Saturday, April 18, 2009

What Have You Been Doing?

This article is the first in a series of three where I will raise the questions of where have you been with your trading, where would you like to be, and what are you willing to do to become a better trader.

In recent articles, we have looked at some issues relating to risk and to some of the psychological factors involved in trading. We have seen a market that crashed and we have seen a sharp rally. I find it interesting that I was receiving quite a large number of inquiries about my coaching sessions as the market was falling, but not nearly as many during the rise. The calls were often from prospective new clients who reported large losses and were looking for ways to stop the bleeding and to attempt to regain lost ground. Sadly, steep losses had already occurred before help was sought. It seems clear that less help is sought as markets move up, but one wonders whether that is a symptom of the old condition of confusing brains with a bull market.

The fact that we have seen an upturn in the market following the March lows certainly does not mean that it can't turn back down. The question is whether the trader knows how to protect himself in the event of another decline or whether he has already forgotten his recent pain. Hopefully, it is the former and the trader has taken steps to understand ways to cut losses, hedge positions, or even insure a portfolio.

No matter who we may be or where we are in our trading, I would suggest it is a valuable exercise to take a personal inventory about our approach to trading and make an evaluation of how well or poorly it has served us. Some of the folks to whom I have spoken told me that they just threw away their account statements unopened because they knew they would be bad. While I can sympathize with their feelings, I don't see how this "ostrich approach" can be helpful. In a sharply declining market, that approach does nothing to cut losses nor does it assist in learning ways to profit from downward moves. Others have simply pulled out of the market either because they have abandoned hope or to cut losses and await the next bullish move. Finally, a small few have had great success.

Now is as good a time as any to recognize where you fall on the spectrum of trading. Did you throw away your statements or did you have exit strategies in place that saved the bacon? Did you know what to do and when to do it or did you just hang on for dear life hoping "it'll come back?" At this point, whatever you did or didn't do can teach important lessons for the future.

Self-evaluation may help avoid costly errors in the future and may help even the most successful improve their trading. I would suggest that each of us look at positions we have entered and/or exited in the last year and a half and try to recognize why we entered a play, ascertain whether we had planned the trade before we entered it and if so whether we followed our plan, and determine what strategy were we attempting to use and ask ourselves whether we actually followed through with our strategy. Did we succumb to the "little voice in our heads" saying something like: "I'll just let it go down another 50 cents before I get out." Did we get out then or did we let it go even farther down? We need to analyze why we made those decisions. Was it a fear of losing? Did we give up because we just didn't know what to do? Did we stay in positions because we consider ourselves to be buy and hold investors? Precisely what led to our decisions or indecisions.

In trading, as in many things in life, it is important in determining where we are going to know where we have been and what influenced or controlled our decisions. The introspection can be extremely helpful in heading us or keeping us in the right direction. If I can understand my behavior with respect to a trade or to my trading in general, I am armed with ammunition that can help me become better than I have been in the past. Failure to come to such an understanding can easily result in repeating the same performance. As has been said, "The definition of insanity is repeating the same thing over and over and expecting a different result."

by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved


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To comment on Bill's article click on the "comments" link below.

12 comments:

joeserra1 said...

I purchased
Pqvax and pjfax

Anonymous said...

Bill,

Thanks for your sage advice in knowing yourself and having a plan before the next downturn.

Steven Shum

Manish Chauhan said...

Agree with you Bill

I am trading from last one year and i have all the records for my trading , I see them every month and I am aware of the mistakes I do , but its really hard to control doing those mistakes again and again , Its all my Greed thats taking control over me .

Anyways , I have done lots of self talking and convinced my self that I will be a great trader some day. Only thing is I have to remain in the game and control myself now ..

You write wonderful ...

Manish
http://www.jagoinvestor.com

Aucel said...

Hello,

Bill, I think your article and comment: "The fact that we have seen an upturn in the market following the March lows certainly does not mean that it can't turn back down." is very timely.

I follow a daily Blog called Triquetra-Trading.Blogspot and the Friday post contained the follwing comment:

"Folks, I think we may have reached that point of correction. Even though the S&P 500 closed up +.50% it did bounce of the 875.60 price two times during the day. This leads me to believe that next week will be a little bearish."

It just seems that people that are "in the know" like yourself, are "battening down the hatches" and expecting rough weather in the weeks to come. Is this a true reading?

Thank you Bill.

Anonymous said...

Is the SPY getting a little toppy ? Is this a bear market rally or is the bottom in at spy 666? Thank you for your opinion.

Bill Kraft, MarketFN.com said...

You're welcome, Steven, and thank you for writing.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks, Manish. Discipline is one of the important keys to success. I suggest having a plan for each trade before ever entering and then follow the plan including the exit strategy.
Bill Kraft

Bill Kraft, MarketFN.com said...

Thanks for writing Aucel. While no one can ever know what is going to happen in the next week in terms of how the markets will behave, we are at a point where one could look for a correction or retracement. It's a good idea, I always believe, to have an exit strategy in place before things turn.
Bill Kraft

joeserra1 said...

On 60 min. last night they showed the fees we pay on our funds. That must be stopped.

Bill Kraft, MarketFN.com said...

Anonymous, thank you for writing. SPY indeed looks "a little toppy" and hit resistance near 87.50. No doubt we have been due for a retracement but whether it will test the March lows is something neither I nor anyone else can say with any certainty.
Bill Kraft

Bill Kraft, MarketFN.com said...

Joe, thanks for writing. One way to stop the fees is to stop buying open end funds. Fees on the closed end funds and ETFs can be much less and they can be traded like stocks. You may want to take a look at my book "Trade Your Way to Wealth" where I addressed the same issues well more than a year before 60 Minutes. My new book, "Smart Investors Money Machine" contains a lot of material about numerous ways to add streams of income aside from those open end funds.
Bill Kraft

joeserra1 said...

Levereged ETF'S Must be stopped.

WSJ 4-18-19 B-1

Levereged ETF'S put cracks in Market.