by Boris Schlossberg and Kathy Lien


The Need For Rationalization

In the quintessential '80s movie, "The Big Chill", Jeff Goldblum's character tells Kevin Kline's that "rationalization is the most powerful thing on earth. As human beings we can go for a long time without food or water, but we can't go a day without a rationalization."

This quote has strikes a chord with us because it captures the ethos behind the "no excuses" rule. As traders, we must take responsibility for our mistakes. In a business where you either adapt or die, the refusal to acknowledge and correct your shortcomings will ultimately lead to disaster.


Case In Point

Markets can and will do anything. Witness the blowup of Long Term Capital Management (LTCM). At one time, it was one of the most prestigious hedge funds in the world, whose partners included several Nobel Prize winners. In 1998, LTCM went bankrupt, nearly bringing the global financial markets to its knees when a series of complicated interest rate plays generated billions of dollars worth of losses in a matter of days. Instead of accepting the fact that they were wrong, LTCM traders continued to double up on their positions, believing that the markets would eventually turn their way.

It took the Federal Reserve Bank of New York and a series of top-tier investment banks to step in and stem the tide of losses until the portfolio positions could be unwound without further damage. In post-debacle interviews, most LTCM traders refused to acknowledge their mistakes, stating that the LTCM blowup was the result of extremely unusual circumstances unlikely to ever happen again. LTCM traders never learned the "no excuses" rule, and it cost them their capital. (To find out more, see Massive Hedge Fund Failures.)

No Excuses

The "no excuses" rule is most applicable to those times when the trader does not understand the price action of the markets. If, for example, you are short a currency because you anticipate negative fundamental news and that news occurs, but the currency rallies instead, you must get out right away. If you do not understand what is going on in the market, it is always better to step aside and not trade. That way, you will not have to come up with excuses for why you blew up your account. No excuses. Ever. That's the rule professional traders live by.


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