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The Three Vices of Trading

Do you have one of The Three Vices of Trading?

Dr. Brett Steenbarger (psychiatrist) who wrote "The Psychology of Trading" (which is a book club selection)list’s just 3 (although I can think of a few more) "negative behavioral patterns" that get in the way off good trading.  I very much agree with his statement:

"Remember, observing and interrupting your patterns are the first steps in altering them! Your patterns lose control over you as you become better at not identifying with them. When you become an observer to your patterns, you are separating yourself from them. What great progress that is!"

Perfectionism: Perfectionism is often the chief culprit when the pain of losing exceeds the pleasure of winning.  Even when there’s a profit on a trade, perfectionists will look for the portion of the move that they did not participate in.  If they caught most the move, they will reprove themselves for not trading a larger position.  By focusing on the portion of their performance that doesn’t match their ideals, perfectionists transform successes into defeats, losses into failures.

Beating myself up” is how many perfectionists describe their self-talk.  The way to beat perfectionism is to make a concerted effort to talk to yourself the way you would talk to a good friend in a situation where things went wrong.

Ego: When traders invest their feelings about themselves in their trading, they are operating with maximum emotional leverage.  It inevitably affects decisions about cutting losses, letting profits run, and entering and exiting in a timely fashion.  The successful trader wants their trades to work out; the ego-involved trader needs them to be profitable. 

If trading has us truly depressed, we know that it’s not just our trading account that’s hurting.  Market success can be the frosting on the cake of your successful life, rarely can it substitute to the cake itself.

Overconfidence: Because they’re so eager to make money – and so sure they can make it – overconfident traders generally trade impulsively. They won’t wait for the setup to form; they’ll jump the gun – and get whipsawed in the process. Instead of being patient and waiting for short-term patterns to align with longer-term patterns, they will take every trade, enriching their brokers in the process.

Overconfident traders overtrade. They fear missing opportunities more than they fear losing money. The antidote to overconfidence is rulebased trading and the intensive rehearsal of trading rules. By making entries, exits, stops, and position sizing rule-governed and vigorously rehearsing trading rules during simulated trading (as well as in real time with small positions), traders can greatly reduce their impulsive trading.

I know I say this stuff all the time, but it’s good to hear it from a professional once in a while.  I strongly suggest you print Dr. Steenbarger’s  article out and hold it in your hand and think about how your "vices" may be getting in the way of some better trading decisions.  His book is an excellent read as well!


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  1. MOT,
    Up 4.9% in pre-market. Icahn Entities claim 1.39% stake in company.


  2. I think our behavior in a trading situation simply mirrors what goes on in our lives, it is not an isolated phenomenon. Trading has taught me a great deal about myself, and some of it I would rather not know, but you can’t argue with the bottom line as a “psychological indicator.” Learning to trade is learning about yourself. Thanks Phil.


  3. Size, I second that.


  4. Hi all,

    Check out this web site for more:

    http://brettsteenbarger.com/

    I’ve read a lot of his stuff. It’s very good, should read more.
    Thanks Phil,
    N


  5. Question,
    i saw a price target upgrade this morning on bloomberg, curious if it will hold with price action. . i regreted not buying puts yesterday on ICE.

    Question,

    I take it it’s possible to own shares of common stock and also sell puts. . Meaning, with WFMI, if I feel it has bottomed, could I sell some puts. . Let’s say I sell some 40 May Puts. .What happens if WFMI is 38 by May. The buyer of my Puts has the “right” to sell the Shares at 40 bucks, right? Meaning, I would have to sell my common shares at 40 bucks that I bought at 45? Am I reading that right? Ouch, that would hurt.


  6. Sorry, that price target upgrade I saw on X (US Steel). Anybody considering buying Puts, this stock has gone up too quickly. ..


  7. SBUX upgraded by JPM and up 2%.


  8. John,

    Selling the puts is an entirely different transaction. It has nothing to do with owning the stock.
    The put buyer has the right to sell you shares at $40.00. If exercised you would be buying more
    stock, not selling the shares you already have.


  9. Phil
    Thanks for the 3 vices. I have ‘em all and more. Size, Digger and others will agree.
    We all have a need to believe and want a magic algorithm to do all our work for us


  10. John – selling puts on a position you own is doubling your downside bet and (forgive the caps) IT IS NOT A COVER AT ALL!

    When you sell the put, you are giving the “putter” the right to FORCE you to buy the stock at $40 on the expiration day – NO MATTER WHAT THE PRICE IS. So it it drops to $35, rather than getting out of your position, you are forced to buy another x100 shares for $40.

    I only sell puts when I have a short or a longer put covering!

    ================================================

    SBUX – somehow we talked about buying them last week but forgot to!


  11. here’s a couple of books that Optrader recommends reading:
    1. Trade Your Way to Financial Freedom – Van K. Tharp
    2. Market wizards – Jack D. Schwager