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Thursday, March 06, 2008

 

don't let it own you


dr. steenbarger with what is, for me, one of the most lucid and relevant insights into effective trading.

i am typically contrary by disposition, most often interested in undermining and cutting against whatever i perceive to be the established position. my favorite activity in conversation is normally playing devil's advocate. i love to challenge confident opinion.

in the market, usually this manifests as a bearish streak. i'm most comfortable being short, which is of course normally an unproductive place to be.

but, since going long the market in november -- and eradicating significant trading gains accrued from july to that point -- i have found myself digging in to defend the position even though it is unprofitable. i could easily have cut it off on january 3, despite being on holiday with the position on and having received a pretty clear negative signal on december 26, but ruefully chose not to. why?

i think the core issue i'm dealing with is a combination of two related psychological needs. first, the gratification of contrariness -- just as i have often tried to hunt up the bear case in rising markets, once the market took a bearish trend i began to look for ways (including irrational ways) to take the contra position. second, the position became a physical manifestation of the desire to be both contrary and ultimately correct -- in other words, the asset became an extension of my intellectual self-valuation.

the first is a necessary feature of successful trading as i understand it -- one has to cut against the crowd to profit. however, the instinct must be harnessed and utilized with a cold circumspection that has been here lacking.

the second, however, is a purely destructive characteristic. the willingness to hold the position through all stops and losses in an effort to be "proved right" is what closes any possibility of long-term success.

to reiterate, then: stop losses are an essential feature of any successful trading venture. defining risk from the adoption of any position is critical to overcoming the difficult and inescapable fact that one will frequently be wrong.

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