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More on Trader Mindsets

Since posting about trader mindsets and how they can get in the way of a trader's performance, I found related comments from other bloggers. 

From Dr. Brett, warning investors to lose a mindset that suggests that each individual trade is a battle that must be won.  He warns traders not to become emotionally attached to the results of each individual trade, but instead to focus on the longer-term objective:

"For
a successful trader, a trade is like a single pitch to a hitter. It is
one part of one at bat, which is part of one inning, which is part of
one game. The goal is to win the game, not to "win" on each pitch…

I focus on being profitable for the
week and month- not on each trade, or even each day. For the active
trader, there are many trades in a day and there are five days in a
week. As long as you don't lose too much in a trade, you can turn the
day around. As long as you keep daily losses reasonable, you have a
chance for a green week. And as long as a week doesn't dig you into a
deep hole, you can still be profitable on the month."

The goal is to
have a successful season: that view makes it easier to shrug off the
pitches that get away from you and focus on what is truly important."

This is good advice and corresponds to my admonition that proper risk management is the key to success.  Do not take too much risk at any one time – either when the trade is made, or after an adverse move in the market.  Your goal is to have a profitable trading/investing career.

***

Larry Swedloe, writing the Wise Investing blog at CBS MoneyWatch, discusses the idea of re-balancing a portfolio.  This is a technique used  by many investors who adopt asset allocation as the major method for managing risk.  (As you know, I much prefer owning collars as a method guaranteed to preserve assets.) 

Quoting David Swensen, Larry posted: “Dramatic bear markets signal the need for significant purchases
of losers, while extraordinary bull markets call for substantial sales
of winners. When markets make radical moves, investors demonstrate
either the courage or the cowardice of their convictions.”

It's not so easy for the average investor, with his/her emotions at their peak (euphoria or despair), to be selling into surging markets or buying when everyone else is panicking.  Yet, for true believers in asset allocation, unemotional trading is a necessity.  Most investors have the wrong mindset and get excessively bullish when markets are topping and bearish when they are bottoming.  For anyone who likes the idea of asset allocation, re-balancing is an essential part of that methodology and the 'buy the top' mindset must be eliminated to do the job properly.  That's difficult for many investors.

***


John, writing The Essentials of Trading, offers this:

"The following was posted by a trader on a forum recently. It’s a question which comes up fairly regularly, if not in print then certainly in the minds of new traders wondering at their prospects for success:

(slightly reworded) 'I heard a lot of people say 90% of traders lose money. I wonder how long and roughly how much the trader loses before becoming one of the 10% winners.'

Of course there is no one answer to this question. How long it takes someone to reach consistent profitability has a lot to do with how much time and effort one puts into it. The more dedication to the task the faster it will tend to happen."

I find that many traders want to know how long it will take before they begin making money or before they achieve a specific trading goal.  That's the wrong mindset.  It assumes that success is coming and all the trader has to do is put in his/her time and the profits will appear.

Trading is not a job in which seniority does any good – unless you use the time on the job to learn and understand what you are doing.  The proper mindset, in my opinion, is wanting to know where the trader can find information so that he/she can read about, study -and especially – practice, various aspects of the new job (trading).  This mindset recognizes that work is required to develop the skills necessary for success. 

***

Reminder: Tonight, Tuesday October 27, 2009 at 6:00 PM (Eastern Time).

Title: Collars; Combining Covered Calls and Married Puts


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