Archives of “position management” tag

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A Bird’s Eye View of Yourself

  
  Education
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When did position management enter my consciousness?  I think it stems from experiences that gave me an appreciation for the psychology behind our behavior.  Sure, I had read the classic from Edwin Lefevre, and believed in William O’Neil stop-loss rules.  The image that still sticks with me comes from a tiny book I read in 1994 that doesn’t get the pub it deserves.

In his tiny 1930 classic, Fred Kelly gives the example of the farmer who had 12 chickens in a cage, and one slipped out.  So he propped open the door and set food out in an attempt to lure the chicken back.  Of course, 2 more chickens now escaped.  Surely, he can’t accept having only 9 chickens when he just had 11.  His repeated efforts to get back to “breakeven” left him panicking to salvage 2 at the end…sound familiar with anyone’s early trading efforts?

The lessons stayed personal until managing an order desk stamped those lessons as universal.   Seeing these episodes play out over and over among traders led to a true appreciation of the human wiring that wreaks havoc with our trading.  These observations led me in the late 90′s to step outside of myself on every trade and ask if I was that person.  Am I holding a short against a wave of strength that will sweep me away tomorrow anyway? If so, why not cover now instead of panicking with my fellow (wrong) shorts later? It was in those moments that I realized the power of anticipating group emotions.  I already had a respect for taking losses, but I gradually moved from exiting in panic, to exiting in fear, to exiting when the slightest bit of hope creeped in.

Remember this…if you’re hoping a position bounces back to being a winner, you’re not alone at that moment.  Hope is said to be a good companion, but a poor guide.  Turn that on its head by realizing that you have a chance to act in defense of your equity by taking your loss before the other “hopers” are forced by emotions to act.  Sure, you’re putting yourself in a position of huge regret if the position then recovers, but you’re also preventing the possibility of acting in a panicked state later.  Stops can be great teachers…if you find yourself repeatedly getting stopped out just before your idea gets recognized, then you need wider stops.  Been there…I now operate with smaller positions and wider stops, giving myself room to be right but not putting my equity at undue risk.

If the image of the farmer doesn’t do it for you, consider 2 traders, Roger and Andy.  Both are caught in a bad situation, hoping for the best.  Andy decides to come clean and admit his mistake.  Roger decides to dig in and show he’s right.  Bad idea.  A small lie today will be a bigger lie tomorrow…rip the band aid now.  Any idea who played that trade right?

It’s OK to be wrong, not OK to stay wrong…that’s the difference between champ and chump.  The longer we stay in a trading range, the more explosive the resulting trend will be, and there will be no place for hope.  Be ready to trade today’s ego hit for a chance to play again tomorrow, and you give yourself a chance to replace any negative episode with your best one yet.

Patience & Confidence

  
  Education
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The market, as much as anything in life, has a way of transforming us from cool, calm, collected individuals into irrational, impulsive, disoriented speculators. Clearly it’s in our best interest in terms of long-term profitability to spend the majority of our time in the former group rather than the latter.

Acknowledging when things aren’t going our way is the first step to becoming a more patient trader, but it’s having the patience to wait things out until we find a more harmonic rhythm that contributes immeasurably to our success.

It’s the losing positions that invariably do traders in. A number of the bigger losers many traders experience come as a result of not being patient and waiting on the right opportunity. Many of us tend to press when things aren’t working out, or we’ve just had a losing trade.

Traders can begin to play catch-up and go on an emotional tilt. It’s the paradox of trading in many ways. The same competitive drive we use to achieve our success has components that can hasten our failure.

When going through my daily checklist, I send out to members of my mentoring program, I always emphasize that the markets provide a multitude of chances to trade. One need not force action when the setups aren’t right. Traders who get into positions with “the best of it” or “an edge” significantly increase their chances for success in the long run.

Confidence comes from a number of sources and is developed through successful implementation of a strategy. It is also a byproduct of the unwavering belief that what you are doing will be successful. This is critical because, at the moment of truth, when you are in a position, self-doubt has a way of creeping in. It’s tempting to deviate from your plan at these times.

While I’m not suggesting that you be inflexible in your position management, I am saying that having belief in what you are doing goes a long way toward your success. In fact, it’s the confidence in your trading skill set that can give you the ability to make a decision to get out of a position, knowing that things aren’t working out. This conviction is a hallmark of great leaders and inspires others.

Important goals for traders

  
  Education
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1) Risk management goals – Goals pertaining to trade sizing and drawdowns;

2) Idea generation goals – Goals pertaining to the process of generating sound trading ideas and formulating these into plans;

3) Execution goals – Goals pertaining to implementing trade ideas/plans so as to maximize reward and minimize risk;

4) Position management goals – Goals pertaining to the management of positions once they’re entered, including hedging and scaling in/out;

5) Portfolio management goals – Goals pertaining to achieving good diversification among ideas and allocating capital effectively to those ideas;

6) Self-management goals – Goals pertaining to maintaining a constructive mindset for optimal decision-making;

7) Personal, non-trading goals – Goals that reflect desired outcomes in areas of life outside trading that might spill over into trading performance, including physical fitness, relationships, spirituality, etc.

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