Tuesday, February 25, 2014

Succeeding at Trading by Not Trading

One important performance variable that isn't tracked often is the variability in a trader's risk-taking.  Opportunities are not distributed perfectly evenly over time:  some markets offer more opportunity, some less.  As a result, the skilled trader will vary risk-taking as a function of the opportunity set:  sometimes trading actively and in size, other times pulling back from trading.  What traders refer to as "overtrading" is the result of an inability to regulate decision-making by opportunity set:  taking risk when rewards are quite uncertain.

"When are you mostly out of markets?" is a question I like to ask.  The ability to not trade is itself a performance edge when it helps traders hang onto their gains during times of market uncertainty.  This is yet another area where having a full and rich personal life becomes important to trading success.  If all you have to sustain you psychologically is your trading, it is going to be difficult to not trade.  If you have a full and rich life outside of trading, then it is much easier to take risk when rewards justify the effort--and put trading aside otherwise.

It's great to have a passion for trading; better to have a passion for successful trading.  And sometimes that means engaging in other passions and refraining from marginal trades.

Further Reading:  Addictive Trading