex-related boards often hear that that news sooner than any others, if they also are sometimes quicker to report rumors than any other. On the day in question, the markets were headed down at the open, and those chats were filled with dire doomsday predictions. One hapless guy who appeared to be something of a newbie at forex trades had already shorted a currency pair, influenced by the doomsday talk. His trade had been stopped out, reportedly wiping out several weeks of profit.
Even though I'm an experienced trader, I had to turn off the chat. The dire predictions were skewing my own attempts to look at charts objectively, and they had certainly impacted that newbie trader's decisions that morning.
It was just a few days later that I read "Too Hot to Gamble" in the February/March issue of AARP's Magazine. (I know. I'm old.) The subtitle of that article reads, "Why betting in groups can be riskier than betting alone." According to the short article, a new multinational study found that our egos can get in the way when we're trading in groups. To quote, "those in the study who risked a lot to win continued to bet even bigger." The article cautioned that we had to keep ourselves "in check" when betting in groups.
I've seen this happen. I've seen a new trader join a trading group, planning to trade in one- or two-lots for a few months until accustomed to a particular trade's nuances, only to be in 10-lot trades the next week. Despite the the trader's best of intentions to go slowly, the larger trades were prompted by the reports of the more experienced traders who are setting up their own much bigger trades.
The take-away point? Set up a trading plan that is right for your personality, account size and experience level. By all means, find someone who will hold you accountable to your expressed trading plan and to whom you can at least show a chart occasionally. That person doesn't have to understand all the intricacies of trading your particular trade but should be willing to listen when you point out the possible risks and rewards. If you can find a group of like-minded people, consider a trading group. Keep in mind, however, that the goal should be greater accountability and more eyes on your trade and ears listening to your plan. If you find instead that what you get is constant temptation to try every new trade that comes around or lots of scary or excited talk about doomsday risks or opportunities that you might be missing, take a step back. If someone's boasts about successes tempt you to emulate them even when their trade is wrong for you, maybe you're not in the right group. Maybe that group is more dangerous for you than helpful.