In my most recent book, "Smart Investors Money Machine" , I
discuss a variety of ways people can add streams of income to their
lives. I use examples of a single unattached male, a family with
children, and a couple at retirement to show how various strategies
might be employed by them at differing life stages with differing
needs and varying time constraints to add what can be important
streams of income in each situation.
One of the important considerations for any of us is to arrive
at understanding of our own trading personality. As I have emphasized
so many times both in these articles and in "Trade Your Way to Wealth" , a critical need is a trading business plan and as or even
before such a plan is developed, the trader would be well advised to
do a little self-analysis to determine his or her trading personality
characteristics. Obvious factors such as how much time one is willing
and able to make available for study and trading are critical, but, in
my view, one needs to take a deeper look in order to increase the
favorable odds or gain an edge.
Since this subject can be both broad and deep, I'll just try to
give a few examples of trading personalities I have seen along with
some suggestions as to how the trader with such traits may help
himself improve in the trading arena. One of the more common traits
seems to be an effort at achieving trading perfection. Classically,
people who have been trained as engineers tend toward this approach.
Through training and experience they seem to tend to seek every last
piece of information before entering a trade. Obviously, if one could
actually gather and process all information relative to a trade before
making an entry, an edge would likely exist. Clearly if one were
designing a bridge or the structure of a building he would need and
want every available piece of knowledge and information in order to
insure the integrity of the structure. However, in trading, it is
rarely, if ever, possible to know all relevant facts.
Suppose one were to undertake a relatively complete fundamental
analysis of a company in order to decide upon a trade. Even if
literally every available fact were gathered and incorporated into the
decision, that would not preclude a new fact from changing the whole
picture just as the buy order were placed. The CEO, for example,
could be indicted or new onerous law passed, or a competitor could
announce a fantastic new product that would be an overwhelming
advancement (remember what the auto did to the horse and buggy or
vacuum cleaners to rug beaters or computers to typewriters?). A new
news item can literally wipe away attempts at perfectionism in
investment analysis.
In addition, those whose trading personalities tend toward
perfectionism are frequently plagued by paralysis of analysis. There
are just so many pieces of information to try to gather and analyze,
one may never get to a level of comfort that permits entry into a trade.
For folks with this element of perfectionism in their trading
personality, I would suggest a bit of change in focus. Instead of
looking for the perfect trade, look instead to trades that offer a
strong reward to risk potential, perhaps on the order of 2.5 to 1 or
better. Look for trades that offer a close and convenient exit just
in case you are wrong on direction (as you inevitably will be on
occasion). Understand that there really is not perfection in trading
and that it is a different animal than designing a bridge. Trading
involves infinite variables.
Not far from the perfectionist is the trader who seeks ever
greater confirmation before entering a trade. He may see an entry, but
then awaits confirmation of the entry and then looks for confirmation
of the confirmation. Believe me, I am not against confirmation, but,
like anything, if taken to extremes it can be harmful. The problem
with confirmation is that the longer one waits, the farther the trade
has moved and the more of the trade the trader often misses. In
addition, the exit in the event the trade goes the wrong way gets
farther and farther away before entry is made thus increasing losses
in losing trades and reducing gains in winning trades. My suggestion
for these folks is to concentrate on having a disciplined close exit
at the time of entry. If that method is employed and the trade goes
south, the loss will be small and contained and the trader can move to
the next trade. Again, reward to risk potential should be a major
consideration in my view.
Lastly, for this week, at least, is the ready, fire, aim trader.
This personality is almost diametrically opposed to the
perfectionist trader and jumps on a trade with little basis, technical
or fundamental, and no plan other than some unsubstantiated hope he
will make money. Often this person buys because a friend owns a stock
that has done well or because it has been touted by a broker. The
trader has neither an entry nor an exit strategy and just jumps on
board, all too often as the stock is about to turn the other way.
Here, I believe the trader needs to learn and exercise discipline. He
needs to have an exit plan in place before entry and he needs an
overall plan for his trading. Without those in place, he is quite
likely to wind up without trading money quite quickly.
Obviously, these examples are relatively extreme, but they are
also relatively prevalent to one degree or another. The key is to
understand yourself and your own foibles. We all have them and they
can definitely impede good trading. I think it was Pogo who said
something like: "We have met the enemy and they are us." It is so
true that we are most often our own worst enemy in trading and the
first step is to discover what we are doing to undermine our own
success. Once found, we can take steps to improve.
Good Trading!
Bill Kraft
Success Trading Group -- by Success Trading Team
Our Success Trading service delivers quality trading ideas for the elite investor that has the financial wherewithal and market nimbleness to profit on small moves in a stock's price. Become a member and you will be provided with email and/or PDA alerts intended to provide you with the opportunity to make many, many profitable trades.
Here is a play from the Success Trading Group:
NSTAR (NST)
Our Success Trading Group members closed two winning trades this week when we closed out a position in NSTAR (Ticker: NST) and Johnson & Johnson (Ticker: JNJ). We have several stocks on our radar and are looking forward to trading next week.
Have a great weekend and we'll trade next week.
Success Trading Group Team
