Tuesday, April 16, 2019

A Formula for Trading and Investing Disaster

Many problems of trading and investing have a simple source:  People follow the markets on a different time scale from their intended holding period.  Typically this means becoming psychologically attached to shorter-term movements up and down and not holding positions as initially intended.  The general rule is that, as pattern-recognizing beings, we will find patterns in whatever time frame we follow.  When our egos become attached to the patterns we perceive, we act on what we see at the moment and fail to maximize our trades and investments.

 Imagine the same problem in relationships.  We could become very invested in each new, interesting person we meet and thus never follow through on cultivating any single relationship deeply.  In making short-term dating "trades", we would never truly invest in relationships.

 Hanging on every tick in markets, making P/L a daily focus of attention, is a recipe for trading and investing disaster.  If we follow markets closely, that will be reflected in our actions.  Inevitably, we act upon what we see.

 The answer to this challenge is not "discipline" or ever-louder exhortations to control emotions, follow plans, etc.  The answer is to not allow ourselves to become slaves to the screens and, instead, only follow markets when we have specific trading decisions to make.  Away from screens, we need to find fulfillment in a wide range of personal, social, and creative activities so that we don't try to impose those needs upon markets.

 Too often, we "overtrade", not because our markets are full of opportunity, but because our lives are otherwise empty.

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