In my experience, actual financial blowups in the institutional finance are driven by risk management specifically. Of course, there are some PMs that has such a strong conviction about a trade that it ends badly. While these ego blowups are well publicized, they are relatively rare and most PMs are very rational risk takers. On the other hand, forcing yourself to behave rationally in the face of random events takes a big toll. A lot of people burn-out professionally, I was there myself a few years ago. Some blow up their personal lives - affairs, divorces, constant maturity girlfriends etc. Finally, there is a fairly high incidence of drug and alcohol abuse. PS. Interesting to see someone like yourself here, good luck!
Actually risk management prevents you from blowing up. Option sellers blew up because of their arrogance in not hedging their huge positions which should have been the proper way to prevent huge losses and damage to their capital base. In their greed, they refused to spend some of the option premiums they received to protect their position. They had no risk management at all.
Actually, these blowups are more of an agency problem, not a risk management problem. Option sellers in the OPM space blow up because they are extremely leveraged. They are overly leveraged because they are trying to offer to their clients something that should not be offered to them, "smooth P&L at all time". They are already selling the tails events and if they start hedging tail events of the tail events, there is just not enough money to go around. E.g. that Natgas Rolex dude - he was selling options for a dime IIRC. There was no way to hedge the risk and keep the same returns. PS. Not to say, of course, that people can't be naive - I've spoken to a few people that did not believe XIV-style blow was possible and these were guys with decades of financial experience.
It is a risk management problem when you can hedge your positions but, you did not because of your infinite greed. That is why hedge funds are called hedge funds. They will be out of business if they did not hedge their positions. Okay, Option Sellers is not a hedge fund but, if you have $120 million at risk in the stockmarket, you better be able to use a bit of common sense and protect those monies. Nobody is going to teach you plain common sense.
As other people have posted, I agree risk management is important. Most of us know at least a litttle about good risk management, and yet we find ourselves unable to do what we know we should do. For example, you know that you should not risk more than 1% or so of your account per trade or 2% per day, yet you do it anyway. How can you get control over that? How can you trust yourself to do what you meant to do? Furthermore, If you are chasing trades, not taking stops, doubling down, getting out before your target, jumping in too soon, etc., you might think of these as red flags. You could use these things to alert you that something is going on that is under your radar, and you are not in control. Risk management is probably not going to help. I suggest you look somewhere else. Even if you have the best risk management system, if can’t follow it, it’s worthless. You might ask yourself, what can I do that will help me to trust myself and follow my plan? What is the missing piece of this puzzle?
True. If you have the technique, but you’re mis-implementing, it’s then a form of self-sabotage. You got a statistical advantage ? Follow the plan to the letter. Monitor your advantage over time. Risk no more than your optimal betting %, Reduce your bet size in periods of draw drown. Do everything to constrains the left tail, Use stop losses, hedge your bets, diversify ... Creat structures to make the good easier, And the bad harder to perform. Constraints on your platform. Max Risk ... Max DD ... Max Contracts ... Set brackets orders (TP, SL) Automate the process. If you have a profitable strategy, And if you risk no more than sound %, And if you implement the above without flaws, Then I can assure you that you won’t blow up. Don’t be a sucker: Rule #1 Stay in the Game ... Risk Management, Gambler’s Ruin Rule #2 Exploit the biases ... Profitability, Positive Expectancy Rule #3 Remove misconceptions ... Precautionary, Realistic
%% Part of it, like Elisabeth E said; if you see a turtle on a fence post he or she had some help. OP is under the FALSE impression trading is impossible. Trading is possible, with risk control = work; even though daytrading was causing me too many losses, so a longer time frame mostly helps me also.......[ I was under the false impression myself, that when Investors Business Daily founder noted ''new traders/investors want to much, with to little work''; he was not referring to me. So time cured that false impression of mine; new traders/investors want to much ,with to little work refers to all. LOL
The biggest thing is income. Look how long it took Dan Zanger to get rich, but he always had a job. This was during the boom years. Jobs today are much harder to come by.