Monday, February 16, 2015

How to "Pull the Trigger" on Your Trading Ideas

In our last post, I quoted hedge fund manager, Jim Leitner on the importance of following up on your investment ideas. 

Today I'd like to follow up and share some thoughts on how you can learn to consistently "pull the trigger" on your best trading setups and investing ideas.

In order to help you do that, we'll take from the best and offer up key insights from interviews with top traders and trading psychologists like Alan Farley, Brett Steenbarger, and Doug Hirschhorn

Now before we get to their key insights on overcoming trading anxiety and pulling the trigger on your trading ideas, let's remember what Jim Leitner said in his interview:

"Learn to love to listen to people and when you hear something interesting, follow up on it. Don't just think, "Well that's an interesting idea" only to find out a year later that the company you could've bought shares in is now up 500-fold. You never want to say woulda, coulda, shoulda.".

The method Leitner stressed to aid us in following up on our investment ideas was taking a small initial position. As I wrote in that post, a small "feeler" position can help us get a toe in the water while keeping our capital risk defined. As the trade goes your way and you begin to see a profit, you can always add to the position (or cut back) in a responsible way. 

Poster via Keep Calm-O-Matic.

What if you're not sure how to enter a trade ("do I buy a breakout to new highs or buy on a pullback?"). Or what if you're not exactly able to clearly articulate your reasons for taking a trade? Or maybe you just don't know if this particular trade will work out in your favor.

Alan Farley addresses these questions in his "Pulling the Trigger Q+A": 

"You're really asking the ultimate Zen trading question: How do I know I'm right? 

Zen answer: There is no right and no wrong. You manage risk. Do that well, and you're right.

Breakouts and breakdowns either go or they don't go. Most of the time you can't tell the difference. Some patterns are easier than others to interpret, and certain kinds of setups have a gut feel that tells you the coast is clear. Just control risk the rest of the time and take the trade to its logical conclusion.

Remember the input you have on the position's outcome. First, you can choose a small position instead of a large one. This keeps your risk small if you're wrong, but you can still make money if you're right. Second, you can take your best shot and keep a tight stop-loss. You take the loss and move on if you're wrong. You add to your position if you're right."

Olivier Tischendorf has written about the importance of trading meaningful position sizes

However, there are times (in choppy market conditions, or after a tough losing streak) when you may want to enter trades with a position size that is smaller than usual. This will help you to focus on your overall process and prevent you from assigning too much importance to the outcome of a single trade. 

As Olivier summarized it in a recent conversation:  

"Small position sizes allow you to approach the market in a disciplined and non-emotional way. It helps to overcome the paralysis of analysis. 

If you struggle emotionally with trading, you should trade smaller position sizes. You'll be more process oriented instead of focusing on the outcome of a single trade. This will allow you to "Just Do It" vs. second-guessing yourself on trades."  

Many times, it seems, the failure to follow up on our investing or trade ideas can be traced back to simple fear. Fear of failure, fear of being wrong, a lack of confidence in our skills, or a poorly vetted trading process may be holding us back in our trading development. 

Tim Bourquin interviewed 3 top trading coaches, Dr. Brett Steenbarger, Dr. Doug Hirschhorn, and Dr. Gary Dayton, about these fears and the performance anxieties we often face as traders. 

They offered up some helpful ideas and exercises in, "Overcoming Your Fear of "Pulling the Trigger"":  

"A lot of traders haven't gone through that kind of developmental process where they first practice their setups then they trade them small, and then they trade them larger.

They're too eager to get right in there and jump right in and trade. And as a result, they don't have the battle test experience. They don't have the confidence in their setups and it can show up as hesitancy and problems in pulling the trigger." - Brett Steenbarger

"Trade in smaller sizes. That's how you practice the skill. Get yourself comfortable with actually putting the risk on and putting the trade on. Because once you can do it with small size and the only differential is changing the default on the size." - Doug Hirschhorn

"What matters to a trader? Well, identifying trades, taking trades, managing sound trades setups and managing them to completion. And if it's only 10 shares, then it's only 10 shares, but that's still taking a step in the direction of what's most important. 

And then be mindful about it as you're doing it. Note what thoughts and feelings you're having. And just pull back from them and accept them as thoughts and feeling that pass that come and go" - Gary Dayton

So whether you're an experienced trader or a newbie investor, I hope you'll come back and reference this post whenever you need encouragement to pull the trigger and act on your research and investing ideas. I hope some of this material helps you as much as it has helped me (even as I researched and wrote this entry).

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