An Impediment to Profitable Trading -- By: Bill Kraft
Copyright 2009, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
When we trade the markets, we have many hurdles to overcome if
we are ultimately to be successful. Underlying all trades, for
example, is the necessity to have knowledge. We need to know what we
are doing and we need to know the specific risk(s) we are assuming. We
need to understand the strategy we are employing and we should have an
exit strategy. We are well served when we have a plan for our trade
and utilize a money management system. All those factors can help us
achieve an edge in our trading that can lead us where we want to go.
One of the most critical elements, however, is one that traders
often ignore and that is our own psychological trading profile. I am
convinced that certain of our individual psychological traits are the
greatest impediments to success that we face. Long ago, a trader came
to me seeking help. He had lost a great deal of money when the tech
bubble burst and the market turned over in the early part of this
decade. He had a fair amount of money and no job and wanted to get
back to trading for his living. When I met with him, I learned that
he had no specific business or trading plan so I began to go through
the elements of a basic trading plan as I later set them out in "Trade Your Way to Wealth" .
When we came to the section where he would set his trading
hours, he absolutely refused to set hours. I prodded him by
suggesting that if he were to open any other business he would likely
have hours, but he persistently refused, creating one excuse after
another as to why he could not set the hours he would devote. I
reminded him that his plan is always a work in progress so once set he
could always make a change. Even that didn't help convince him to
include hours in his plan. His resistance was adamant and seemed
irrational to me. Suddenly it occurred to me that refusal to complete
the plan may be a way for him to avoid trading altogether so I changed
gears.
I asked this fellow whether buying stock was a strategy he
believed he understood well and he agreed it was. At the time of our
meeting, the market was bullish so I suggested we find a stock that
looked ripe for an entry and that had a nearby exit in the event it
turned down. In a short time we found a candidate that we both agreed
looked bullish and that might afford a good entry. I asked the student
how much money he had in his account and learned it was in the mid six
figures. The stock we found was trading for around $30 a share. I
suggested he buy one (1) share. Immediately he refused, he literally
began to shake and offered many reasons why he needed to do further
research before committing. I pointed out that even if we were wrong
on direction and the company immediately announced a bankruptcy after
he bought the share he would lose only $30 and the commission. Tears
filled his eyes as he claimed a need to do more research, gain more
knowledge about the fundamentals, and await confirmation.
He never made the trade. Undoubtedly this situation illustrates
an extreme case, but it does illustrate a psychological barrier that
absolutely prevented this fellow from becoming a successful trader.
He is a poster-child example of how perfectionism (in his case
resulting from fear) can stifle good trading. Perfectionism in
trading can lead to paralysis of analysis. The perfectionist seeks
every bit of information he can possibly find and then seeks
confirmation of the information. Meanwhile, he is likely to miss the
trade. He is so interested in being right that he fails to pull the
trigger until after the target is gone.
One of the problems with the perfectionist approach is that it
fails to recognize that even once as much information is gathered as
is humanly possible there is still no guarantee that it will remain
the same the moment after the trade is entered. Perfectionism does not
guarantee the trade even though the perfectionist may, indeed, be
seeking the perfect trade. A perfectionist generally does what he
does to insure complete safety, but in reality there is no such thing.
Many years have passed and the fellow about whom I wrote in the
anecdote above continues to try to create a perfect algorithm to find
the perfect trade. Unless we can perfectly predict the future there
can be no such algorithm. Unexpected attacks occur; cataclysmic
natural events occur; fundamentals can turn on a dime -- any of those
kinds of things can and do alter predicted outcomes.
Those who are perfectionists can help themselves in their
trading, I believe, if they are aware of the trait and temper it with
the knowledge that no matter how hard they try, complete safety cannot
be achieved. Learn to make reasonable efforts, understand that all
cannot be known and even if all current facts are known it does not
guarantee the next moment. Try not to let the trade get away, but
realize that it will have risk. Work to manage the risk.
Good Trading!
Bill Kraft
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Natural Resource Partners LP (NRP)
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Here's a look at a trade Bill is currently working on:
NICE Systems Ltd. (NICE)
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Bill Kraft
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We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains and, of course, at worst, the risk is limited to what we paid for the stock.
Here's a look at a trade Bill is currently working on:
Zale Corporation (ZLC)
$10 Trader hit a home run on ZLC capturing a 51% gain
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