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Becoming a Better Trader: Play the Position, Not the P&L


Playing the position without regard to your P&L is not easy, but it is something you can do to help reach your full potential.


Over the years I have learned that once an individual has developed and honed a personal trading style, ultimate success has more to do with psychology than any set rule or guideline. Trading quickly evolves from a battle between man and stocks, to a battle between man and himself. Learning to trust certain instincts, avoid others, stick to a set trading style, all the while keeping emotions in check are just a few of the issues a trader faces throughout his entire trading career, regardless of how well he understands chart patterns, fundamentals or macro economics.

I am a firm believer that should a trader desire to move from good to great, they must be willing to sit and reflect upon these variables, seeking to truly understand how they influence their trading decisions and results. It is a simple matter of getting away from the trading desk in order to do some personal reflection with the ultimate goal of improving performance. I do this often and long ago stumbled upon a simple yet profound idea that has helped my trading more than any other tenet I have subscribed to thus far and is the basis for my current rule #6.

If you've missed any of Prof. Tatro's series, Becoming a Better Trader, you can catch up with the preceding columns here: Developing Your Personal Rules, Position Sizing, Let the Chart Be Your Guide, Legging In, Stops and Don't Fight the Tape.

It all started as I was reviewing trade records and asking myself the question of why had I not let winning stocks run further, or had cut lagging stocks immediately. These are the foundational rules for any successful trader and honing in on them has always been quite helpful for me.

As I continued to dig a bit more, I couldn't pin point why exactly I had shed some winning stocks when I did. It made me nauseous to look at where they were at the present time and the fact that I owned either none or so little was a mistake I wanted to correct. I searched and searched for some rationale as to why I sold when I did, and could find nothing. I then got the idea of looking in other places, as I could have quite possibly been influenced by something else, such as the broad market. Should the broad market have been selling off or technically unhealthy, quite possibly I would have felt as though I was going against the trend and wanting to protect myself by selling down some stock. Unfortunately, as I looked at the broad market averages, nothing stuck out to me that would insinuate this having something to do with my premature selling frenzy. I was definitely running into dead ends.

Finally, as I sat in silence trying hard to drill down into why I sold when I sold, a thought rushed in that sparked my curiosity. I decided to recreate my profit and loss on the day I had done my selling. It took a little bit of work, but I quickly found that on that particular day, most of my stocks were trading higher and I was well into the black. Not only that, but my advance for the day far outpaced the market averages. Immediately, a thought rushed in, a comment that I have written hundreds of times, "If you are feeling anxious over the gains, take a little off to make it real." That must have been it, that must have been why I sold when I did. It wasn't what the market was doing, it wasn't what the individual stock was doing. It was that I was having a great day and I wanted to make some of the gain real. But was that a problem? Was it a problem taking gains?

Initially, I would say no, but as I looked at some of these stocks, I saw I had no technical reason for selling them at all, and to boot they were often 30, 40, or even 100% higher today than when I sold them earlier. So what exactly was the problem?

The exercise was quickly turning into an obsession, but I felt as though I was really onto something big and wanted to keep going. I sat and pondered the thoughts some more and came to the conclusion that somewhere along the way, I had stopped playing the position and was actually playing my P&L. Rather than make decisions about my individual stocks because of how they were acting, I was making decisions about my individual stocks based on how my P&L was acting. I looked at previous records to see if this thought held true and sure enough, there it was. Each time I sold a winning stock early; it correlated with either a fantastic day, or a terrible day for my P&L where I felt as though I had to do something, where I had to make a change. Unfortunately, it was always at the expense of the winning stock.

The next Monday, I decided to do something radical. Luckily, I have a highly customizable trading platform, so I decided to hide my daily P&L. I also hid the dollar amount of gain or loss on each stock and kept only the point and % change. I had made the decision to start playing only the stock and not the P&L.

Let me tell you, it was not easy. I found myself extremely anxious throughout the day, wanting to know how I was doing. I would review my positions and none of them needed anything done to them, so most of the day I just sat, doing nothing, while my stocks moved about. It was terrible and such an uneasy feeling. At the end of the day, I reviewed my P&L, and not much had changed.

I made a decision to try this at least for a week. The days went on and for the first few, it did not get any easier and I must say there were times I broke down and looked, which only made the exercise more real as I felt the desire to take action flow in, however there was no action to take. Finally the day came. The market was advancing steadily and my positions were running. Oh, how I wanted to look, I wanted to look so bad, but I didn't. I didn't review the P&L once, but just remained focused on my positions. There was a stock that wasn't participating at all in the advance, in fact it was flirting with its line in the sand. I cut it, not giving it a second thought.

The others were breaking to new highs on excellent volume and hopefully setting up for another prudent entry down the road. I managed to add a few that were on the verge of breaking out and did so by day's end. Finally, when the bell rang, I looked at my P&L and was shocked to see one of my best days ever. I then looked at the stock I cut, which had fallen another 0.50 before the bell. As I retired for the evening, I thought about the exercise and wondered if I would have cut stocks on that day that were moving only because I was anxious about my P&L. I wondered if I would have let the lagging stock hang in the portfolio because others were offsetting the loss. While I am not exactly sure what the outcome would have been, I do know I would have done something and more than likely it would have held back my profit potential for the day.

It sounds simple, but if you really think about it, it is quite profound. Playing the position without regard to your P&L is not easy, but it is something you can do to help reach your full potential. I now have my P&L hidden all throughout the day, as well as the dollar gain/loss for each stock. I can't say I don't peek periodically, but I am still getting comfortable with the exercise. I am trading better than I ever have and I give much credit to this new rule. It has helped me and maybe it is something that will help you.
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