As I was thinking about the subject for this weekend's article I found myself a bit mentally mired searching for a topic. That happens every once in a while. I find that when I try to think of a topic rather than just letting it pop into my head from a reader's comment or something I may see or read I have a tough time coming up with something new or at least with some new twist. There is almost a little mental paralysis hindering the quest. Anyway, the thought of that paralysis made me think of how we are sometimes affected by paralysis in our trading.
One type of paralysis I've seen over the years is the paralysis of analysis where the would-be trader spends so much time and effort conducting his analysis that he may never pull the trigger and make a trade. That issue seems to be more prevalent with people in professions and vocations that require precision and perfection in their tasks. Engineers are classic (though not always fairly) examples of this type of paralysis. I apologize in advance to the engineers as I relate an observation a dentist I was coaching once made. He said engineers were his worst patients because they wanted a complete course in dentistry before they would permit him to drill a cavity. Obviously, that was hyperbole and meant in a joking manner, but it illustrates a type of trader paralysis. The person who seeks to learn every fundamental bit of information and then wants every technical to be in perfect alignment may never find a trade. He is caught in the confinement of his analysis process. Of course, I have to agree, if he does ultimately find a trade it may be a good one. It also may not be so good since the moment he enters the trade some fact about his stock or about the market in general may change and all the effort went for naught.
Another type of paralysis is the deer in the headlights phenomenon where the trader is frozen in fear or panic as a position goes the wrong way against him. Most of us have had that type of paralysis at some point in our career. It is often marked by comments like: "it'll come back." The fact seems to be that at times traders see a position go the wrong way and just can't seem to pull the trigger to take the loss and move on to the next trade. This paralysis results in a failure to cut losses and can be devastating to a portfolio.
While there may be other examples of paralysis in traders, each of the two may share a common cure in my view. The cure is to start trades with an exit strategy; one that will take the trader out of a trade before losses run too deep. If the paralysis by analysis trader is willing to look for a trade where the initial exit is nearby, he may begin to understand that the fear of loss that propels him into all the analysis in the first place may be alleviated by having an exit strategy that will cut any loss. The same, of course, is true for the deer in the headlights paralysis. If the trader has an exit strategy from the beginning all he need do is implement it.
If we are going to trade, we must understand that there will be risk and there will be losing trades. As I write at length and in detail in my first book, "Trade Your Way to Wealth," there are many ways to manage risk so that if not eliminated it can at least be reduced and managed. Paralysis in trading results from emotions. Fear of taking a loss or fear that a trade I enter might lose. Fear can be overcome by knowledge and if we learn how to reduce and manage risk there is less reason for fear and a lesser likelihood of paralysis.
by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved
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