Online Trading Errors – Obsession with Keeping Score

May 21, 2010

One of the common errors made by beginning day traders, position traders, and long-term investors alike is spending an inordinate amount of time thinking about and tracking gains and losses before, during, and after trades. Because money is on the line, our decision making is overly conditioned by the fear and greed that accompany this score-keeping fixation.

While we obviously need to monitor our gains and losses, the difficulty comes in when our flexibility to respond is compromised by never being able to get the tally of profit and loss out of our minds.

Being obsessed with keeping score does not appear to be the optimal approach to working with fear and greed.

So, the question that arises is this: At what times is it useful to consider the score and at what times should it be the furthest thing from our minds? Take a moment before reading on and answer this question for yourself. Can you allow for the idea that score-keeping sometimes is best kept out of your mind? Or do you think this is impossible to do?

If we’re constantly thinking about preserving our capital, we will be overly cautious, fearful, and unable to take calculated risks at just those times when we need to strike. The fear of jumping in to buy when a stock has dropped fast but a floor, or resistance point, has not been firmly established is one example of this fixation. Traders say that “scared money never wins.” And money that is being counted up too often tends to become scared rather easily.

On the other side of the coin, using margin to greedily trade in larger share lots than we can really afford because of some arbitrary amount we want to make is another example. In both instances, being too concerned with the score dictates our actions. Emotions¡ªfear and craving¡ªrather than disciplined thinking, prevail.

So, one way we can try to balance both fear and greed is to diminish their strength through the persistent application of clear, rational thought. With clear thinking, emotional swings between fear and greed become less frequent and less intense when they do occur.

It is not that we expect to wipe away all emotion¡ªthat would not even be desirable if it were possible. Because knowing how we feel is important as one piece of data to be weighed in our decision making. We just don’t want emotion to be what we prematurely base our trading decisions on. And we sure don’t want momentary impulses causing foolish, snap decisions.