Friday, May 26, 2017

Suffer from Analysis-Paralysis?

If you're not making mistakes, then you're not doing anything. I'm positive that a doer makes mistakes.
John Wooden
When your hard earned money is on the line, there's a strong urge to be extremely careful. Why? If you should make a mistake, you could end up taking a big loss, or worse yet, you could find yourself in a major draw-down situation.

It's a natural human tendency to be averse to risk, but if you're not careful, you may be afflicted with a severe form of analysis-paralysis. Although it is often the case that an analysis of all possible alternatives and all possible consequences of one's decisions is the hallmark of good decision-making, too much analysis can be and often is a distraction.

The question becomes; why are we consumed with making a mistake? Throughout our lives, we have been taught to make prudent decisions rather than acting on impulse. Great thinkers, such as Benjamin Franklin, advocated evaluating the pros and cons carefully before making a decision. Research studies have shown, for example, that cultivating a deliberative mindset helps people focus on and consider incoming information and decrease the influence of self-serving decision-making biases.

A study by psychologists Dr. David Armor and Dr. Shelly Taylor suggests that in some cases, it may be wise to just quickly choose an alternative and focus all your energy on achieving an objective. In a well-controlled experiment, participants were randomly assigned to one of two conditions. In the deliberative condition, participants were asked to decide between two equally effective strategies to obtain a reward, before using one of the strategies to reach an objective. In a second condition, participants were not given a choice, so they would immediately focus all their energy on using a single strategy to achieve the desired goal. There were clear advantages to focusing on a specific strategy, rather than deciding between two options. Participants who did not have to choose, and did not deliberate, showed greater determination, commitment, curiosity, and confidence than those who did. They also viewed the task as less difficult and performed better.

Many investment/trading decisions must be made quickly before market conditions change. Through experience with the markets, you can analyze information quickly and reach a decision. While trading, it does not help to deliberate too much. It just doesn't pay off. You may not always be right, and you may have a few losing trades, but that's the nature of the game. Through a carefully devised trading plan and risk management, however, you can minimize the impact of a single losing trade, and make enough winning trades to come out ahead. So when you start to see yourself over-analyzing and becoming paralyzed, stop! Just put on the trade already. You'll trade more profitably in the long run.

Enjoy Your Holiday Weekend!

Thursday, May 4, 2017

Conquer Guilt

Take a chance! All life is a chance. The man who goes the furthest is generally the one who is willing to do and dare. The 'sure thing' boat never gets far from shore. - Dale Carnegie

As traders/investors you surely understand profits are hardly a sure thing. Even the "Market Wizards" make mistakes and pay the price. When you experience what you consider to be severe draw-downs, don't feel bad about it. You're not the first person to have this experience nor will you be the last. Understand that psychologically it is almost impossible to avoid feeling uneasy. Facing losses is one of the most difficult issues to deal with emotionally. If you are an active professional, your identity and livelihood are on the line. If you are part-time, it's frustrating to feed your account from your day job, wondering if you'll ever make back the money you've lost. Depending on your personality and experience with the market, you may have trouble handling feelings of loss, guilt, and fear. Unless you get your emotions under control, you'll never be able to get back on track.

As normal human beings we feel guilty when we break a personal moral rule. Losing money can make almost anyone feel guilty. We want to live by the rules our parents and teachers taught us, and many of them taught us to work hard and save our money. A requirement of trading/investing is that we risk our money in hopes of monetary gains, and risking money may seem to go against how you were brought up. Well, if you want to make huge profits in the end, you're going to have to risk money, and in all likelihood, you're going to lose at least some of it before you develop the skills you need to trade/invest profitably across a variety of market conditions.

Are you going to lose money? Yes. Is it morally wrong? No. You must identify the beliefs underlying your guilt and change them. Ask yourself first; is your guilt warranted? Feelings of guilt are there to protect us; it isn't a good idea however, to rack up so many losses that you can't pay it back easily. If you trade money that you can't afford to lose, or that you will have difficulty paying back; guilt is a natural reaction. You must make sure that your losses are reasonable and are actually a short term setback. It will be hard to control guilt if it realistically reflects losses that will permanently harm your financial security.

If you determine that you can actually afford trading losses, and still feel guilty look at possible assumptions that may underlie your guilt. One possible reason; you may have been taught that money is sacred and that it is morally wrong to risk it and lose it for any reason. If you want to trade actively, you have to change the way you look at money. To a serious trader, money is merely a vehicle to make more money. It is just part of the tools you need to trade successfully. They think of "money" as "points" used to keep score of how well they are doing. A second possible reason you feel guilty; is the need to be perfect. You believe that you must not make trading errors. You may believe that if you do, you are inadequate. Losses are not personal; losses are a natural part of trading. It's possible that you are merely experiencing a temporary change in market conditions. You may need to change your approach, but it doesn't mean that you are inadequate. It just means that you need to explore more options. When you feel guilty, then you mull over about how bad things are. There's no time to mull while actively trading, however. It gets you nowhere. If you want to stay ahead of the crowd, you must actively problem solve. You must find new trading solutions, and guilt distracts you from freely searching for creative, fresh solutions.