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If you don’t know what to do, don’t do anything - 11-2-2003

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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