“No passion so effectively robs the individual of all its powers of acting and reasoning as fear!” Edmond Burke’s quote is haunting when you stop and think about how that applies to trading and investing money. On Monday night we focused on the topic of taking fear out of investing in our webinar. While the process seems impossible the secret to success lies in the quote above. It is found in the process of ‘acting’ or taking action consistently until the process becomes a habit. Of course you want to practice doing the right things relative to the process of trading and not the bad or ugly. Everyone makes mistakes and everyone loses money… the key is learning from the mistakes and getting better at doing the right things that make money as well as control the losses we take. This means not allowing small losses to become large losses that we cannot recover from financially or mentally. If you were unable to make the webinar it is available for nominal fee by clicking the image link.
The following is a brief outline to help your take inventory and develop strong habits in relationship to the strategy you implement for trading and investing your money.
- Managing Risk = Money Management. Too often these two concepts are separated when in reality they are one and the same. Any good strategy for trading or investing money has to address risk management of the process. This included learning how to place the actual order for a trade to take some of the emotions out of the entry process as well as the exit process. Entry, Exit/Stop and Target are the key variables to managing a trade or investment. Trade management relative to how the trades are placed can remove the emotions of the decision process in the heat of the battle. Too many large losses in portfolios are the direct result of not being able to sell a position at the appropriate time and cutting our losses. I learned from a good friend who owned a car dealership the saying, “your best loss is your first loss.” What he meant simply by this saying was when the car on the lot didn’t sell during the time frame to make money, it was imperative to cut the losses sooner rather than later. The process of getting rid of a bad car freed up the mental power to look for the next opportunity versus worrying about the dog on the lot costing him money. Money management is similar in cutting the losers from the portfolio to focus on the opportunities going forward. Using sound position management coupled with trade entry can keep you from holding on to the losers.
- Never, Ever, Ever take a big loss. Number one above should prevent this with the simple use of stops or conditional orders to control the downside risk of the positions in your portfolio. These orders should be monitored on a daily basis to adjust as needed relative to the markets risk in the current environment. The key issue with big losses is first and most important financial. Making up losses of 10, 20 or 50% are very difficult to do as you need to exponentially have higher returns than the losses to get back to even. Second, the psychological damage done by taking big losses will impact, haunt, undermine, etc. your trading going forward. While we don’t wish to live in the past we develop a fear of history repeating itself and we become trigger happy and cut our profits versus letting them run. We can get fixated on protecting our gains in an attempt to make up for our losses and we become a trigger happy trader. That is not a good combination for success. Building confidence in trading comes from making good and sound decisions while repeating them habitually every day.
- Practice Patience – Let em’ Run! This is a process mentally that is not practiced enough by investors and traders. We spend so much time, energy and effort finding winning stocks… why are we so eager to let them go before they become big winners. The practice of managing stops to allow for the winners to run is vital to the strategy. Practice this process regularly and learn how to define the winners that will change the outcome of your portfolio both short and long term.
- Invest according to your defined strategy. The strategy can be technical, fundamental or quantitative in nature. You define the strategy that best suits your style or psychology of investing… then follow it. Too often in talking and working with traders to refine and build this process I find they are very detailed at the concept of how they will scan, filter or find investments that meet the criteria of the defined strategy. They spend hours working through this process daily to find the perfect investment. They will equally spend time on how to enter the trade or a process for buying the position. Yet very little if any time is spent on how to manage the trade in-between the purchase and exit point. Equally important is how to maximize the return on the trade within the portfolio. If you find the right trade, but have bad timing, what are the odds you will own it again? What are the odds you would hold it long enough for the trade to develop into the winner you wanted? Follow a predefined strategy and perfect the process.
- Keep it Simple (KISS)! No matter how much I say this when teaching it is amazing how complex we make the trading process. From the strategy to the actual trading there is too much complexity built into the process. Technical and fundamental indicators are great, but the more you use the more complex the decision making process becomes. The number one way to take fear out of your trading process is to understand the process! Simple wins and the simpler the process the better from my view.
In the process of trading we develop two types of fear, rational and irrational. Rational fear is knowing what you are afraid of and why. You can overcome this fear by facing and dealing with it by taking action and developing habits that allow you to defeat it because you know it exist. Irrational fear is a lack of knowledge, declared ignorance, nervousness, and self-inflicted. It results in irrational actions of difficult to overcome bad habits. Which one do I struggle with? Honesty is the best policy in facing and defeating fear. If you are irrational define where the deficiency lies and educate yourself to overcome it by taking the right actions and repeating them successfully until they become a positive habit. This is a process much like trading itself. Decide how important it is to manage your money. Define your purpose for wanting to manage your money. Learn how to manage your money and then practice the process until it becomes a sound and successful habit. No one said it would be easy, but I can say it is more than worth the investment of time and energy to learn how to take the fear out of your investing.