Aim to Be Profitable, Not Perfect
05/11/2015 6:00 am EST
Traders who strive for perfection commonly fail to limit losses and in turn can suffer disastrous results, explains Price Headley, who tells how to face down perfectionism and win more often.
The desire to be perfect cost me plenty of money in the early days of my trading career. Why? Because a perfectionist cannot take a loss, so small losses can easily turn into bigger losses for the trader who is not able to admit being wrong.
Plus, the trader will try to book a profit too soon to feel like a winner. Read on for methods to tame perfectionist tendencies in trading.
Perfectionists share a belief that perfection is required in order to be accepted by others. The reality is that acceptance cannot be gained through performance or other external factors like money or social approval. Instead, self-acceptance is at the root of happiness. The biggest obstacle to overcome that is facing down the fear of failure.
If you have a perfectionist mentality when trading, you are really setting yourself up for failure, because it is a given that you will experience losses along the way.
Think of Trading as a Probabilities Game
You can't be a perfectionist and expect to be a great trader. Your losses (that you hope will return to breakeven) will kill you. If you cannot take a loss when it is small because of the need to be perfect, then the loss will often times grow to a much larger loss, causing further pain for perfectionist traders.
The Objective Should Be Trading Excellence, Not Perfection
In addition, you should strive for excellence over a sustained period, as opposed to judging each trade. In trading, the great ones make their share of mistakes, but they are able to keep the impact of those mistakes small, all the while getting the most out of their best ideas.
In order to change long-established behavior patterns and personality characteristics, it may be necessary to enlist the support and services of a qualified professional. Long-established habits, beliefs, and traits never change overnight, but acceptance of a problem is the first step.
Here are a few tips consistent with attempting to become less perfectionistic in trading:
- Begin to appreciate the process as well as the outcome-set more achievable goals
- Realize that you are worthy no matter whether you win or lose on any given day
- Focus on achievement less and on enjoyment more; you may even be surprised with more favorable outcomes
- Don't be so critical of your errors; just learn from them
Set One Goal and Make It Process-Oriented
Forget about the outcome. If you achieve that goal to improve your trading via that goal, you win no matter the outcome. Perfectionists often seek to control uncontrollable factors in a trade (like waiting for all the risk to be out and everything to look perfect, the quality of the fill on the exit especially, hoping or "willing" a better outcome by doubling down on a loser, and many more). When a trader focuses on these uncontrollable issues, he is more likely to tighten up and not be able to pull the trigger to exit a losing trade or miss out on a new winner that has moved "too far."
Based on these perfectionist tendencies, I often recommend the following entry strategy for perfectionists. Enter half a position as soon as you see an opportunity that generates at least three times the reward for the risk at the current market price, then place the remaining half at your desired, "perfect" entry price.
For exits, I usually use limit orders, but give yourself some leeway on your limit price in relation to the bid/ask spread to avoid the perfectionist tendency of missing the "perfect" price.
Here's an example of how this strategy can work: Buy just half of a $10,000 position in an option as your initial order. If the position goes down in price, don't buy any more of the option. If it goes down to your stop price, sell the option to take your loss.
However, if the stock moves up in price from your initial buy point, and it is performing relatively well (your original trade indicators are still in place and/or the trend looks to be accelerating), you might consider adding another $3,000 to your original $5,000 buy. You would then have $8,000 of your $10,000 total position in the trade already committed.
If the stock moves up another few %, you can finish your $10,000 position by buying another $2,000. In this way, you average up on the best trends and don't average down on the trades that aren't working. You only want to add money if your prior buys are working.
See also: Only Losers Average Losers
By Price Headley of BigTrends.com