Disasters All Traders Can Avoid

02/29/2012 11:05 am EST

Focus: TRADING

Rob Hoffman

President and CEO, Become A Better Trader, Inc.

Equipment failures and poor dealings with a broker are entirely preventable disasters, says Rob Hoffman, who tells how to implement contingency plans or recover if a disaster does transpire.

Rob Hoffman joins me, and Rob, everyone tries to have a trading plan. What other types of plans should traders have?

You know, Karen, from my perspective, there's one plan that seems to be overlooked until it's too late. Like many things we do in our lives, sometimes we don't think about things until after something bad has happened, and it is a disaster recovery and contingency plan.

So Rob, what are the elements of the plan?

We'll break it down into pre-disaster, in the middle of the disaster, and then post-disaster. 

First of all, pre-disaster; there's things that we can do that we often don't think about. This in some ways applies to our home on a daily basis in addition to our trading. For our computers, do we have a battery backup? Do we not just protect the battery, the power supply to the computer itself, but do we also protect the monitor, your router, your modem? These are key elements that we need to keep going. 

Sometimes people back up their computers, but they forget about the monitor. So the monitor shuts down, or the modem shuts down, the router shuts down, and they back up one thing thinking that they're protected, but then other equipment fails.

Having a backup to your typical Internet provider, so if you have a cable modem backup or a cable modem Internet service, perhaps you might want to have a DSL backup through the phone company. Have a separate type of connection, because those do occasionally go down.

Have a second computer. I've found a few times personally that my primary computer locks up, but then I just go right over to my laptop, where I have my trading dome, and if I'm in a position when the computer crashes, I'm able to go over there. 

So those are a couple of things prior to a disaster that people can think about. Additionally, have your broker's telephone number. It's amazing how many people don't have their broker's direct phone number. 

The firm's telephone number, in case their broker isn't answering, and also, just as importantly—especially in this 24-hour era of trading we have—people don't remember to have their broker's 24-hour desk number. They'll put a trade on in the middle of the night, then something terrible happens and they only have their broker's daytime phone number, not their 24-hour desk.

Suppose what happens when the broker refuses to answer your phone call. That has happened in the past. And you're now into rescue and recover.

That's right. One of the things—just back to the other point—is having your account number. Some people forget to have their account number ready. If your broker doesn't know who you are, then you have to provide that additional information.

So, if you're in the middle of a trade, one thing to think about is if there's a possibility to actually consider hedging your instrument. That's something to talk to your broker and registered financial representative about in advance of it ever happening. 

But let's say you're in the S&P futures and the connection to the CME for some reason goes down. Is it possible that you can go over to another exchange, like the ICE exchange, and if you're in a long position in the S&P futures, could you possibly put on a short position in the Russell futures, for instance, so you can hedge?

This is a common practice that happens in the grains a lot. If the corn market goes limit up, is it possible to perhaps short wheat if you're trapped in a short position in the corn.

NEXT: How to Recover When Disaster Does Strike

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That's something to talk to registered financial representative and your broker about in advance of these things happening, but it's a great strategy that a lot of professionals use when they're trapped in one market or one exchange with one type of position, they sometimes can go to another market in another position to hedge. 

So if all of a sudden the market re-opens and you're down terribly in the one, you might be potentially up in the other ones.

A trading plan, but as well, a contingency plan.

Exactly. Then third to this is the post-disaster. What I find happens sometimes when people come out the other end—especially if it's a loss—their connection to the broker goes down. They didn't have these plans in place, and when their computer comes back up, they're down money. I see a natural tendency for traders to feel like they were victimized, and they want to go back in there and make it back right away. They want a revenge trade, and I very seldom see that work out well for the average trader. 

So I strongly encourage when coming out the other end of a disaster, don't take a trade right away. Ask yourself, "What is my reasoning? Am I really taking the right trade at the right time for the right reasons based on my plan, or am I looking to make back the money that I feel was unfairly taken from me due to a computer problem, a broker problem, or an exchange problem?" 

I strongly encourage people not to make that mistake, because what happens if you take a loss and make it much worse? How will you feel on the other end of that?

Wait until your emotions have cooled.

Exactly. So there are three parts: the pre-disaster and recovery plan; the in-the-middle phase and how you might be able to handle those positions; and then post-disaster and how you are going to handle that responsibly.

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