Tuesday, October 07, 2008

Cross Talk: Trading the Way You Want to Trade

One of the most common concerns I hear from traders at the end of a difficult day is that they didn't trade the way they had wanted to trade. This is particularly the case for active traders who get so caught up in price action and volatility that they lose sight of their larger market ideas--and sometimes get turned around and trade counter to those ideas. In my recent post, I mentioned position sizing as one important element in mindful trading. Risk acts as a kind of magnifying glass on emotions during trading; it is easy for the swings in P/L to become emotional swings. By controlling risk and keeping losses to manageable levels, we also manage our responses to loss.

I heartily encourage readers to check out the comments to that recent post. Readers have done an excellent job of laying out their ideas regarding sticking to one's desired approach to trading. Here are a few highlights from the comments:

* The value of having explicit trading rules and being out of the market for stretches of time to assess markets and performance;

* The value of being selective; picking spots to trade rather than trying to keep up with each volatile market movement;

* The value of scaling into trades to limit initial exposure and limiting overnight exposure during volatile markets;

* The value of grading and reviewing your trading, setting goals for improvement;

* The value of limiting directional risk in volatile markets;

* The value of tracking results monthly, setting monthly goals, and being willing to re-enter trades after first getting stopped out;

* The value of selectivity: focusing on highest probability trades;

* The value of knowing when you're not attuned to the market and limiting risk exposure at those times;

* The value of sticking to one's basic trading rules and style rather than just going with the gut and limiting risk exposure while adapting to changing market conditions;

* The value of focusing on trading well, sticking to high reward-to-risk trades, and standardizing the percentage of one's portfolio that is at risk per trade.

These nuggets hardly do justice to the richness of the comments; many thanks to those who took the time to share their ideas. One commenter, Adam, used a phrase that I found particularly valuable: he advised losing "as intelligently as possible". This is an important distinction: between intelligent losses--those that are the results of being mindful, that are planned and controlled--and unintelligent losses: those that result from mindlessness in the midst of volatility.

The bottom line is whether you are controlling your trading--from the generation of ideas to the timing of entries, the sizing of positions, and the setting of exit criteria--or whether markets are controlling you by turning price volatility into cognitive and emotional volatility. The strategies advanced by readers are tools for mindfulness: you trade the way you want to trade by staying self-aware even during your absorption in market action.