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What you want from your trading?

Before I launch into the subject of this weekend's article, I hope all of you had a fantastic Thanksgiving. Traditionally, the holiday is a time to give thanks for what we have and to reflect about our lives. In that spirit of reflection, I thought it might be a good idea to reflect on what we want from our trading.

Obviously, on the most basic level, we want to make money from trading. I suggest, however, that there are considerations well beyond the basic. Dr. Ari Kiev, a psychiatrist, an advisor to traders and a prolific author of trading books suggests that more self-examination is something that would benefit us ("Trading to Win," Wiley, 1998, p.7). I couldn't agree more. Few traders seem to take the time to determine what they really want and how they might go about it.

It seems to me that one thing almost everyone would like is more regular income. Before we can amass great fortunes, we need to pay the bills each month so it makes sense to me to consider utilizing trading strategies that provide regular streams of income. I devoted a whole book, my recently released "Smart Investors Money Machine," (Wiley, 2009) to precisely that concept. The book sets out at least 16 different strategies through which a trader or investor can create income flow beyond what he or she may earn through their employment.

I haven't been employed for years yet I am fortunate to live a comfortable life and am able to enjoy many of the things life has to offer with relatively little stress. One of the major reasons is that I have developed a number of streams of income and while no single one may be considered particularly large, together they provide more than enough to cover my costs of living. It is only after those costs are covered that we can look to increasing our net worth.

In my own case, I assign a portion of my assets to income production and the remainder to efforts to appreciate capital. Once I know expenses will be covered, I can be relatively relaxed and patient in my efforts to accumulate more capital. I would suggest that may be an important approach for many traders. As I have written before, patience is a critically important factor in successful trading. One of the impediments to trading I often have seen is the rush to make money. Recently I heard a speaker discuss a strategy he was using and as part of that strategy, he was taking profits at a specific target even if the move was continuing in a favorable direction. I call that cutting profits. The speaker admitted it was part of his personality in that he did not want to stay too long in any position. I look at things a little differently and would prefer not to stay too little time in any position that is continuing to add money to my account as time goes by.

The speaker to whom I refer may be an example of the trader who hasn't conducted a self-examination at least to the level where he recognizes that he is violating a cardinal rule of successful trading. He is not letting profits run. The idea of exiting a trade quickly just to be finished with it quickly does not appeal to me. It is hard enough to find really good trades, and makes little sense to get out of one that is still producing just because I want a trade to finish quickly. It's like capping an oil well that is still a strong producer in favor of drilling a new well in the hope that it will be productive.

Self-examination might lead such traders to a conclusion that they might improve the bottom line simply by staying with a trade until it is no longer productive. All of that is to say that if one knows precisely, not just generally what one wants, the results may improve. As Dr. Kiev suggests, setting a goal (and then putting it in the background) is often very helpful in getting where we want to be. My own suggestion is that we first consider how we intend to get to the goal once set. For many, I suspect that is the production of regular income.

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