Tuesday, September 29, 2009

Overcoming Stubbornness as a Trader

A reader notices that he has been fading strong moves, much to the detriment of his account. What can he do to stop himself from being stubborn?

Many times stubbornness comes from trying to be right: investing one's ego in catching market highs or lows. Sometimes that stubbornness comes from missing a market move and then fading that move just to be proven "right".

The opposite of stubbornness is accepting losses and the inevitability of losses. If you mentally prepare yourself for losing, you will be maximally flexible in exiting losing positions and getting into good ones.

You emotionally prepare yourself for losing by not just viewing stop loss points as price or time levels, but as concrete action plans. You want to mentally rehearse those plans--actually visualize yourself taking those losses if the stops are hit. If you make yourself familiar with a scenario and make yourself cope with it and accept it, it will lose much of its threat value.

It helps to view every trade idea as a hypothesis, not a fixed opinion or conclusion. If you frame a trade idea as a hypothesis, you immediately open yourself to the possibility of the hypothesis being wrong. That helps you plan "what-if" scenarios for how you would respond if the hypothesis is not supported. Similarly, the what-if scenarios can help you become more aggressive in trades that do find market support.

Developing traders should trade small enough that inevitable losses won't hurt the account too badly. If you make losing painful, you'll try to avoid losing...and that will keep you in bad trades well beyond any rational stop level.

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5 comments:

RooS said...

excellent post and many thanks for your contributions!

Nonadamas said...

Overcoming stubbornness. I am training myself to accept to get out of a trade when it does not move in the direction and way I anticipated, just get out...I can always reenter. Or if I am uncertain I get out...and can re-enter. Often before it hits my stop. Sounds very simple and it is, saving much heartache and loss. You can even set a time to get out, quickly and not waste time and money.

Matt Fahmie said...

One thing that has greatly helped me in my trading, is having a framework of understanding market activity. If I understand the situation of the foreground and the background, I am more tuned to the various potential scenarios that could play themselves out. With an understanding which phase of market activity (horizontal or vertical) is currently dominant, I can analyze what it will take for the situation to continue or change. I understand the variables that would constitute both continuation or change, and from this perspective can objectively analyze what needs to happen for the market to change or continue. This framework of understanding has directly improved my market discipline.

Stubbornness, I believe, is a function of lack of understanding. Understanding what will need to occur for the situation continue or change and having variables to assess this, removes many of the psychological problems I have had in the past.

E said...

One of our members, JK posted this great blog of yours in our room; such is the power of teamwork.

"No one trade will ever make me or break me" is part of our philosophy.

There is a thin red line between commitment to a trade and stubborness; and truthfuly I find it easier to abandon a losing position, go to the sidelines, and think clearly.

Defending an investment in an idea is perhaps the most dubious logic; this business is about risk of ruin as well as lost opportunity cost.

Bend like a willow,using the "snowfence" concept; when the bough breaks, the cradle will fall.

Thanks for a great blog.

Mark Wolfinger said...

" If you make losing painful, you'll try to avoid losing...and that will keep you in bad trades well beyond any rational stop level."

The real problem for many traders is recognizing that they HAVE ALREADY LOST.

Refusing to close the trade and 'officially' recognize the loss is merely hoping things will get better.

The money has already been lost. It cannot be borrowed, used as collateral, or spent. It is gone. There is a much better chance to earn money going forward from a fresh, quality trade than by holding onto the current garbage.

If traders recognized this simple truth, they would not hold bad positions. They would exit and put the money to work in a better spot.