Psychological Issue #1 in Trading: Perfectionism

Psychological Issue #1 in Trading: Perfectionism
Why do we let losses ride and cut profits short? Perfectionism tends to keep
traders from taking their losses quickly, as they are too concerned about looking
good to others and not wanting to admit they are wrong. This leads to the dreaded
hope for a return to ‘break even’, to get out without a loss. But does the market
care about where you bought the stock? NO! The market is going to go wherever it
wants to go, and your job is to see that trend, recognize when you are not in tune
with it, and get out of such trades.
We all have this tremendous desire to prove ourselves right. But in the
markets, we should concern ourselves more with making money than the amount
of times we are proved right. This means winning ideas need to be ridden longer
than average, while losers need to be cut short quickly. Our school training says
there is one right answer, but in the markets there are many ways to win.
Perfectionism cannot only keep you hanging on to losers too long, it can
also keep you out of the best performing stocks. On stocks that rally sharply, I
sometimes have to fight the feeling that I’ve already missed out on the move. In
retrospect, many of these stocks go on to much bigger gains than the initial gain I
missed. Traders tend to desire a perfect entry, and this leaves them on the sidelines
during major trends. It is these huge trending trades that have carried my portfolio
historically, so I have to make sure I am participating in these big moves.
Ironically, perfectionism does not lead to higher performance or greater
happiness. Perfectionism can destroy your enjoyment of trading. Focusing on flaws
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and mistakes depletes energy. This may escalate to panic-like states prior to making
the trade, impairing objective performance. At some point perfectionist standards
get set too high, and life is measured in units of accomplishment. The drive to be
perfect becomes self-defeating, as the individual often places the intense pressure
on himself, which can become crippling.
Perfectionists share a belief that perfection is required to be accepted by others.
The reality is that acceptance cannot be gained through performance or other
external factors like money or social approval. Instead, self-acceptance is at the root
of happiness. Ultimately you must be the one who must live with yourself. If others
think you’re perfect, but you yourself are never happy, then perfectionism is not
helping you to grow and develop to your fullest potential.
One way to be less of a perfectionist is to set one goal and make it process
oriented, instead of being focused on the outcome. If you achieve the goal to
improve your trading via that goal, you win no matter the outcome. Perfectionists
often seek to control uncontrollable factors in a trade. For example, waiting for all
the risk to be out and everything to look perfect (the quality of the fill on the exit
especially), hoping or ‘willing’ a better outcome by doubling down on a loser, etc.
When a trader focuses on these “uncontrollables”, he is more likely to tighten
up and resist pulling the trigger and exiting a losing trade, or he’ll miss out on a
new winner that has moved ‘too far.’ By focusing on a process that you can control
(such as to focus on only five stocks at a time, or work on implementing your
entries and exits consistently with a small amount of money to improve your ability
to execute trades, or another process-oriented goal), you build confidence in your
ability to execute your trading plan.
Based on these perfectionist tendencies, I recommend the following entry
strategy for perfectionists. Enter half a position as soon as you see an opportunity
that generates at least three times the reward for the risk at the current market
price. Then place the remaining half at your desired ‘perfect’ entry price. For exits,
always place market orders, as the tendency for the perfectionist is to try to get a
better exit price with a limit, which often results in missing the exit on the way
down.