July 08, 2008 at 10:39 am | | Comments 6

Trading With Objectivity

Trading today’s markets is as competitive as any other endeavor. The brightest minds are involved, countless sums of money are at stake, and if you don’t show up prepared, you can get your face ripped off.

The Bottom Line, At the Top

Here’s the concept that so many traders miss: if your head isn’t clear, then do not trade.

Simple, but not easy, right? With dirt-cheap commissions and the ability to enter and exit trades with a single click, it’s incredibly easy to be overactive. It can be downright exciting to dart in and out of the market. The problem is, that typically leads to a loss of focus as you chase every tick, and rarely does it translate into overall profits. Instead, it can quite often lead to a nasty losing streak where you ultimately don’t know which way is up.

I can’t think of anything I’d like to avoid more!

Honesty Helps

Not long ago, a trader I know was being very up-front with his reasoning to stand aside, and it reminded me of the importance and the truth of this trader’s words. After being frustrated by a few trades, he commented that “today I don’t think I’ll be able to very objective….I’m clearly too angry right now to be productive. I don’t know if I’m like other traders but I’m (carrying) a lot of emotional investment baggage that will show itself in times like this.”

Wow! How often can you make that kind of admission to yourself? Self-honesty is a great thing to strive for in your trading, because the trader who knows himself and his own tendencies can avoid the pitfalls which so many other fall victim to.

This is indeed a trying time for traders of all but the shortest of timeframes. Long-term investors are getting hammered, and those with intermediate-term timeframes are having to stay very selective and hold high levels of cash while waiting for lower-risk opportunities to surface.

Whenever that’s the case, it’s of paramount importance to trade with your objectivity intact. If you’re thinking clearly and you have your head on straight, then nothing is holding you back and you can actively seek out new trading opportunities.

However, if you’re paralyzed by recent trading losses, if you have a distinct market bias which puts you at odds with the existing downtrend, or even if you have personal distractions away from the screens, then there’s nothing to justify being active. If that describes you, then sit on your hands for a little while and wait for the fog to lift. Remember your trading objective, and wait for the right conditions to surface (both externally and internally) before you get active again. You’ll prevent a lot of frustration by doing so.

Protecting Two Kinds of Capital

As traders, we all have to remember our top priority and keep our trading accounts intact so that we can stay in the game. However, often times we ignore the state of our emotional capital and the importance it carries. When we neglect the condition of our psychological capital, we leave ourselves vulnerable to a different kind of drawdown – the worst kind.

When we lose our objectivity and continue trading anyway, the harm done to our trading account can be significant, but often times it pales in comparison to what’s happening to our confidence. Once that erodes, it’s extremely difficult to replace, so take every measure possible to protect your confidence along with the dollars in your account. After all, survival is the secret.

Objectivity is key in this game, and to me it is a top priority to keep it intact. That’s how I’ll locate good opportunities to trade going forward without trying to force something that isn’t there.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

RSSComments: 1  |  Post a Comment  |  Trackback URL

  1. Another great article from you!
    Yes, it’s wise to stay away from the market when we’re not in the right state of mind to trade.

    Thanks for the article.

    Options Trading Beginner

Trackbacks: 5  |  Trackback URL

  1. From Articles You Kind of, Should, HAVE to Read To Be Successful on Jul 11, 2008
  2. From Anything’s Possible | on Aug 25, 2008
  3. From World Series Series, Part 2 - Have a Backup | on Oct 23, 2008
  4. From Are Conditions Shifting For Your Timeframe? | on Nov 3, 2008
  5. From Trading Education | on Jul 9, 2009

Sorry, comments for this entry are closed at this time.