Rebuild Confidence After a Bad Trade

Last week I made a call on Dick's Sporting Goods (DKS - commentary - Cramer's Take) that went bad. It reinforced for me a point that is easy to lose sight of: that successful traders think in terms of the quality of the trading decision, not the outcome of the trade.

The Outcome Trap

The stock opened at $35 on Aug. 16, down from the previous day's closing price of $39.23. On the basis of previous patterns of similar stocks and what I was seeing in the tape, I expected some recovery, so I went long around $33.50. It continued falling, stopping me out. And as often happens, someone looked at that beaten stock and said to me with a smirk, "Wow, Ken, I'm sure glad I didn't do that trade!"

A narrow escape can generate feelings of gratitude and relief, a self-righteous pat on the back and thoughts like, "I knew it! I did the right thing by not entering that trade!" But trading has a way of bringing out our weaknesses, and the psychological games we play with ourselves can be very subtle.

For instance, Tom, a professional full-time trader for a couple of years, was starting to learn this. Anyone can learn patterns and setups and trading signals. But can you consistently act on those signals and keep a stop when you are wrong? That is what will determine your success or failure at trading.

Tom came to me saying he'd been having a problem: "Lately I'm in a phase where I see opportunities and know they'll be good. But I hesitate and let them go, only to rip my hair out after watching them fly. Then I rationalize about why I didn't pull the trigger. It drives me nuts. I feel like a total wimp for letting this happen. You know that feeling, when you let something go? And it wasn't guessing -- you knew it would be good. All the buy signals were there, but you actually feel frozen."

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Ken Wolff is founder of MTrader.com, the first educational daytrading site on the Net, and co-founder of Investingonmomentum.com, a Web site devoted to short-term potential for retirement accounts. TheStreet.com has no affiliation with InvestingOnMomentum.com, and no endorsement of InvestingOnMomentum.com or momentum trading is intended. At the time of publication, Wolff had no positions in any of the securities mentioned in this column, but positions may change at any time. While Wolff cannot provide investment advice or recommendations here, he appreciates your feedback; click here to send him an email.