When we trade we need to make many decisions. What stock will I choose? What strategy will I use? When will I enter? Am I bullish or bearish? What is my exit strategy? Will I set a stop to buy? Will I set a stop loss once I have entered? What reward to risk do I seek to attain with the trade? Will I bother to create a trading plan? These are just a few of the decisions we must make as traders.
As I have often said and occasionally written, one of the best pieces of advice I ever got was from a colleague regarding decision making. We were talking about the difficulty so many people have making decisions and my friend said that it is often more important to make the decision than what the decision actually is. "Naturally," he said, "the decision may be wrong, but then all we have to do is make another decision and fix it." So often, I have seen traders (and other people) absolutely agonize over making a decision. They try to gather every fact relevant to the decision and then worry over it for prolonged lengths of time only to find once they have finally made the decision that some fact changes immediately after they have decided and it makes the decision wrong or inappropriate.
Should I buy XYZ? It was going up, but it just took a dip. Earnings have been good, but the next earnings are set to be released in a month. I like the CEO, but there is a rumor he might be leaving. Their product is super, but rumor has it that the ABC company might be releasing an improved product in the next six months. There is almost always a "but" in any analysis we make. We simply can't know what a stock or the market will do tomorrow.
The only time we can make a decision is now. As Dr. Ari Kiev wrote in "Trading to Win" (John Wiley & Sons, 1998), "Waiting for the right answer before you act is a trap. You may think you are doing something when you are deciding on the right way to go or the right path to follow, when in fact you actually are mired in your own thinking. The issue is to choose or not to choose, not choose the right answer."
If we buy a stock, for example, we can be right or wrong. The issue for us is to decide what to do when we see we are wrong or when we see we have been right. In my view, that is what an exit strategy is all about. If we are wrong, we should get out, that is what cutting losses is all about. If we are right, we should stay in until the play turns against us. That is how we let profits run. In either event, we need to make the decision now.
by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
All Rights Reserved
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