Thursday, April 20, 2017

The Mindset of the Trader

I think anything is possible if you have the mindset
and the will and desire to do it and put the time in.
Roger Clemens

Way back in the 1960's and 1970's one decision stocks became a popular way to invest. A one decision stock is one you buy and hold on to forever. Along with this philosophy a select group of stocks became known as "The Nifty Fifty". Fifty stocks that were the ultimate one decision stocks; like IBM and GM. If you talk with some people who invested back then you'll sometimes hear them say: "I learned my lesson a long time ago. I put my money in the markets and lost it; Never again!"

They searched for "undervalued" stocks, purchased shares, held them, and waited for them to increase in value. Sometimes it worked, often it didn't. The buy-and-hold strategy often misleads investors. The markets don't go in one direction forever, whether the trend is bullish or bearish. Only by anticipating the twists and turns of the market can you make "significant" profits. If you are striving to become a profitable trader, you must cast aside the buy-and-hold mindset of the long-term investor, and learn to think like a trader.

The buy-and-hold strategy is still viewed as a viable trading strategy even in many business schools. Even in the wild 1990's fortunes were lost when the dot-com bubble burst, by people subscribing to that buy-and-hold strategy. Please note I am not addressing time frame. Had you purchased some of the dot-com stocks in 1995 let's say and sold them in 1998 or 1999 or even 2000, you still traded them. Your time frame just encompasses a much longer time frame than the very short-term trader.

Whether you trade based on technical analysis or prefer fundamental analysis you must try to assess the potential for that company. Are they still growing profits? Does the company have new and exciting ideas they are or will be bringing to market?

We never know for sure what the future holds. Who could have known five years ago the energy crisis was coming relatively soon and what that crisis would do to our domestic auto companies? It's difficult at best to make these forecasts.

Stock prices do reflect the companies' fundamentals most often; however they also reflect market participants perceived notion of what the future holds. Did your holding just report horrible earnings and a not so great outlook? Did their stock price decline? No! Market participants are probably now looking to changing conditions in the not to distant future, hence buying appears in the face of seemingly bad news. Don't be confused by it, listen to the market.

It may be hard to accept at first, but trading requires you to accept risk and uncertainty. It may take time and experience to accept, and you may get hurt along the way, but after a little while, you'll be able to accept uncertainty, and thrive on it.
Reprint from 2007 Newsletter

Wednesday, April 5, 2017

Striving for Perfection

Strive for continuous improvement, 
instead of perfection. 
Kim Collins

Lexus advertises the "The Relentless Pursuit of Perfection" and it seems an amiable goal; perfection. Unfortunately we are human and humans are not perfect. Perfection is a pursuit, but we can never really attain perfection. What we really do is strive to be better and better at who we are and what we do. Perfection however is out of the question, especially in our line of work. As traders the pursuit of perfection can be very costly if carried too far.

Some traders are so obsessed with looking for the ultimate opportunities that they spend most of their time looking, rather than actually trading. They don't want to miss that once-in-a-lifetime trade. There's nothing wrong with searching for a good setup, but constantly looking for the ultimate setup is time consuming. Why do some traders spend too much time searching for the ultimate trade? It may be a fear of leaving money behind. They don't want to miss out on a rare opportunity.

We want to believe that if we analyze the markets hard enough and long enough, we'll find the perfect setups and take home huge profits. This however can do us more harm than good. Spending so much time looking for the perfect setups, that really don't exist, will have us fail to trade the "available high probability setups". If you constantly search for the "perfect setup" it will restrict your actions and most often will cause unwanted and unneeded stress. Instead of moving forward; you stagnate.

Many people work under the assumption that they must be thoroughly competent, adequate, and
achieving in everything that they do. Psychologist, Dr. Albert Ellis, claims that holding such a belief produces fear and anxiety, which for traders often produces hesitation and self-doubt. As we grow up, we often face adverse consequences for not being proficient. We begin to believe that we must be thoroughly competent, adequate, and achieving in everything that we do. It is normal therefore that we come to believe; if we could just be perfect as a trader, we will make the most profits. Ironically, what happens is just the opposite

A more adaptive approach is to realize that it's impossible as a trader to be thoroughly competent, adequate, and achieving all the time. Certainly, you should develop an extremely detailed trading plan and try to account for all adverse events that may go against your plan, but there are limits to what you can do. You don't need to be perfect. You don't need to trade the ultimate setups. You just need to make profits, even if it is just from trading mediocre setups. Searching for perfection can lead to stagnation if you aren't careful.