wealtharticles-an_impediment_to_profitable

An Impediment to Profitable Trading - by Bill Kraft

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
Editor of $10 Trader, Option Trader and Trend Trader
"Trade Your Way to Wealth" by Bill Kraft is an Amazon.com best seller!