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So This Is Christmas

Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes.

 

There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.

 

Jesse Livermore

Okay – hands up who has a section in their trading plan that accounts for Christmas?

I can guarantee you that only one in ten traders have a section in their plans devoted to the times they will not trade. Most trading plans are geared towards the prospect of constant trading or rather the constant search for opportunities be they real or imaginary.

Within each plan it is necessary to have a series of circuit breakers that tell you when it is not appropriate to trade and I am not talking about price not being above or below X days moving average. What I am talking about is physical and mental relief from the market, conditions that may prompt this partial retirement are.

  1. Illness.
  2. Some form of emotional distress.
  3. The simple need for a holiday
  4. Periods that are not conducive to trading such as Christmas

Much of the logic regarding traders failure to take a break from the market revolve around two rather interesting forms of delusion.

Firstly, they believe that they will somehow miss out on something, that the magical opportunity that will change their life will occur when they are not looking. Interestingly this is similar to the random reinforcement that occurs in gambling addiction. Gamblers receive reward that is completely random. This inability to attribute success to any consistent pattern of activity forces gamblers to be constantly in the game in the hope of repeating this rather haphazard reward.

The similarities with traders are easy to see – those traders without a consistent approach to the market are subject to random reinforcement. The indiscriminate nature of this reward imposes an addiction to always be in the market upon the trader. They believe that if they are not always in the market then how can they win. Interestingly fund managers still believe despite the overwhelming evidence to the contrary that it is time in the market that is important.

In addition to this there is also the rather irrational belief that the market will not be there when they get back. Whilst this sounds strange this form of separation anxiety often permeates many endeavours. I see it often in athletes for whom overtraining is a regular occurrence. Just as athletic performance degrades with overtraining such to does trading. Overtrading (impatience) often causes many good trading systems to collapse as traders take trades that don’t exist and exit positions that are doing well because of the need to satisfy their desire for action.

Trading plans should have time out periods built into them, which stipulate that during this time no new positions will be opened and only maintenance activities such as the moving of stops will be undertaken.

If you want a little mental homework for the holidays find a chart of a stock that has trended well for a substantial period times. Copy the quote below onto the chart and the print it out and put it on your desk to remind you that activity does not equally profitability.

The desire for constant action irrespective of underlying conditions is responsible for many losses on Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.

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The Trading Game Pty Ltd (ACN: 099 576 253) is an AFSL holder (Licence no: 468163). This information is correct at the time of publishing and may not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.

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