| Perils of Perfectionism |
| By Price Headley |
Published
02/3/2005
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Stocks
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Unrated
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Perils of Perfectionism
The desire to be perfect cost me plenty of money in the early days of my trading career. Why? Because a perfectionist cannot take a loss, so small losses can easily turn into bigger losses for the trader who is not able to admit being wrong. Plus the trader will try to book a profit too soon to feel like a winner. Read on below for methods to tame perfectionist tendencies in trading."It was never my thinking that made the big money for me. It was my sitting. Got that? My sitting tight...... Men who can both be right and sit tight are uncommon. I found this one of the hardest things to learn........It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance." Edwin Lefevre, Reminiscences of a Stock Operator. Why do we let losses ride and cut profits short? Perfectionism tends to not allow traders to take their losses quickly, as they are too concerned about looking good to others and not wanting to admit they are wrong. This leads to the dreaded hope for a return to 'breakeven' to get out without a loss. But does the market care about where you bought the stock? NO! The market is going to go wherever it wants to go, and your job is to see that trend and recognize when you are not in tune with it to get out of such trades.We all have this tremendous desire to prove ourselves right, when in the markets we should concerned ourselves more with making money than the amount of times we are proved right. This means winning ideas need to be ridden longer than average while losers need to be cut short quickly. Our school training says there is one right answer, while in the markets there are many ways to win.Perfectionism can not only keep you hanging on to losers too long. It can also keep you out of the best performing stocks. On stocks that rally sharply, I sometimes have to fight the feeling that I've already missed out on the move. In retrospect, many of these stocks go on to much bigger gains than the initial gain I missed. Traders tend to desire a perfect entry, and this leaves them on the sidelines during major trends. It is these huge trending trades which carry my portfolio historically, so I have to make sure I am participating in these big moves.Ironically, perfectionism does not lead to higher performance nor greater happiness. Perfectionism can destroy your enjoyment of trading. Focusing on flaws and mistakes depletes energy. This may escalate to panic-like states prior to making the trade, impairing objective performance. At some point perfectionistic standards get set too high, and life is measured in units of accomplishment. The drive to be perfect becomes self-defeating, as the individual often places the intense pressure on himself, which can become crippling. Perfectionists share a belief that perfection is required in order to be accepted by others. The reality is that acceptance cannot be gained through performance or other external factors like money or social approval. Instead, self-acceptance is at the root of happiness. Ultimately you must be the one who must live with yourself, so if others think you're perfect but you yourself are never happy, then perfectionism is not helping you to grow and develop to your fuller potential.One way to be less perfectionistic is to set one goal and make it process oriented, not focused on the outcome. If you achieve that goal to improve your trading via that goal, you win no matter the outcome. Perfectionists often seek to control uncontrollable factors in a trade (like waiting for all the risk to be out and everything to look perfect, the quality of the fill on the exit especially, hoping or 'willing' a better outcome by doubling down on a loser, and many more). When a trader focuses on these uncontrollables, he is more likely to tighten up and not be able to pull the trigger to exit a losing trade or miss out on a new winner that has moved 'too far.' By focusing on a process that you can control (say, you will only focus on 5 stocks at a time, or you will work on implementing your entries and exits consistently with a small amount of money to improve your ability to execute trades, or another process-oriented goal), you build confidence in your ability to execute your trading plan.Based on these perfectionist tendencies, I recommend the following entry strategy for perfectionists. Enter half a position as soon as you see an opportunity that generates at least 3 times the reward for the risk at the current market price, then place the remaining half at your desired 'perfect' entry price. For exits, always place market orders, as the tendency for the perfectionist is to try to get a better exit price with a limit, and then keep missing the exit on the way down. Price Headley is the founder and chief analyst of BigTrends.com, which provides daily stock and options recommendations and education.
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