How to Stay Objective in Your Trades

05/15/2009 12:01 am EST

Focus: STRATEGIES

Doug Hirschhorn

CEO, DrDoug.com

One of the most challenging skills in becoming a successful trader is maintaining objectivity in trades. While there are a variety of factors that contribute to you losing objectivity in a given situation, there is a clear and defined path you can follow to regain it. In simple terms, it is called “thinking backwards.”

The Issue

More times than not, losing objectivity occurs when you micro-manage a situation. It may be in the form of watching the tape or over-thinking a position, but in essence, you lose sight of the macro picture, or why you were in the trade in the first place. As a result, you make poor decisions, which generate poor results.

How Can You Overcome This?

Know your reason why and ask yourself frequently:

  • Why am I in this trade?
  • Why do I like/not like this position?

These questions will help you to continually clear up your picture as data points (or your own bad habits) attempt to fog up your view.

Red Flag

The more difficult it is for you to target your reason why, the more likely it is you have lost objectivity in the situation.

The Solution: Thinking Backwards

  • Acknowledge that you have lost objectivity. Now that you are aware of the problem, you can begin to deal with it.
  • Remove yourself from the day-to-day noise and write down what your original thesis was. Clearing off your mirrors will tell you what direction you are moving.
  • Begin to “think backwards” by creating three columns with the following headings (Support, Do Not Support, Undecided). This will force you to objectively lay out and evaluate the situation.
  • Talk to yourself: “Based on the data points I wrote down in each column, if I did not have a position on, what would I do?” Asking yourself this question forces you re-evaluate the trade from an unbiased perspective.
  • Compare your response with your original position or thesis to create a win-win situation.

Win #1: If there is a discrepancy, you can be proactive in creating a new game plan which may involve taking some or all of the risk off or even reversing the position.

Win #2: If there is no discrepancy, you have instilled deeper conviction in your original thesis and can then hold or even add to the position.

In trading, losing your way is not nearly as important as how long it takes you to get back on course. We all get lost from time to time, and the skill of “thinking backwards” can serve as your map to regaining objectivity in your trades.

By Dr. Doug Hirschhorn, www.DrDoug.com

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