Anatomy of a Margin Call

Catastrophic Mission Failure

Any one of these items is not a catastrophic failure of the mission, but when combined, the result is mission failure.

• Impatience
  • Start with breaking rules and compromising your trading system definition.
  • Enter a trade without confirmation of a valid setup.
• Denial of Reality
  • Begin justifying the trade, forget the defined parameters of the trade, reason your way into dynamically changing trade parameters.
  • Fail to exit when price is not doing what your plan requires.
• Delusions of Grandeur
  • Increase risk by moving or removing stop loss orders.
  • Increase risk by adding leverage to make up for losses.
• Mission Failure
  • Watch your account drain as price continues to move against your position.

---

Preventing a catastrophic failure in a trading system

• Define rules and stick to them
• Introduce the idea of friction into trading rules to flatten the drawdown curve
  • Leverage, cut risk by 50% on each loss or after 8 wins in row. Once loss is recovered, increase risk by 25% until back at full risk of max 2% of portfolio.
  • Time, pick set times (sessions) to trade, additionally set a max number of trade losses per session.
  • Setup validation, increase the validation needed to enter a trade on every loss in a session.
    • If the entry setup is an OB forming after a Liquidity Raid, before entry and the trade is a loss.
    • Next entry requires Liquidity Raid + OB + Intermediate Swing High/Low + Retracement to OB, before entry, if a loss occurs.
    • Next trade requires all of the above and price moving in the direction of the trade before entry.