As if the last two months of 2007 weren't bad enough for many investors and traders, the start of 2008 hasn't proven to be any more promising. As the threat of a recession becomes more realistic with each trading day, Wall Street has opened the new year with one of its most disappointing starts ever.
So now that the expensive champagne and cognac have stopped flowing, all that investors are left with is their reality. For some, they can see a bright year of trading ahead, but for others, the holiday market "hangover" continues and so does their poor decision-making.
The Coach Will See You Now
As a performance coach for traders, I have seen many of their pitfalls and problematic tendencies. These are especially apparent when markets are extremely
volatile and unpredictable.
Many investors and traders share a double-edged personality trait: They tend to be perfectionists who are afraid of failure. This allows them to be extremely analytical, focused and detail-oriented. However, on the flip side, they can also be extremely self-critical and their own worst enemy when it comes to making decisions under negative circumstances. They are never mentally or emotionally prepared for accepting loss, failure or being wrong.
In professional sports, there are many parallels to the trials and tribulations of investing and trading. Take the current unbeaten football team, the New England Patriots. The Patriots became immortalized in history this season by winning all 16 of their regular-season games. Often, they didn't just win -- they decimated their opponents and exemplified the word "perfection." But how can you learn from this winning team to improve the way you play the trading game?
Get Over Yourself and Get Out of Your Own Way
To achieve football immortality, the team's coach, Bill Belichick, had to instill rigid discipline in a group of highly paid egos. Consequently, the Patriots have overcome the one pitfall often faced by teams striving for perfection: arrogance.
How they did it: Regardless of how impressive their recent stats have been, for each of his superstar players, Coach Belichick spotlights any areas of weakness. No player is immune from this daily scrutiny by the coaching staff. Belichick's philosophy is that there is more to be learned by drilling down on mistakes and holes in performance than by praising his players for their successes. To maintain perfection requires serious introspection, tune-ups and hard work
off the field
. In active trading or long-term investing, this lesson also holds true. One can never be complacent -- no matter how well (or poorly) you did last
quarter or last week.
Notes From Inside the Action
A couple weeks ago, a seasoned trader came into my office, disoriented, after he took one on the chin earlier that day. He incurred a significant
loss when a trade involving a major
component blew up in his face. He had put his portfolio at risk because he was unable to recognize important data points that would have impacted his strategy. Consequently, he lost tens of thousands of dollars over the course of the day, along with his winning attitude.
A man who was typically confident with his formula for success was now feeling confused and hopeless because of the way one stock was behaving.
His initial theory about the trade was that he would make some money on an expected uptick. However, it dropped over the next two trading days, propelling him to pull out of the trade with a big loss. He was overwhelmed when he watched the stock go up to his predicted price point on the third day. In essence, he should have perceived the trade as a longer-term opportunity rather than a short-term trade. But his market radar was still a bit foggy after a rough fourth quarter. He was still experiencing a trading hangover.
Three Hangover Remedies
As you attempt to correct
mistakes from last year and make improvements to how you approach the market, here are a few hangover remedies and daily drills to help you remain confident, focused and disciplined in 2008.
1. Enhance your mental perspective
: Remember that it is not where you start that counts. It's all about the end result of your long-term process. The bottom line represents how well you did on the whole at the end of the year, not how well you did on a particular day, week or month. Perfectionists tend to obsess over each failed trade or bad day. The key to improving as a trader is to accept loss and failure as a normal part of the game.
: At the end of each day, force yourself to think about the bigger picture by visually going through a calendar. Use this as a visual cue to remind you that one bad day of trading will not determine the outcome at the end of the year.
2. Take inventory of your trades
: It is impossible to learn from your mistakes if you aren't aware of them in the first place. New data points and ever-changing market moves can impact your trading strategy on a daily basis, so it is important to keep a log of the trades that have been working for you as well as the ones that have gone against you.
: Create a log that accounts for all of your successes
failures. Peruse your executed trades for the day and examine which sectors or types of stocks do not seem to be consistently behaving in a rational or logical way (or at least a way that
understand). Keeping a daily trading log is a great way to objectively see where you are hot and which stocks you should be avoiding, because you are not reading them correctly.
3. Know when to walk
: To survive these irrational and uncertain markets, it is important to be optimistic, but not irrationally exuberant. Many young and inexperienced traders and investors continue to hold positions that they feel "married to" because they are just too overconfident. Trading from a stance of overconfidence can end in pain. As individuals with perfectionist tendencies, they feel a strong need to be right on
On the other hand, the best traders do not deny reality and accept being wrong as a part of "the game." When they see a problem, they move on with their next trade. Most importantly, they rarely make the same mistakes twice. So as soon as you recognize that a market strategy or theory of yours is flawed, it's important to get out of it quickly and admit defeat.
: Keep track of each of your trades this week, taking special note of your initial prediction, the data points that led to the trade and the outcome. As soon as you notice you were wrong, get out of the trade. Sometimes, writing down your trades and their outcomes and seeing them on paper can help you remain disciplined and in touch with what's really happening in the market.
Cass is a performance enhancement coach and clinical psychologist for Catalyst Strategies Group (
) who specializes in working directly with individual and teams of senior investment executives, including high-profile CEOs, top hedge fund and prop traders, investors, and financial advisors to help them achieve their financial and personal goals. He works to modify behaviors that are hampering their performance and to give them the mental edge within competitive work environments. He is a licensed clinical psychologist and an expert on the use of psychology in the financial services industry. He has conducted behavioral healthcare studies on retail stockbrokers that indicated that 23 percent of the group measured met criteria for major depression. His research has been presented at both national and international conferences (APA, ICPP). He is a major contributor to columns in On Wall Street Magazine and Traderdaily.com. Cass has also conducted workshops with the Securities Industry Association, Money Management Institute, Trader Monthly Magazine's Peak Performance Workshop, The Wall Street Branch Managers Meeting at the Federal Reserve Bank of New York, and the London Bullion Market Association, the Silver & Zinc Association, the Investment Management Consultants Association (IMCA), and the Investment Products Association (IPA).
He has appeared in the following media: The Today Show, Fox News Live, New York Magazine, Businessweek, Lou Dobbs Moneyline CNN,CNN money.com, CNBC London, Financial Times, London Financial Weekly, Washington Post Radio, NY Newsday, On Wall Street Magazine, E-Trade "On Air," BBC Radio, Reuter's Business Newswire, New York Times, Boston Globe, Absolute Return Magazine.