Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Nobody Likes a Micromanager Trader
09/24/2009 12:01 am EST
It is my understanding that the micromanager believes that excessive attention given to a particular task given to a subordinate will somehow create a better product or make a process run more smoothly. Most times, however, the complete reverse is actually true.
It’s likely that we’ve all had micromanagers—which I assume is the converse of macromanagers, or just managers, for short—whether parent or superior. They exist in either our past, present, or perhaps even future. Whatever the case, one thing is true—everyone hates micromanagers—always watching over your shoulder, evaluating every move, questioning your progress, re-evaluating, adding and changing direction, failing to look at the big picture, overvaluing short-term events, taking matters into their own hands, and undermining all kinds of process and general protocol.
Yes, that’s called foreshadowing.
I imagine that if some of our trading positions could speak to us, they’d scream, “Good grief, enough already!” They are increasingly exasperated that we’re continually standing over their shoulder, monitoring every tick, every move. Turns out that our trades hate micromanagement as well, and reward us with greater losses and smaller gains.
We all have micromanaged trades somewhere in our career; but those of us achieving greater results have eliminated this habit. Habits, as we know, can be very hard to break. Psychologists say that the reason we have difficulty breaking habits is related to anchors, central beliefs that guide our actions, or hooks for our habits.
Why do we micromanage our trades? The answer is simple: Fear and greed. This is the sole reason I often say the mind is not built to trade, but must be trained to trade. Micromanaging is never planned for the trader. It is reactionary behavior based on the impulsive fear of loss and potential for gain.
How do we micromanage our trades? We watch candle movements, and before they complete, we make an adjustment. We consider our positions on smaller time frames than we used to initiate the trades and make an adjustment. We introduce new indicators outside the ones we used as rationale for the trade entry and make an adjustment. We re-evaluate due to noise and minor changes and alter midstream without thinking things through. Get the picture?
Let’s consider a scenario from Trader Z. Z bought AAPL at $176 expecting the stock was going to move up, but was not sure when the exit would be, or at what price (not good, indicative of a lack of structured planning).
The stock runs to $179, and Z is delighted and allows the stock to run. Greed. Volatility picks up and AAPL falls to $174. Fear kicks in as Z begins looking at the five-minute candles and reacts by hedging with short 175 calls for $3.85. Then the stock rebounds and approaches $179 again.
In a panic and seeing a cap on profits (greed), Z closes the 175 calls position for $5.90 (-2.05 points from options hedge; net gain of .95pts, though stock is up 3 points from original entry). The stock dips again and Z decides that it is better to look at the five-minute chart instead of the 30-minute chart that Z based the trade on because Z does not want to give up any more gains.
Z decides it is time to add a five-day VWAP, and now a sell signal is triggered and Z releases the stock (fear) for $175 at a sum loss of -3.05 points, not even including broker fees.
Perhaps the same thing happens to Trader V, but instead of hedging with options, V moves in and out of the stock, selling low and buying high in a reactionary manner, changing what was used to make decisions, trying to minimize loss and maximize gain, when in fact achieving the reverse. The swing between fear and greed is a perpetual pendulum.
The question now becomes, “How in the world do we break a cycle of reactions based on fear and greed? Unless we replace these “primal anchors” of human behavior, our habits, or hooks, are always going to return to the same place. We must exchange anchors to have a successful trading career.
Trading based on your emotional reactions to the market is a sure way to take your accounts to zero. Using a well-constructed system has the power to change our belief structure, that way our anchors can move from emotions to our structured system.
We achieve this with training. You can work on training yourself, find a mentor who might take you on, or you could hire a coach. Training creates discipline, discipline creates routine, and routine creates habit. It is proven that among highly trained individuals, in times of crisis or duress, we revert to our training. The market is a breeding ground for duress, so get trained to manage the crises.
If you find yourself trading in a reactionary manner, realize it is because you are using the anchors of fear and greed to manage your positions. Ask yourself if you have a well-constructed trading system that you are consistently implementing, and if you’re not, do something about it.
By Anne-Marie Baiynd of AnneMarieTrades.com
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