What Traders can learn from the Gulf Oil Spill

Research by Shaza

Lesson: A small problem can (and will) turn into a larger one. Google created a Crisis Response page filled with images and videos to help track the spread of the spill. We started here with the rig burning off the coast:
And we ended up here:
Do we not have the technological know-how? Perhaps we don’t know enough about the deep sea? In any case, $BP allowed a small problem to become something that cannot be contained. The spill has now spread to Mississippi and Alabama, and may reach Florida by the end of the week. Now, it seems like the next ‘likely’ solution is two months away. By that time, the majority of the Gulf of Mexico will be in trouble. $BP, as a result of one mistake, will blow up and it will never be the same for them, ever again. With 23,000+ claims against them already, $70 billion in market capitalization wiped out, a Federal criminal probe against them, and a  host of other issues, we can safely assume that $BP already “blew up”.
How does this apply to traders? It’s about the principle of cutting losses short and quickly. I am a champion believer of this as it has kept me alive for 8 trading years. First, it is necessary to recognize that taking losses is inevitable. Sh*t happens, so you deal with it professionally. Second, it is entirely up to you to follow your rules. If you are nervous, your position may be too large. If you are quick to sell out, you may have trigger finger syndrome. If you get stopped out too often, then you are not setting your stops right. This leads to the third thing, which is trying to limit the number of times you make the same mistakes again. Since we are all human, I can’t say “don’t make the same mistake again” because it is likely that we will. The difference between a professional and an amateur is recognizing the mistake (self-realization) and taking action quickly to remedy the mistake.
Jesse Livermore said it best in Chapter 3 of “Reminiscences of a Stock Operator” by Edwin Lefevre:
“With me I must back my opinions with my money.  My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat.  But if I cannot advance I do not move at all.  I do not mean by this that a man should not limit his losses when he is wrong.  He should.  But that should not breed indecision.  All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable don’ts.  I have been flat broke several times, but my loss has never been a total loss.  Otherwise, I wouldn’t be here now.  I always knew I would have another chance and that I would not make the same mistake a second time.  I believed in myself.  A man must believe in himself and his judgment if he expects to make a living at this game.”
He also said: “A stock operator has to fight a lot of expensive enemies within himself.” Livermore understood this as a fact of human nature. Don’t be afraid to cut the loss short and quickly. If you’re wrong about it, then you can always get back in via the next entry opportunity. If you are right, then you will be breathing a sigh of relief after having purged yourself from a potentially huge awful mess.
In the end, you’ll make out just fine.