Wednesday, August 21, 2013

Two of the hardest things to learn

At the recent Investor's Business Daily CANSLIM meetup, someone mentioned two of the hardest things for traders to learn:
To admit that you are wrong, and to ride a long term trend. Depending on a person's personality, one tends to be harder than the other, and they do tend to work against each other. A person can always rationalize about long term if they are sitting on a loser. A person can always want to take profits saying that they were wrong about the long term trend.

The context was for floor traders, the hardest thing is to admit you are wrong. Most men that become floor traders have healthy egos, alpha males, so admitting you are wrong is not something they learn easily. The other side is after getting burned, or whipsawed, it is easy to want to take profits after a small move, instead of riding a big winner.

Some may say this is doublespeak, but there is some wisdom in these cliches. One reason to keep a trading journal (and that is basically what this blog is), is to learn from your mistakes. Having a written record and in this case a public record tends to help a person learn more from each trade. The reasons that a person went in, and why they got out. If they followed a plan, some indicator, some talking head on TV, some blog writer, or other financial writer, some news item.

For me, riding winners is one thing I am learning from attending the CANSLIM meetings. As long time readers observe, most of my trades are low risk, low reward, high probability. Some describe selling way out of the money naked puts as picking up nickels in front of a bulldozer, because there is the low probability risk of a big loss. 

Lions Gate Entertainment LGF has been an example of not getting the full value of identifying a winning stock. The stock has more than doubled since I started trading it (15 now 34). Because I am mostly selling puts, often puts way out, I haven't made as much as I might have doing other strategies. Of course, some of this is hindsight. If I was sure that a stock would double in 18 months, there isn't much need to hedge or do conservative strategies, just go all in and let it ride.

The other side of this was mentioned at the meetup. A person took a position in a recent IPO before earnings. The report was poor and the stock dropped. Boeing and the troubles with the 787 is another example of how news can have a dramatic effect. Hopefully I can learn to get more profit out of a long term uptrend or downtrend and still temper the risk. And yes, despite decades in the markets, I am always open to learning. Even a beginner sometimes has something to teach me. In my younger days, I was sometimes too arrogant. I see it sometimes on various forums, that some people would rather argue than listen, rather preach than possibly learn. 

The other side, is that a person does need to make their own decisions and be confident in them. Relying and being dependent on another person's advice is different from listening, and perhaps adding that information.

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