Insanity

Insanity -- by Bill Kraft
Copyright 2011, Makin' Hay, Inc., All Rights Reserved

Bill Kraft Editor

It is not unusual for traders who contact me for assistance to tell me exactly what they are doing. I normally start by asking three questions. The first question is: "What is your exit strategy at the time of entry?" I am no longer surprised when this question is met with silence and if we are face to face, a very blank look. I then ask: "How are you doing?" All too often the response is that they have not been doing very well. I then ask about how long they have been using that particular methodology or strategy and the answer often is that they have been doing the same thing for quite some time.

The old saying is that the definition of insanity is repeating the same thing over and over and expecting a different result. While most of the folks I mentioned in the first paragraph are not insane, it seems that their approach to trading may have some elements of insanity. A first step in that direction may be that they have no overall trading plan and no plan for any specific trade. That frequently can translate into letting losses run and/or cutting profits; precisely the reverse of the desired performance. The trades lack discipline and are controlled by emotion. At some point, one would hope that the trader catches on that his approach isn't working and needs revision.

As many long time readers already know, I advocate paper trading as a way to learn specific strategies and methods. It seems whenever I suggest that paper trading may be helpful I get responses from some subscribers who argue that paper trading doesn't help and is a waste of time because it does not incorporate the same emotions as real money trading. I completely agree that the emotions of real money trading are not present in paper trading but I disagree with those who contend it is not worthwhile. For those who take it seriously and do it properly there is a lot of helpful knowledge to be gained. For example, an option trader who enters a debit spread without understanding how the trade might be adjusted with price movement over time may well see his trade fail while someone who has learned and practiced adjustments on paper could wind up with a very successful trade even though both started with the same trade.

One comment I often hear from the unsuccessful is that they do not use stops because they have been stopped out in the past only to see the play reverse directions after they exited. That is something that does happen to traders sometimes, but is it better to let losses grow because they had no stop? Could it be that with practice they could get better in placing their stops? That has been the case in my own trading. Practice and observation has helped me place much better stops than when I began. Even if one is stopped out of a position, there is no law against re-entry if the position turns back in a positive direction.

One very helpful practice, it seems to me, is to keep some kind of a trading journal that includes information as to the reason for entry, exit strategy, entry price, exit price, profit or loss and what actions, if any, the trader took during the course of the trade. Once the journal entries are made it seems like a good idea to look back on them at regular intervals to see what one has done wrong and, at least equally importantly, what one has done right. It is a way to help end the insanity.

For those who persist in doing the same thing over and over and expecting a different trading result, ultimately the result will be different. Those people eventually will run out of money and the trading career will end.

Good Trading!

Bill Kraft
Editor of $10 Trader, Option Trader and Trend Trader