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business newsAvoid Impulse, Follow the Rules
By
Quint Tatro
Jun 02, 2010 1:45 pm
Patience is the most valuable skill a trader can possess.
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Many traders got into the game because of the action. Watching the screen as prices race; red and green numbers lighting up your trading station can be mesmerizing, made all the more exhilarating when your trading account is also showing a profit. The month of May might have been challenging for you as a trader. Perhaps you held your long side bias through the correction and paid the price as your holdings got crushed. Perhaps you traded in and out during the entire month, but died the death of a thousand cuts and couldn't wait for May to end. Or you might have indeed been one of those who prospered during the sell-off, and capitalized heartily on the volatility.
No matter which mask you wore in May, June brings with it new opportunities and new perils. It is difficult sometimes to separate ourselves from the action, always afraid of missing the next great opportunity. But trust me when I say that learning patience is one of the greatest skills a trader can develop. Instead of coming into each trading day with an “I gotta make money” mentality, it would behoove traders to develop a more market-neutral attitude and focus on the process instead of the outcome. To that end, let me share some ideas that have helped me over the years to control the impulsivity that many traders find hard to control.
Many times the “need to trade” is based on some other issues that have very little to do with actual participation in the marketplace. The allure of quick profits, the idea that the stock market is a glorified casino is a draw to some people, where the quick thrill of throwing down some cash outweighs the desire to actually operate a viable business venture. May I suggest that each trader take a hard look into why they're in the market, and be brutally honest no matter the answer. If you experience exhilarating joy when a trade makes you money and crushing frustration with each loss, then your emotions are tied too closely to a marketplace that doesn’t care about how you feel. Take some time to explore the emotional roller coaster that trading has sent you on, and commit to a more balanced attack.
Another area where many traders struggle is patience. Preachers talk about the virtue of patience. Parents talk about patience with their kids. Traders talk about patience in waiting for the right setups in the right market environment. But talking about patience and actually implementing the attribute take mighty resolve, which most traders don't possess. Back in the dark ages of trading, people actually had to call up their broker to place a trade. Nowadays, a key stroke can get you into a trade in less than a second. Although I enjoy the simplicity and ease with which I can now place a trade, I'm not so sure that it has helped traders become any better at their craft. Traders are quick to get in and slow to get out when just the opposite should be true.
To become a more patient trader, try this exercise for awhile and see if it helps your trading. Grab a notebook and write down every trade you're contemplating. Before putting a single dollar of your equity on the line, journal why it is you're looking at the trade, what your stop loss will be, what your profit target(s) are,, and what the overall market climate is at the time of the trade. If you find that you can't do this simple step and revert to placing trades indiscriminately, this should be a huge signal that you don't control your trading but that it controls you. It will only be a matter of time before the account dwindles to zero and the trader will be scratching their head at what happened.
Another arena where patience comes into play is when we're in a trendless market climate, like the one found in the current tape. The urge to have a trade on just to have something to watch is immense. May I suggest that these are exactly the times when a cash position will serve you best. Keep the powder dry, and when the time is right you'll have the emotional and financial reserves to play the charts setting up. Putting on positions to stave off boredom is a recipe for disaster. And if you do in fact make money off of such imprudent trading, it will merely embolden you to continue taking trades against the playbook you have designed for your trading. (You do have a playbook, right?)
To combat trading from boredom, have other activities and outlets that you can turn to when the impulse hits. Some prop desks will have a treadmill where traders can refocus some of their energy. Have a stack of trading books nearby that you can dive into. Run through charts on a different timeframe, looking for those overlooked opportunities from your normal rituals. Bone up on some of the fundamental news making the world economy tick, so you can understand the connections when they come into play. Even learning a foreign language would be better than putting on a trade when the trader has no edge.
A third issue that plagues traders on this road to consistent profits and mastery is not understanding the nature of the beast. The markets are like little kids hyped up on caffeine. They run around pushing themselves beyond normal parameters and then crash hard and can barely stand on their own two feet. Traders need to remember that volatility is what drives the marketplace, as stagnant pricing is a non-winner for all parties. Ever notice that the major headlines in the news cycle are saved for the biggest and most shocking stories? Famines, natural disasters, war, massive stock market declines, and European debt crisis all grab headlines because they play into the collective human need to break out of normal routines and experience events from a heightened state of arousal.
Take the current 10% drop we've experienced in the overall averages. By the time the news hit the front page of America, it was too late for traders to participate in that wave. All the easy money had been made by the patient traders who knew when to pounce, and they were covering into the latecomers selling panic. Emotional trading is a license for disaster. Don't let your trading be hampered or driven by greed, fear, boredom, anxiety, or frustration. Remain true to a disciplined approach to trading mastery, and if you execute properly the profits will follow.
Even in a trendless market traders can continue to learn and become better practitioners of the discipline. Like all those who are proficient at a craft, it's attention to detail that counts. It's the smallest of habits that matter most. Running through charts, keeping a trading journal, staying focused and not trading outside of your realm of expertise, and implementing a rules-based style will all lead you on the path to greater self-discovery and proficiency as a trader for life.
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No positions in stocks mentioned.
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