Saturday, February 21, 2015

Best Practices in Trading: Making Trading Fit Into Your Life

A common, but poorly recognized, cause of trading failure occurs when traders attempt to engage markets in ways that do not engage their greatest strengths and resources.  Daytrading and investment are two ways of participating in markets that are quite different in their demands.  The talented daytrader--one who can make decisions quickly based upon pattern recognition--can be very different from the talented investor, who often is one who possesses strong research and analytical skills.  The daytraders I have worked with have managed individual positions with a high degree of leverage.  The portfolio managers I have worked with have managed a large number of positions with a high degree of diversification.  It's like sprinting and distance running:  both are track events, but they require quite different skills.

Today's best practice comes from reader Saul Matos from Portugal (@TridionTrader).  He emphasizes the importance of finding an approach to markets that works for your lifestyle as well as your skill sets:

"When I started trading, I tried to be a trend follower because it was the method that suited me the most.  This way, I thought, I would be able to reconcile trading with my professional and family life.

Nevertheless, trading started consuming more time than I initially imagined.  With the pressure of everyday life, I became more anxious when I needed to make decisions, resulting in really poor decisions.  That resulted in losing 10% of my total capital.

In the next few years, I feel my life will not get easier, as I am the father of two small kids.  So I was compelled to adapt my trading method to fit my life and not the other way around.  Therefore I started a long-term investment in a diversified asset allocation portfolio.  Adapting the way I trade instead of the way I live and knowing that time will heal some of my mistakes has been really reassuring.  I'm making decisions fear-free and my results are becoming better and better."

Note that Saul made two key adjustments to his trading:

1)  He extended his time frame, becoming more of an investor than a trader;

2)  He diversified his holdings, so that any single holding moving against him could not unduly damage his capital base.

The combination of these adjustments enable him to engage markets constructively without interfering with his other commitments.  

I know traders who have developed effective methods for trading intraday and several day swings in markets, allowing them to make use of pattern recognition skills but also allowing them significant time away from screens.  Two traders I know limit themselves to trading patterns that set up at specific times of day, which again enables them to exploit their pattern recognition, but keeps them from becoming too caught up in market activity.

It's necessary that your trading have an edge in your favor, but having an edge won't help you if that edge is not one you can trade sustainably.  Saul's insight is that trading has to fit into your life and not the reverse.

Further Reading:  Embracing Stress and Minimizing Distress