A hedge fund named Situational Awareness blew up last week.
Which is ironic, and it’s also the oldest story in this business. Brilliant people, a firm that prided itself on knowing what was going on, and it turned out they had no idea what was going on.
They were taking shots at one-hit wonders. You don’t survive doing that.
Go look at Long-Term Capital Management if you want the older version of the same movie. Some of the brightest minds anybody had ever assembled, and it was the math geeks running the portfolio.
I blame the geeks. And I’m allowed to, because I watched it up close.
At thinkorswim we had twice as many developers as we had traders. Plenty of those developers came over and started trading. Some success stories, some horror stories.
The development brain is spectacular at a lot of things. Risk aptitude is not automatically one of them.
The common theme in every successful trader I have ever seen is the ability to absorb and interpret risk. That’s it. That’s the X factor.
Interpreting risk is what lets you see the future of your own position. Nobody gets margined out of a trade when they can see where it goes. You look at the screen and you think, this is some stupid stuff I’m doing right now, and you stop.
If the lizard part of your brain is switched off, you don’t get that warning.
So I think about it a completely different way now, and it took me a long time to get here.
You cannot look at trading as anything other than a series of occurrences. Stop with the “this is the one trade, this is the one for me.” That is nonsense in this business, and anybody who does it ends up flat broke.
I go out, risk a dollar, strike out, and lose the dollar. Same thing the second time and the third time.
Fourth time I make six bucks and I’m golden.
It’s all about small, defined, repeatable risk, over and over, until one of them pays for the rest.
Now here’s the part nobody wants to hear. If I make six bucks today, I should expect to give two or three of it back over the next few days doing the exact same thing.
That’s not a broken system. That’s the system working.
The mistake is not losing. The mistake is deciding one position is going to be the one, and sizing it like you believe that.
I risked about $330 in a trade this morning. The trade was the XSP 755 puts, 0Dte. If it goes against me, I walk away. I’m not defending it, I’m not adjusting it, I’m not sitting here at 50% down doing math on how to save it.
It’s set and forget. Who gives a damn.
Because I’m going to do the same thing tomorrow, and the day after, and the day after that.
To your success,
Don Kaufman
