1) Becoming Overly Focused on P/L During Trading – Watching your profits or losses tick up and down during a trade; becoming anxious about P/L and letting P/L, not a trading plan, dictate when you get out of a trade. It’s a recipe for performance anxiety. By focusing on process goals rather than P/L, you can stay grounded in good trading practices and minimize performance stresses.
2) Trading Much Larger After a Series of Winning Trades – It is common that traders become overconfident after a series of wins and decide to increase their risk by a factor of two or more. This often leads to large losing trades that wipe out much of the profit, generating frustation and discouragement. Just as it doesn’t make sense to plow into a trade after a large move has already occurred, it doesn’t make sense to plow into risk after a series of profitable trades.
3) Failing to Learn From Losing Trades – Traders often want to put losses behind them and not dwell on negatives. The downside is that they don’t learn from their losses and thus miss opportunities to understand what’s happening in markets and what they might be doing wrong. This is especially important following a series of losing trades: either you’re not seeing the markets well, or you’re not acting well on your perceptions. Both scenarios offer learning opportunities that can help generate profits down the line.
It’s common to think of trading as a stressful occupation, but much of the stress is self-generated. By staying focused on “best practices” in trading, we minimize fear and frustration and build confidence in our development.
Archives of “dictate” tag
rssLessons From John Templeton
1. “I never ask if the market is going to go up or down, because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: Where is the one that is lowest priced in relation to what I believe its worth?” Like every other great investor in this series of blog posts John did do not make bets based on macroeconomic predictions. What some talking head may say about markets as a whole going up or down was simply not relevant in his investing. John focused on companies and not macro markets. He was a staunch value investor who once said: “The best book ever written [was Security Analysis by Benjamin Graham].
2. “If you want to have a better performance than the crowd, you must do things differently from the crowd. I’ve found my results for investment clients were far better here [in the Bahamas] than when I had my office in 30 Rockefeller Plaza. When you’re in Manhattan, it’s much more difficult to go opposite the crowd.” The mathematics of investing dictate that investing with the crowd means you will earn zero alpha, because the crowd is the market. You must sometimes be willing to take a position that is different from the crowd and be right about that position, to earn alpha. John put it this way: “If you buy the same securities everyone else is buying, you will have the same results as everyone else.”
3. “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell. Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. People are always asking me: where is the outlook good, but that’s the wrong question…. The right question is: Where is the outlook the most miserable? For those properly prepared in advance, a bear market in stocks is not a calamity but an opportunity.” To be able to sell when people are most pessimistic requires courage. Being courageous is easier if you are making bets with “house money.” Making bets with the rent money is always unwise. Templeton believed problems create opportunity. For example, it was on the day that Germany invaded Poland that he saw one of his best buying opportunities since prices were so low and values so high. Simply telling his broker that day to buy every stock selling under $1 yielded a 4X return for John. (more…)