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As the calendar turns to 2012, we reflect on the year that was and chart our course for the year ahead. Ah, New Year's resolutions! We are going to eat healthier, exercise more, and cut back on our vices.
But what if we applied this type of self-reflection to our trading? Imagine what we could learn! With this in mind, let's look back at 2011 and discuss some key "traders' resolutions" for the New Year.
When you look back at 2011, the first question to ask yourself is: "Did I make or lose money?" This is truly the bottom line.
We saw nearly all types of market behaviours in 2011.
OK now the New Year is around the corner, what are our top trading resolutions for 2012?
The answer is simple.
Our top five resolutions are going to be Discipline, Results, Integrity, Victory (over emotions) and Education. Which we can remember them by using the acronym DRIVE.
D iscipline
R esults
I ntegrity
V ictory (Over Emotions)
E ducation
Discipline
Most traders could benefit from being more disciplined with their trading. Discipline in trading takes many forms. But it can be summarized as just doing what we know needs to be done.
For example, a common New Year's resolution is to lose weight. Losing weight is simple in theory—we just need to eat healthy foods and exercise more. Just say no to the doughnut and yes to the salad—simple! Of course, sticking to your plan is anything but easy, which is where discipline comes into play. Just do what we know needs to be done.
If I could target only two things to be more disciplined in next year's trading they would be:
Cut losing trades: Do everything to keep losses small.
Let profits run: Don't fall prey to the fear of a small profit slipping away.
Losing trades are inevitable, because nobody gets it right all the time. It's important to take the loss before it grows and does serious damage to our accounts. This requires discipline.
Profitable trades are equally inevitable because nobody gets it wrong all the time either. Here, it's important to let those profits run, rather than grabbing them at the first hint of a price pullback out of fear that our profits will slip away. This also requires discipline.
Results
Some traders keep detailed records and know exactly which types of trades have been their most profitable, as well as their biggest losers. However, many of the Schwab trading clients I have met have only a general idea of their results. So a useful resolution is to track trading results more closely in 2012.
Let's look at one example of tracking our trading closer. How do you determine how long you want to hold a given trade? This is also known as your desired timeframe. We can simplify the choices by labelling them:
Short-term trades (a few days)
Intermediate-term trades (a few weeks)
Long-term trades (a few months)
Longer-term investments (a few years)
While no one size fits all for trading timeframes, most traders tend to have a favorite.
When we measure our results, we examine our trading given the chosen timeframe and the type of market environment. Because 2011 had all types of markets, it will be instructive to review our trades under the various market conditions.
For example, an intermediate-term trader would have enjoyed the lower volatility uptrend. He would have likely been frustrated by the sideways markets. He would have had a difficult time in the much higher-volatility, erratic market of the fall.
Integrity
In the context of traders' resolutions, "integrity" means taking personal responsibility for our trading decisions and holding ourselves accountable for our results. In sports, there's the popular saying that, "There is no 'i' in team." In other words, the team either succeeds or fails as a group and it is not about the individual. However, there is an "i" in trading.
Nobody is forcing us to buy or sell any stock or other investment vehicle—we make those decisions ourselves.
When a trade goes against us, it is tempting to find some external source to blame. Identifying a scapegoat may make us feel better in the short term, but we lose the benefit of examining our own decisions and looking for flaws in our thought process.
One analogy is plane crashes. Whenever there is a crash, an investigation identifies exactly what went wrong and, more importantly, how to correct it in the future. All of today's advances in air travel safety have come from studying the plane crashes of the past.
So our resolution for 2012 is to apply integrity to our trading—to hold ourselves accountable for our decisions and to learn from those trades that don't work out as planned.
Victory
Fear and greed are two emotions that affect our trading decisions. Unfortunately, they generally lead us to make the wrong decision at the wrong time. While life wouldn't be much fun without emotions, fear and greed can be hazardous to your trading.
As you look back at losing trades in 2011, identify which emotion (greed or fear) drove your decisions to enter and exit the trade. This will not be easy, nor will it be enjoyable. Yet, it may you help you be a better trader going forward.
As we identify how our emotions have affected previous decisions, we can better recognize when we might fall prey to fear and greed in the future.
Education
I will tie our trader's resolutions together with our final topic: education. In 2012, resolve to learn something new to enhance your trading each week. Learn how to trade globally. Study a new technique of stock screening or a new method of investment research. Explore how to use a new tool, or try a different way to apply a tool you are already using. Investigate investing in a different sector of the economy.
