The $4,017 Hair Dryer
By Victor Sperandeo
May 12, 2007

One day in 1979, I was day trading the commodities when I got a call from my friend, Susan.

I was long 40 wheat contracts, and the market was moving, so I had to watch the position intensely. I had a mental stop set to get out and limit my losses. Anyway, Susan calls me, she's hysterical – crying, sobbing, sniffling – to the point that I can't understand what she is saying.

Naturally, I was concerned. I thought that maybe she and her husband had been fighting, that some real crisis had occurred. Then the truth came out.

Through sobs and sniffs I heard, "Mmm... my hairdryer, it's... ittsss... it's broken!"

I just couldn't believe my ears. "Your HAIRDRYER! Is THAT why you're so upset!" I looked over at my good friend and longtime partner, Norman Tandy... he just rolled his eyes.

"Susan," I said, "Susan, calm down. How much do hairdryers cost?"

"Sniff... $17."

At this point, I'm amazed and on the verge of bursting out laughing. "If it will make you feel any better, I'll buy you another one."

Naturally, any time someone gets so upset over a hairdryer, something else is really wrong. So, I started talking to Susan, trying to help her come to terms with whatever was really bothering her. In the process, I lost my mental focus.

I looked at my screen, and wheat had dropped 2 cents below my mental stop. That's $100 times 40 — $4,000 bucks. I immediately called and sold the position, losing $4,000 more than I had mentally allowed. A $4,017 hair dryer, and I didn't even get to pick out the color.

I couldn't help but laugh about it then, and I still laugh about it now. The point is that there are all kinds of ways to lose money that you never think about. To paraphrase the song, "Fifty Ways to Leave Your Lover," there must be 50 ways to lose your money.

The single biggest way traders lose money, however, is by not following the rules, by somehow thinking that "this one time" there is an exception. It's a mistake that everyone makes, but one that is controllable. If you understand the rules, and more importantly, why they exist, it's a mistake that is possible to avoid 99% of the time.

Many people make the mistake of thinking that market behavior is truly predictable. Nonsense. Trading in the markets is an odds game, and the object is to always keep the odds in your favor. Like any other odds game, in order to win, you've got to know the rules to stick to them. Unlike other games, however, the single biggest reason rules are necessary is to keep a check on your emotions. Assuming you have the knowledge you need to take a position with confidence, the hard part is executing the trade correctly. That's what the rules are for.

There are so many factors affecting market behavior that, with just a little mental energy, you can twist and distort them, even if only slightly, and rationalize yourself into taking unwarranted risks or closing a position too early or too late.

Just recently, on an S&P futures trade, I went short 10 minutes after the opening with a stop set 5 ticks above the day's high. In the next 30 minutes, the market went down about 10 ticks from where I sold them and then looked like it might rally. I did not have a clear buyback signal on the trade at all, but, emotionally, I didn't want the small profit to turn into a loss, and I had my assistant buy them back at a 10-tick profit ($250 per contract).

Just 15 minutes later, the market broke down two full handles (a handle on the S&P futures is one full point, which is 20 ticks or $500 per contact). If I had followed the rules, I would have made five times more profit than I did.

My thinking process was something like, "This market looks like it is going to rally, so I better bail out and take the profit while I have the chance." But that was really just a rationalization, which was shielding my fear of being wrong in the trade. The market did, in fact, rally just a little bit, but it never even approached my stop – the point where the market would prove I was wrong.

The purpose of rules is to make market executions as objective and consistent as humanly possible. Without them, you'll end up imposing your wishes on your trading decisions and, nine times out of ten, your wishes will fly in the face of market action.

Good investing,

Victor

		Editor's Note: Victor Sperandeo has been a professional trader and money manager of 24 years. He currently manages and advises institutional and large individual portfolios for Rand Management Corp. He has been profiled in Barron's and The Wall Street Journal and appears frequently on CNBC and other television networks, and is in demand as lecturer.
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