Through my years of trading, I've watched a number of full-time traders or investors give up trading and go back to their day jobs. Some part-time traders gave up, too. What stops a trader from trading and how can you keep that from happening to you?

Changing market conditions have sometimes played a part.

Changing Market Conditions, SPX Monthly Chart:

Trading strategies that work well in a rallying market might not work as well and certainly need to be managed differently in the higher-volatility environment of sharply declining prices. The trader who had perfected entry and exit targets for long calls, call debit spreads or sold naked puts to the exclusion of other types of trades would have needed to switch strategies or risk foundering during 2000-2002.

I knew a few traders who specialized in selling naked (or not very well-dressed) puts in the period leading into March, 2000. They reasoned that they sold puts only on companies whose stocks they wanted to own. Some ended up owning a lot of stock in the period after March, 2000. Those who managed their risk could always retrench and rethink their preferred strategies. Those who didn't manage that risk were sometimes too discouraged or had too little money left to trade.

VIX Chart, 1997-2007:

The iron condor trader who had whetted her skills during the higher volatility years on the left-hand side of this chart would have discovered shrinking premiums during the lean low-premium years of 2004-2006. She would have been taking in less premium for the same or higher risk. When implied volatilities are low, as they often were during the low-volatility years of 2004-2006, iron condors bring in less premium. Iron condor traders sometimes found themselves battling relentless rallies or occasional sharp declines during that period, with the premiums they'd taken in so low that the first adjustment took away all hope of profit. Traders who couldn't learn new strategies to control risk, such as using delta levels on sold calls and puts to adjust early, sometimes found themselves with bigger losses than they expected when a sharp move suddenly deepened their losses. Butterfly traders weren't immune from the need to change their strategies. They sometimes developed trading plans that included moving part of their contracts further out before the expiration breakeven was approached, for example, rather than waiting until prices were near an expiration breakeven.

Gapping Movements Increase, RUT Chart from Part of 2012 and Early 2013:

Way back when, many traders traded options on the big indices rather than individual equities because it seemed that those indices were less subject to morning gaps than single equities. That's not true any longer. During the period covered on this chart, some traders who hadn't developed good risk management skills were ending the day with their trades nearing an adjustment point or at an adjustment point. Based on prior years' experience, they sometimes thought they could wait and watch the next day's open to make up their minds about adjusting. Sometimes that wait meant that the adjustment was too late to prevent large losses or at least preserve any hope of making a profit. Their trades might be gutted when it was more expensive to make an adjustment than it would have been before the gap.

It was during the period covered on this chart that I had contact with several options traders, newbie and experienced traders alike, who quit trading. Why? They experienced massive losses, sometimes losses that wiped out their accounts or erased their confidence in their abilities. I make no judgments here. As I've often mentioned, in 2010, I suffered a confidence-damaging loss that fortunately did not rise to amounts that wiped out my trading accounts. It did mean that I retrenched and revamped my trading plan, so that I spent some time not making any money and sometimes suffering small losses as part of the learning curve with a new strategy.

A massive loss is the kind of event that can stop you from trading. Trade and risk management skills are more essential than any kind of expertise in volatility trades, adjusting by the Greeks or inventing new versions of iron condors. They're more important than a carefully lined out adjustment plan, even though such plans are of course essential. It doesn't matter if your plan has worked for two years' worth of live trades: if it doesn't adequately address risk management, you're risking having a loss that will wipe out either your trading account or your confidence in your trading skills or both.

Each day, ask yourself what you're risking if the markets gap at a standard deviation (better yet, a standard deviation and a half) on the opening the next day, with volatility rising (in the case of a gap down) or staying steady (in the case of a sharp rally). Although implied volatilities tend to drop in a steady rally, they don't always do so on a sharp morning gap and rally. If you have to adjust in that kind of environment because your trade has gotten way past your adjustment point and you can't wait to see if markets settle down after amateur hour, you're risking a loss bigger than any you thought you would ever experience. If you see that kind of possibility the next morning on an outsized gapping move, then you must manage the risk before the close. Reduce the size of the trade, put on a hedge or take other actions.

It's painful to experience such a loss. It's even painful to hear about other traders experiencing them, especially when the losses are larger in monetary dimensions than my confidence-busting one was. We've had a long period when markets have been climbing fairly relentlessly. Risk-management skills may be rusty for experienced traders and may never have been adequately developed by newbie ones. That worries me. If you haven't done so yet, spend some time this weekend looking at what you have at risk in your trades and what you might do to lessen that risk. If you have no idea how to manage risk on your trade or what adjustments might be possible, go to CBOE and look up a free webinar on the trade you prefer, looking for presenters who focus on adjustments and risk management.

Linda Piazza