Do you have a favourite trading quote?
Maybe “the trend is your friend until the end when it bends”? Or perhaps “a
bull market knows no resistance and a bear market knows no support”? I have
a favourite trading quote and while it does not originate from the trading
world it has everything to do with how to manage your trades.
My favourite trading quote comes from the
NASA space program. It was first uttered by Christopher Columbus Kraft
(yes, that’s his real name). Mr. Kraft was the director of the NASA space
programs during their hey-day in the 1960’s when America was racing the
Soviets to the moon.
There were many rocket launches during
this time; however as those of you old enough to remember will know, not
all the space flights were successful. In fact some of the early attempts
were downright disastrous. It was as a result of these errors (and
sometimes the loss of life) that Mr. Kraft evoked a new, but unwritten,
policy at NASA.
This policy was quite simply “if you don’t
know what to do, don’t do anything”. So profound are these words of wisdom
in the realm of trading that I even made them into a little sign that hangs
in my office.
If you don’t know what to do, don’t do
anything. How often as a trader have you been tempted to fidget with your
position for no good reason? I would bet that if you looked back at some of
your trades that did not work out, the answer would be “more often than
not”.
It’s only human nature to want to “adjust”
a trade that might not be working out. Sometimes you will be long a market
and the trade will rally nicely for a few days before posting a very
bearish looking day. This is usually when “fear” and “greed” set in and
begin making your decisions for you. It is especially important at times
like these to resist changing your trade if you do not have a good reason
to do so.
Anyone who has been trading for any length
of time knows that the markets rarely make a straight line to their
targets. The markets will usually advance for a few days and then “reset”
themselves before most likely continuing in their original direction. It is
during these times, when the market pauses, that you must exercise a great
deal of discipline and only alter your original trade if you have a good
reason to do so.
This is vitally important. Many traders
will change a position without having a good reason. The market moves
against their position and they begin to panic. With the panic comes a
feeling of having to “do something” to make it better. However, we have a
tendency to forget that the markets are beyond our control. We can not do
anything to change what the market will do, but we can change our position.
Herein lies the problem. In a desperate
attempt to “fix” the trade, without having a good reason to do so, we end
up changing something about or original plan which inevitably leads to less
than satisfactory results.
“If you don’t know what to do, don’t do
anything” can prevent you from “adjusting” yourself right out of your
position. I can not begin to tell you the number of times this piece of
advice has kept me from losing money. Yes, it can be uncomfortable to watch
the market move against you; however unless you have a good reason to
change something about your trade, don’t.
The key then is to know what to do. This
means understanding your trading system inside and out. You need to have
the confidence to know that the decisions you are making are the right ones
and that you are not merely making changes because you feel you have to.
Bear in mind that I am not saying that you
should never adjust your trade. Far from it! There will be times when this
is correct course of action; however you have to “know” what you are doing
when you make the change. Do not change your trade without knowing why. Do
not change your trade simply because you feel you have to do something!
Remember, “if you don’t know what you’re
doing, don’t do anything”. This is an excellent piece of advice whether you
are sending a man into space or trying to pick up a few dollars on a trade.
By following this advice you may find that you keep yourself from doing
something you will only regret later on.
-Erich
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If you don’t know what to do,
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