Getting Some Style

Last week, I promised some examples of losing your confidence, and how that might affect your trading. In addition, I promised we'd move one step closer to matching your personality to a definable, repeatable methodology. Once again, I'll start with a golf example.

In the early 90s, an Aussie named

Ian Baker-Finch

was at the height of his game, and won the

British Open

. I had a chance to follow him around at the

Colonial Invitational

in Ft. Worth, and sure enough, he was the real deal: a superb ball striker and a wonderful putter.

But somewhere along the way he just lost it, and for over a year he couldn't make a cut. Unfortunately it wasn't a technique or health issue, because in practice rounds he could still break 70.

No, it was a mind issue, as he just lost the confidence to go out and shoot under par. As many of you know, the tough part about golf is that there's a lot of feel involved. Conversely, there's very little of "move your hands to x spot, and you'll hit the ball y distance." The swing is just too complicated for a paint-by-numbers approach. And as a result, once players lose their feel, they lose their confidence, and finally, their games. And there's really no way around it. Even "Mr. Definable Repeatable,"

Ben Hogan

, was done in by a loss of confidence (in his putting). Ditto

Arnold Palmer

. Without a hard set of rules and "data," a golfer has nothing to fall back on other than his past performance. And it only takes a few bad tournaments to wipe out years of good memories.

Now, let's leap over to trading. There are traders who trade exactly like golfers, relying entirely on feel, and eschewing hard data. And some flourish for long periods of time. They bought

Amazon.com

(AMZN) - Get Report

at $12 and

Dell

(DELL) - Get Report

at $2. And they held on while it soared. Great, congrats to them. But what happens if the next time they buy XYZ and it goes from $200 to $4? Was it them? The market? Bad luck?

Well, there's no way of telling. And unless your self-esteem is absolutely bullet-proof, you're going to start questioning yourself. And then second-guessing your trades. And then failing to pull the trigger. And then? And then you're pretty much done for.

How do I know? Because I've been there. What, you think I woke up with a proven, data-tested methodology? No, I started out like a lot of folks: I went long or short based on my feel and for quite awhile was a total discretionary trader.

And then it was one trade that went south. And then two. And then enough in a row that I was almost paralyzed. In fact, I was convinced that not only could I not trade, but that

no one

could make a living trading!

And it was all because I had nothing to fall back on other than my tenuous track record. No data to say, "Yes, I can expect to be right only 40% of the time. Nine losing trades in a row is unusual, but completely within normal probability. I just need to keep at it and let consistency win the day."

No, I had none of that. Zero to boost my confidence and give me the motivation to stick with my game plan. Nothing to prevent my morale from plummeting to zero.

As I subsequently learned, though, trading doesn't have to be like golf. You don't have to rely on feel and instinct. You don't have to draw your confidence only from your past track record. No, all you need is a back-tested methodology, and plenty of real-life data.

Now let's pause for a second and regroup. In previous weeks, I had you do a self-examination, as that was certainly step one. In the past two columns, I approached methodology development from a different perspective, that of seeking to find a process that was definable, repeatable, and met your profit goals.

Great, now going one step further, what's that all mean? Well, in short, once you know what you're looking for in a methodology, it becomes relatively straightforward to find a style that matches your personality. Perhaps more importantly, it also becomes straightforward to rule out potential trading methodologies, because they either a) don't match your personality type; or b) are -- repeat after me -- definable, repeatable, and able to meet your profit objectives.

Am I making sense yet? Probably not, so let me give you two personal examples.

Example one concerns day trading. It was about this time last year that I wrote about my adventures into this netherworld. You might recall, though, that after a few months I abandoned ship. The reasons were twofold: One, I thought I could make more money with my current methods due to being able to take bigger position sizes (i.e. it didn't meet my profit objectives). Second, I'm not the "day trader" type. I can't concentrate fully on trading for six or seven hours, and during the day I like to write, golf, and tool around the house. (In other words, the day trader lifestyle didn't match my personality.) In short, despite its many advantages, day trading wasn't for me.

The second example concerns the methods of fellow writer and trader

Jeff Cooper

. I interviewed Jeff last January, and have a great deal of respect for how he trades. The problem, though: Even he admits that his exits are discretionary, and as a result many of his methods are almost impossible to backtest.

Furthermore, while you can set up a computer scan to look for all his setups, even Jeff will say he only takes some of the many candidates available. So, in a sense he's discretionary on both the entry

and

the exit. And the more discretionary a trader is, the less reliable his or her data, and the further the process moves from definable and repeatable. Frankly, I never got quite the results Jeff manages to achieve, and if I had adopted his methods full-time, the lack of hard data would have made me a basket case during the first losing streak.

So, in both these examples, you can see the mismatch on personality and the lack of back-tested data prevented me from becoming a day trader in any form. These approaches weren't definable, repeatable, and certainly not for me.

Therefore, if you're trading already, ask yourself if your style fits your personality. And if it fits your personality, do you have enough data to adhere to your method even during a bad streak?

If the answer is no, you obviously need to change. Next week, I'll start to wrap this series up with some thoughts on paper trading, expectancy, and sticking to your methodology.

Gary B. Smith is a freelance writer who trades for his own account from his Connecticut home using technical analysis. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. This column, Technician's Take, appears every Monday. Smith also writes Charted Territory, which appears every Wednesday, and TSC Technical Forum, which runs Saturdays and Sundays.