Don't Go There
There are some lines that you just don't want to cross. It can be the little things as well as the big ones. Have you ever eaten inexpensive caviar from the grocery store? It tastes great until you eat the real stuff from Russia. Your Toyota Camry may be a nice ride, but drive an S-Class Mercedes for a week, and then tell me what you think. Crossing lines happens in personal finances too. At first you may want to avoid interest payments and follow a general rule of not carrying credit card debt, but you may decide to carry it for a month, and then it can become two months, and three...Soon, you get used to paying the interest and you justify it. It becomes commonplace and familiar. In the trading realm, there are lines that you may not want to cross but you have to. Learning to take risks is one of them.
In the movie "Rogue Trader," all Nick Leeson wanted to do at first was cover for one of his young staffers who made a mistake. He figured he could merely hide losses in a secret account, make up the losses, and no one would be the wiser. He succeeded. He made up the losses, and prevented his staffer from getting fired. However, he also learned to break the rules and get away with it. Eventually, he started believing he could mount losses, hide the fact from his superiors, and get away with it. Eventually, he didn't get away with it and ended up in jail. In your everyday trading life, and in your own way, you may end up breaking trading rules that appear to be no big deal initially, but later, you end up regretting them. For example, you may decide to abandon your trading plan, but rather than end up losing, you may end up winning. Although you may profit, it may be "unjustified" in that you acted on impulse but were rewarded for it by a win. What's the harm? In the back of your mind, you will think, "Abandoning my trading plan isn't so bad. Sometimes it pays off." You'll have difficult fighting the impulse to abandon your plan in the future.
Similarly, you may decide to abandon your risk limits by putting up 50% of your trading capital on a single trade. It can pay off, and big! But what happens to your ability to maintain discipline? Again, in the back of your mind, you may think, "It's all right to make a big trade occasionally. I'll survive." It may be useful to cross a line occasionally. It may not be a pleasant experience at first, but it is useful to experience a severe drawdown and recover. You will prove to yourself that you can take a hit and recover. It's better to face your fears than cower under the constant threat of losing money, and worrying about whether you have the ability to recover. Knowing that you can recover will give you courage. Once you learn to take losses, you'll be able to trade more freely. That said, this bravery may come at a price: You may have to always look over your shoulder and wonder if you will be tempted to take an unnecessary risk because you know you can.
When taking unnecessary risks and allowing your discipline to waver becomes commonplace, you may have difficulty maintaining control. It's useful to be aware of this tendency. It can catch you off guard, and you should be ready to take preventative steps to stay under control. An important preventative step is to make a list of potential negative consequences for breaking a rule and pulling it out whenever you get the urge to falter. For example, make an actual list of the times you abandoned your risk limits and lost big. The list might include a severe drawdown that took two years for you to recoup your losses. Write down how you felt and how you regretted the action every day that you had to work to pay for your mistakes. When you remind yourself of the consequences of abandoning your risk limits, you will be able to stop yourself from taking actions you don't want to take. Discipline is hard to maintain. When we see the potential rewards of taking a risky action, we tend to get amnesia with regard to the potential negative effects. We suddenly feel excited, high, and at times, omnipotent. As good as it feels, though, these thoughts and feelings can be dangerous. When you feel like you are about to do something you may regret later, it's essential to stop and think, "Don't go there." Sometimes trading like a winner requires that you know when to regain control and prevent yourself from making a big mistake.
In the movie "Rogue Trader," all Nick Leeson wanted to do at first was cover for one of his young staffers who made a mistake. He figured he could merely hide losses in a secret account, make up the losses, and no one would be the wiser. He succeeded. He made up the losses, and prevented his staffer from getting fired. However, he also learned to break the rules and get away with it. Eventually, he started believing he could mount losses, hide the fact from his superiors, and get away with it. Eventually, he didn't get away with it and ended up in jail. In your everyday trading life, and in your own way, you may end up breaking trading rules that appear to be no big deal initially, but later, you end up regretting them. For example, you may decide to abandon your trading plan, but rather than end up losing, you may end up winning. Although you may profit, it may be "unjustified" in that you acted on impulse but were rewarded for it by a win. What's the harm? In the back of your mind, you will think, "Abandoning my trading plan isn't so bad. Sometimes it pays off." You'll have difficult fighting the impulse to abandon your plan in the future.
Similarly, you may decide to abandon your risk limits by putting up 50% of your trading capital on a single trade. It can pay off, and big! But what happens to your ability to maintain discipline? Again, in the back of your mind, you may think, "It's all right to make a big trade occasionally. I'll survive." It may be useful to cross a line occasionally. It may not be a pleasant experience at first, but it is useful to experience a severe drawdown and recover. You will prove to yourself that you can take a hit and recover. It's better to face your fears than cower under the constant threat of losing money, and worrying about whether you have the ability to recover. Knowing that you can recover will give you courage. Once you learn to take losses, you'll be able to trade more freely. That said, this bravery may come at a price: You may have to always look over your shoulder and wonder if you will be tempted to take an unnecessary risk because you know you can.
When taking unnecessary risks and allowing your discipline to waver becomes commonplace, you may have difficulty maintaining control. It's useful to be aware of this tendency. It can catch you off guard, and you should be ready to take preventative steps to stay under control. An important preventative step is to make a list of potential negative consequences for breaking a rule and pulling it out whenever you get the urge to falter. For example, make an actual list of the times you abandoned your risk limits and lost big. The list might include a severe drawdown that took two years for you to recoup your losses. Write down how you felt and how you regretted the action every day that you had to work to pay for your mistakes. When you remind yourself of the consequences of abandoning your risk limits, you will be able to stop yourself from taking actions you don't want to take. Discipline is hard to maintain. When we see the potential rewards of taking a risky action, we tend to get amnesia with regard to the potential negative effects. We suddenly feel excited, high, and at times, omnipotent. As good as it feels, though, these thoughts and feelings can be dangerous. When you feel like you are about to do something you may regret later, it's essential to stop and think, "Don't go there." Sometimes trading like a winner requires that you know when to regain control and prevent yourself from making a big mistake.
posted by nomadhunter at 1:12 AM
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