In case you haven’t heard, the Northeastern U.S. was hit by a bit of snow over the weekend. It started midday on Friday and ran just about all the way through Sunday. The biggest accumulation was early on, but the add-ons definitely forced a lot of folks to re-shovel their driveways and walks a couple of times. Welcome to winter in New England!
As I made theÂ walk from my home to the local subway stop Monday morning, I couldn’t help but relate what I was doing to trading. See, I live on a dead-end street which never gets properly plowed, or even sanded in most cases. What happens after these types of storms is that the sun and car traffic serve to melt the top area of the snow during the day, but it gets compressed and freezes overnight. So basically my street is nothing but several inches of uneven ice. Getting to the main street, where I can finally get onÂ bare pavement, is all kinds of fun.
Stay with me here. The metaphor is coming. 🙂
So there I was on Monday morning trying to get down my street without falling and breaking a hip or cracking my skull open, and it occured to me that it wasn’t too different from trading. If you’ve ever had the pleasure of trying to walk on ice you know you have to take small steps to keep your feet under you. If you try to stride out at all your foot is bound to slip out from under you and BAM!, down you go.
Taking risk in trading is very much the same way. ThereÂ may beÂ times when you can get a bit more aggressive (dry pavement) because you are unlikely to get burned (though sometimes you still trip over a crack in the sidewalk). There are other times when the volatility in the market (icyÂ pavement)Â is such that if you don’t take care with what you’re doing you could find yourself flat on your back, figuratively speaking. Part of becoming a good trader is learning how to identify when the conditions are treacherous and absolute safety is required and when they are more stable. Unfortunately, it isn’t always as easy as seeing whether there’s snow and ice on the street, but experience goes a long way.