Saturday, July 17, 2010

The Flow of Trading

Over the many years I have been trading, teaching, and coaching traders I have observed that many, at least initially, have what I consider to be an unrealistic expectation of how successful trading flows. They seem to expect each trade to realize great gains and are disappointed if the gain is not great or if a loss is suffered. At times that disappointment results in the trader withdrawing from the activity because he doesn't think it can work for him or because he didn't make money fast enough. One of the problems may be that he has yet to understand the flow of trading.

What I have found is that a whole lot of trades are of the "kiss your sister" variety where gains are not particularly exciting and there are quite a few trades that result in losses. Occasionally, however, a specific trade takes off and does exceptionally well. Provided a trader cuts losses appropriately on the losing trades, the less exciting gainers can be the meat and potatoes while the occasional big gainer can make the difference between mediocrity and excellence. When a trader understands that there will be losses and there will be more trades that just make a little than there are trades that make huge gains, he can adjust his thinking. The fact is that we can never know ahead of time which trade will be the superstar and which will be the small gainer or the loser. We can only know that if we are really to become traders we will experience some of each. If we are really lucky, the big gainer will come first and often, but it may come later and less often. We just can't know ahead of time.

As far as I am concerned, trading is a business and I am in it for the long haul. That means I ride the flow, working to keep losses small, capturing the gains in a fashion that avoids cutting profits as much as possible and accepting that only some of the trades will achieve great results. Those, I believe, are more realistic expectations and enable me to achieve what I consider to be acceptable results.

Impatience and unrealistic expectations are rampant in many retail traders. If they don't get a fantastic return on the first swing, they allow doubt to affect their trading actions and may immediately switch methods or stop their learning efforts or stop trading. The fact is that first trade is only that; a step along a much longer path. Experience on that path teaches more and more about flow as it is gained.

One of the reasons I always suggest paper trading is so that the trader can observe that flow, gaining understanding that there will be big gains, little gains, and losses (hopefully all of the losses will be small). I am fully aware and agree that paper trading is not the same as real money trading, but it does help the trader to see the flow of trading and helps him learn the intricacies of the strategy and adjustments. It may help overcome what I call "home run syndrome" where the trader is always swinging for the fences only to suffer the inevitable disappointment that accompanies unrealistic expectations.

by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved

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Anonymous said...

Hi Bill,
I have been trying to trade for years mostly unsuccessfully, and have found most of your thoughts and ideas familiar to me, but this article today was a genuine eye opener. I have been stuck in that mode of thinking myself....Hopefully I can get into the flow with more success..
Barry Parish

Anonymous said...

Well said Bill. Games are won on base hits, not grand slams. Seems to me that Babe Ruth was also the strike out king.
Paul Roden

Bill Kraft, said...

Thanks for writing, Barry. I'm glad to hear that the article may have awakened a new insight and sincerely hope it helps you improve your trading.
Bill Kraft

Bill Kraft, said...

Thanks Paul. Accurate observation about the Babe.
Bill Kraft

Anonymous said...

Hi Bill great blog.

I had a interesting trade on July 6th. Shorted AMED @37.49
covered @ 36.01 a nice 4% gain in one day.As i can see now I managed this trade very poorly. If I had only moved my stop up to a profitable area and stuck with it, I would of hit the $10 drop on on July 12th. I should of let the stock throw me out. This could have been one of those exceptional trades that make a big differance.
I feel I have learned alot from this trade.This is one of those trades where I could of let the stock run without risking much of my profit as it went sideways for 4 days .
I see managing the winners is as important as managing the losers.


Bill Kraft, said...

Congratulations, Morris. I believe you have come upon two critical insights that could well take your trading to the next level. First, the idea of letting the stock throw you out and then understanding that managing winners is as important as managing losers. By letting the stock throw you out, you let profits run and that is an equally important part of the two edged approach to success -- cut your losses and let your profits run. The lesson learned in that trade is much more important than the result of the trade, itself.
Bill Kraft

Anonymous said...

Thanks Bill

I appreciate your comment.

Michael said...

I look forward to your articles each week. Thanks for putting in the time to give me the insight into what kind of attitude I need to become a successful trader. I do have a question. I am new to trading and I don't have any real training with economics. My interest is with short term trading in stocks. Sometimes when I read the wall street journal or listen to CNBC I get discouraged because so many things they mention go over my head. For instance, options, treasury yields, bonds, futures, FX. I know that these are all important components of the market, but how much time do I need to dedicate to learn these components to become a successful day trader? Thanks again.

Bill Kraft, said...

Thanks for writing, Michael. It is impossible for me to answer how much time you need to dedicate to learning about the markets other than to say something like: as much as it takes. When we begin learning trading, the information can seem overwhelming. Part of the difficulty comes from learning a new language. Options, futures, puts, calls, FX along with a myriad of other words are foreign at first, but as we gain knowledge they become second nature. I would suggest you learn at the pace that is comfortable for you understanding that you may become a little impatient to put some money on the line. There is no need to yield to the impatience. Learn first, then paper trade, and if successful with your paper trades, gradually put money at risk in small positions. I would suggest you first study trading stock or ETFs (Exchange Traded Funds) and then perhaps add some knowledge about options like covered calls and protective puts. You may never trade futures so that might come later in your study. When you write that you want to engage in short term trading, I would add a caution that it might be better to let the stock decide when you get in and when you get out rather than trying to pre-determine how long you will be in a given position. If you believe it would be of any help, I offer a 5 DVD set entitled SWAT (Stockmarket Weapons and Tactics) that is a complete two day seminar I gave that starts with the basics and continues through several option definitions and strategies. Overall, the DVDs cover 13 strategies. If you are interested, you may contact me through Earleen at MarketFN. The price for the 5 DVD set is $199. I hope your studies go well.
Bill Kraft