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The "All In" Trade
Written by J Crawford on Dec. 24th, 2016

    You know it’s going to work. It’s a sure thing. And the payout is going to be huge… life-changing, overnight success huge. Is it time to put all your chips in the pot? Or does someone need to talk you off the ledge? 

    When we talk about an “all-in” trade, we mean just that – allocating all of your capital to a single idea. For my casino gamblers and traders that laugh at the idea of stops or money management, all-in trades require no explanation because it is such common practice for your trading styles. For those of you out there that are unfamiliar with the term, it means the position can literally make you or break you. When I say, “break you”, I am not implying a slight bump in the financial road. I am saying your account will go from $100k to parking meter money in a short time.

    These are high volatility trades where a stock, option, futures contract or leveraged instrument can move up or down quickly. For example, putting everything into a penny stock with a great story, leveraging it all with options that expire in a month, or backing up the truck on a biotech awaiting phase 3 approval from the FDA.

    But first things first. You need to understand how you got here – how you decided to risk it all on the move of a single ticker. This may sound like an unnecessary step if you are already in the trade, but it is important to know how you have ended up in an all-in trade, in order to navigate your way through such a precarious position.

Did you open the position in hopes of hitting a home run trade?

    Most of us realize that there are no free lunches in the market. For every commodity that soars 400%, there are ten more that go the other way. But home runs do exist. They put John Paulson on the map when he shorted the housing market in 2007, walking away with a $100 million paycheck for his insight. If a similar call is your target, then you didn’t get here by mistake. You’re aware of the risks and ready to make the bet of your life.

Did someone else talk you into taking the position?

    Taking advice from others can feel like the right thing. It subconsciously transfers responsibility of your trading actions onto someone else. Making money this way will feel great when things are going your way. But the minute things go south, you will be frantically looking for a life raft. The reason being, you never fully understood why you were taking the trade in the first place. And without a winning attitude and nerves of steel, the market will always find a way to separate you from your money.

    These are arguably the worst kind of all-in trades. Even if you’re piggybacking the idea of a Wall Street legend, you have no idea if his reasoning is the same as yours. Even worse, you won’t know when he abandons the idea. If you’re about to risk your financial future on someone else’s idea…anyone else’s idea…take a moment to reconsider. If the trade goes south, the only person you can blame is yourself.

Did you start out with proper money management techniques, but kept averaging down and found yourself in a concentrated position?

    This is one of the most common causes for being over leveraged. You were fighting the market or trying to average down and things got out of hand. You weren’t looking to strike gold. And you didn’t use someone else’s advice to bet big. You were simply trying to manage your way out of a bad situation and things went from bad to worse. These instances rarely work out.

    I once watched a day trader buy a single Russell futures contract in hopes of making a few ticks. In the span of 3 hours, he was long more than 300 contracts. His Martingale strategy collapsed before his very eyes, and the nightmare ended when his broker force-liquidated his position for a $327,000 morning loss.

    No matter your current P&L, remember that things can always get worse. Identify your uncle point before you get into the trade and hold yourself accountable for abandoning ship if it is reached.

Embrace the Risk or Fold ‘Em

    The decision, my friend, is never easy. But it must be yours and yours alone. The logical response to holding an all-in position is to fold ‘em and live to fight another day. But what if you have already taken a sizable loss in the trade, or what if you have played it safe for years and you are willing to take the risk on this one trade?

    Regardless of how afraid you may or may not be, the key is taking a stance and sticking to it no matter what. If you elect to reach deep and let it ride, then let it ride. You cannot begin second-guessing yourself and overreacting to every tick. If you micromanage the position, you will find a way to sabotage the trade and completely ruin your potentially life-changing event. If you elect to close the position or reduce your exposure (which most “rational” trades will recommend for long-term success), then do so and never look back.

    Do not act prudently and then monitor your old position everyday as if you are still in the trade. Specifically, do not beat yourself up if the instrument goes to the moon after you closed or reduced your position. Remember, it could have gone the other way. And the odds that you would have taken profits at the peak are slim.

Learn to Manage Your Emotions

    You are going to have a heightened sense of emotions like nothing you’ve felt before when holding an all-in position. Your mood will ebb and flow with every tick. The grip the position will hold on your life is indescribable.

    So, as you are reading this article, remember there are really two emotional levels you will have to endure: …the short-term emotional swings you will experience while holding the position …and the need to emotionally accept the outcomes of your decision (good or bad) after the trade is closed.

Have a Pre-Determined Target

    Trading all-in will bring about greed and fear in your soul as if you were betting against the devil himself. The only way to control this is to have a set target where you will exit the trade no matter what. Now, if the trade is not working out, your target will likely be somewhat realistic as you have been humbled through the experience. If you are on the other side of the trade and things are going well, you will start to develop such lofty targets that you begin to smell the Napa leather seats in your new LaFerrari.

    So, herein lies the challenge, how do you effectively set a target that will make the risk worth your time? This is the holy wisdom all traders seek. And as much as I’d love to satisfy your thirst with an answer…I cannot. No one can. The best thing you can do is set a realistic target. Enter your order and when that number is reached, exit the position and never look back.

    Personally, I’m a spreadsheet guy. I analyze the numbers to death. What is the 3-month average true range for this stock and what percentage of the time does it exceed it? When the commodity climbed over 10% in the past, how many trading sessions did the rally continue before reversing? If I’m exploiting a chart pattern, what is its historical success rate and at what price would the pattern prove a failure? There’s no right question or answer here.

    Paul Tudor Jones’ rationale for shorting the market going into Black Monday was likely very different from Soros’s when he successfully broke the Bank of England. But each of these men reached an independent conclusion and decided the juice was worth the squeeze. And once it was over, they probably did the same thing…

Immediately Take a Break From Trading

    After you close an all-in trade, you will need to take a break from trading. Home run trades not only work a number on your bank account, they will also take a toll on your personal well-being.  They could also negatively impact your closest relationships. The other reason for taking the break is you need to grasp the position you placed yourself in, regardless of the outcome. 

    Obviously, if the trade went against you, you may feel like you need to checkout to build back up your confidence. However, if the trade is wildly successful, there is also a reason to take a break from the market. Inexperienced traders lose the most money after reaching a euphoric peak in their account balance. The money often leaves that just as quickly as they earned it if they do not take a breather.

    Depending on the level of risk you were carrying should dictate the amount of time you step away from the market. If things got out of control, you might consider taking 2-3 months to clear your head and to work on setting up safeguards.

Final Thoughts

    All-in trades are both the scariest and most exhilarating moments of a trader’s life. Euphoria can turn to despair in minutes, and you will never feel more alive. Statistically, most traders suffer defeat before victory in this area. What seemed like a sure thing early in one’s trading career will be remembered as a moonshot as his skills mature. But for as long as we reminisce on the legendary feats of Paulson, Soros and Livermore, traders will keep trying to slay the dragon and make their fortune with an all-in trade. Do the math. Map the trade. Plan your exit for both outcomes. Then take one deep, final, relaxing breath…and pull the trigger.

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