Module 7 – Execution

Character

Character is destiny.

Herodotus

In previous chapters we examined tools and techniques of analysis, the business of selecting good trades. In this chapter we take up execution, the business of trading well.

As important as analysis is to profitable trading, many fine analysts are poor traders. The ability to make good decisions under fire marks the successful trader. Much of what is required to trade well can be learned through study and practice, but there are certain traits that all good traders must possess in some degree at the outset. Here are three traits essential to success:

Self-Control

The paradigm for success in most fields is control. The successful artist controls his/her medium to create a work of art. Success in medical science is measured by advances in our control over disease. The successful businessperson has control over employees, the production process, and the marketing of products. But the trader works in an environment over which he exercises no control. No trader controls the flow of the market.

An utter lack of control over the market is matched by the trader’s nearly total freedom of choice. With sufficient capital and a brokerage account, traders are free to buy or sell any issue, in any amount up to the limit imposed by capital, at any time during market hours. From among literally thousands of possibilities, the trader is free to make choices, free to succeed or fail any way he or she chooses.

What a trader does control is his or her own pattern of choices. Self-control, not control, is the key to successful trading.

Self-control is vital because all of the natural instincts we possess as human beings conspire to defeat us as traders. If success in trading could be achieved by doing what comes naturally, then beginning traders equipped only with native instinct and enough capital to trade would go on to certain success. Since that is clearly not the case, native instinct must somehow mislead. And indeed it does.

Mistakes of analysis aside, every trading error is a product of doing what comes naturally: taking profits quickly before they disappear, holding losers until they come back, waiting until you are sure the stock will move one way or the other before taking a position, reducing cost by averaging down, taking advantage of a rumor before it becomes news, loading up on a sure thing. None of these tactics seems unreasonable to the novice trader.

Self-control in trading can be learned, but only if some propensity for self-control is already present. Consistent winners, through education and experience, have learned to control–to override–their own natural instincts. Self-control is the edge that allows the pro to compete successfully against traders who have not yet mastered that art.

Self-Esteem

With freedom comes responsibility, and accepting responsibility for outcomes is vital to trading success. Traders who have not already laid down an adequate foundation of self-esteem are extraordinarily vulnerable to failure because they find it difficult to accept responsibility for bad or unprofitable choices.

For the experienced trader, losses are commonplace events. But losses are a threat to traders with low self-esteem. The most likely response of these traders is to put off accepting a loss until the pain of financial damage finally exceeds the pain of self-contempt prompted by the loss.

Traders who become angry at the market after a loss, or who blame “them” or the big interests “manipulating” the market, are attempting to direct responsibility away from themselves. These traders tend to be perfectionists, for whom the need to be right eclipses the desire to be profitable. Their strategy for self-protection is to construe each loss as the outcome of a conspiracy by unnamed others. These traders are never wrong; they have been unfairly victimized by overwhelming and malevolent forces. Consequently, they do not recognize that their own pattern of choices is faulty, and in need of correction. It follows that they will not learn; and because they will not learn, they will fail.

Commitment

The Street is full of victims who didn’t know how and couldn’t wait to learn.

Richard Wyckoff

Many individuals are first attracted to trading because they believe it is an easy way to make money. They do not appreciate the skill level required to compete successfully. It is not enough to learn a few of the underlying principles; one must have a deep understanding. That can only come with persistence and practice.

Only the inexperienced can think that making money in the stock market, year in and year out, by means of more or less continuous trading, is an easy proposition. There are times when it is easy. But let the novice stay at it for two or three years, and he will change his opinion.

Many beginners, unwilling to pay the tuition imposed by early financial and emotional setbacks, cut their lessons short before they have learned to hold their own against the competition. Only a firm commitment to the goal of trading mastery will see the student through.

Despite early reversals, some rookies continue to trade, but are too impatient to learn. For them, trading is reduced to gambling. It would be wiser for these hapless traders to cut their gambling losses short and walk away from the table.

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