May 2012 be your best and most profitable year ever. Until then good luck and good trading!
Edited article from schwab.com
But what if we applied this type of self-reflection to our trading? Imagine what we could learn! With this in mind, let's look back at 2011 and discuss some key "traders' resolutions" for the New Year.
When you look back at 2011, the first question to ask yourself is: "Did I make or lose money?" This is truly the bottom line.
We saw nearly all types of market behaviours in 2011.
OK now the New Year is around the corner, what are our top trading resolutions for 2012?
The answer is simple.
Our top five resolutions are going to be Discipline, Results, Integrity, Victory (over emotions) and Education. Which we can remember them by using the acronym DRIVE.
D iscipline
R esults
I ntegrity
V ictory (Over Emotions)
E ducation
Discipline
Most traders could benefit from being more disciplined with their trading. Discipline in trading takes many forms. But it can be summarized as just doing what we know needs to be done.
For example, a common New Year's resolution is to lose weight. Losing weight is simple in theory—we just need to eat healthy foods and exercise more. Just say no to the doughnut and yes to the salad—simple! Of course, sticking to your plan is anything but easy, which is where discipline comes into play. Just do what we know needs to be done.
If I could target only two things to be more disciplined in next year's trading they would be:
Cut losing trades: Do everything to keep losses small.
Let profits run: Don't fall prey to the fear of a small profit slipping away.
Losing trades are inevitable, because nobody gets it right all the time. It's important to take the loss before it grows and does serious damage to our accounts. This requires discipline.
Profitable trades are equally inevitable because nobody gets it wrong all the time either. Here, it's important to let those profits run, rather than grabbing them at the first hint of a price pullback out of fear that our profits will slip away. This also requires discipline.
Results
Some traders keep detailed records and know exactly which types of trades have been their most profitable, as well as their biggest losers. However, many of the Schwab trading clients I have met have only a general idea of their results. So a useful resolution is to track trading results more closely in 2012.
Let's look at one example of tracking our trading closer. How do you determine how long you want to hold a given trade? This is also known as your desired timeframe. We can simplify the choices by labelling them:
Short-term trades (a few days)
Intermediate-term trades (a few weeks)
Long-term trades (a few months)
Longer-term investments (a few years)
While no one size fits all for trading timeframes, most traders tend to have a favorite.
When we measure our results, we examine our trading given the chosen timeframe and the type of market environment. Because 2011 had all types of markets, it will be instructive to review our trades under the various market conditions.
For example, an intermediate-term trader would have enjoyed the lower volatility uptrend. He would have likely been frustrated by the sideways markets. He would have had a difficult time in the much higher-volatility, erratic market of the fall.
Integrity
In the context of traders' resolutions, "integrity" means taking personal responsibility for our trading decisions and holding ourselves accountable for our results. In sports, there's the popular saying that, "There is no 'i' in team." In other words, the team either succeeds or fails as a group and it is not about the individual. However, there is an "i" in trading.
Nobody is forcing us to buy or sell any stock or other investment vehicle—we make those decisions ourselves.
When a trade goes against us, it is tempting to find some external source to blame. Identifying a scapegoat may make us feel better in the short term, but we lose the benefit of examining our own decisions and looking for flaws in our thought process.
One analogy is plane crashes. Whenever there is a crash, an investigation identifies exactly what went wrong and, more importantly, how to correct it in the future. All of today's advances in air travel safety have come from studying the plane crashes of the past.
So our resolution for 2012 is to apply integrity to our trading—to hold ourselves accountable for our decisions and to learn from those trades that don't work out as planned.
Victory
Fear and greed are two emotions that affect our trading decisions. Unfortunately, they generally lead us to make the wrong decision at the wrong time. While life wouldn't be much fun without emotions, fear and greed can be hazardous to your trading.
As you look back at losing trades in 2011, identify which emotion (greed or fear) drove your decisions to enter and exit the trade. This will not be easy, nor will it be enjoyable. Yet, it may you help you be a better trader going forward.
As we identify how our emotions have affected previous decisions, we can better recognize when we might fall prey to fear and greed in the future.
Education
I will tie our trader's resolutions together with our final topic: education. In 2012, resolve to learn something new to enhance your trading each week. Learn how to trade globally. Study a new technique of stock screening or a new method of investment research. Explore how to use a new tool, or try a different way to apply a tool you are already using. Investigate investing in a different sector of the economy.
May 2012 be your best and most profitable year ever. Until then good luck and good trading!
Edited article from schwab.com
