Traders often develop a certain set of skills that help them achieve success. Then, in an attempt to increase profits, they end up deviating from their expertise. This happens unconsciously, and traders often aren't aware of their errors until there is a drop in profits. Expertise is not necessarily measured by the methods used but also the mental time frame used for decision-making. All traders have knowledge, but knowing when to put that knowledge into practice takes true expertise. Some traders are better at making split-second decisions, while others need to sort information logically. In the middle of these extremes are traders who make quick choices but are basing their decisions on long-term criteria, logic and education. How we make decisions in life should align with how we trade; if an alignment is not attained, any study and effort will be wasted. (Do-it-yourself trading can be very rewarding - both psychologically and for your wallet. Check out Create Your Own Trading Strategies.)
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Determining How Your Decisions Are Made
Every one makes decisions in his or her way, yet there are common elements in the process. One key element is the time frame in which individuals make decisions. Some people are referred to as impulsive, while others are methodical. Then there are people who seem to be both. The type of person you are should match your trading method.
Some people make decisions in an instant. Even if they think something through, they are in a rush to "pull the trigger" on what was likely already decided even before deliberation took place. The traders making split second decisions likely have trades that only last seconds before another split second decisions determines the exit. These traders thrive as "scalpers" in the market place, getting in and out of positions largely on intuition, even though that intuition is based on a broad background of trading experience.(We look at different styles of scalping and how they can all be very profitable. Read Scalping: Small Quick Profits Can Add Up.)
Other traders require deliberation. They make decisions slowly and only after careful consideration. They deconstruct information and then try to rebuild it into a logical trade decision. These people resemble detectives gathering information to determine a suspect - or in this case - a trading decision. They will gravitate toward long-term investing or swing trading, where decisions can be made slowly and methodically.
In between the two extremes, there are people who accumulate a broad knowledge base but then must act on the information rapidly. In life and death situations, physicians must act in this way. While their training can be used to make methodical decisions, it can also be drawn on to make immediate decisions. This type of decision process pertains to many day traders, who generally aren't scalpers or swing traders. These types of people (if they decide to day trade) make several trades a day based on a wide range of information or signals, but when the time comes, they react quickly and make the trade that their analysis and education has produced. (To learn more about day trading, check out Would You Profit As A Day Trader?)
When Trading Goes Awry
Traders who begin within their mental time frame will likely experience success early. Yet as traders mature, they will often try to incorporate other methods of trading to improve results, leading to a deterioration in performance. A scalper, for instance, begins to look at longer term moves and wants to catch more of the move. Therefore, the scalper still makes split-second decisions to get into positions, but then he or she must battle the instinct to exit quickly. Even though logic will dictate a longer term trend could bring more profit, the internal nature of split-second decision making will likely sabotage the trader's patience. At this point, it is clear that the trader has abandoned his expertise (in this case, scalping) and will likely end up holding onto losses while chasing short-term profits to compensate. (Learn to overcome one of the biggest trading hurdles in Master Your Trading Mindtraps.)
Traders who do not begin in their niches will likely feel uncertain about what they should be trying to achieve and the strategy they are trying to implement. Unless drastic personal changes are made (or the trader is extremely disciplined when making uncharacteristic decisions), the career will likely not last long.
Why a Time Frame Matters in Trading
You may think that if a trading plan is in place, all a trader needs to do is follow it. While this is easily stated, the reality is much harder. Trading is no different from any other area of life. If what we are doing does not align with who we are, conflicts develop and it becomes easy to move off course. It is not a bad thing; our mistakes often tell us what we should be doing and how we should be trading.
Aligning Our Decision Process with Our Method
While our mistakes tell us a lot, the emotion of a situation can overshadow any potential lessons learned. After making a mistake, traders often ask themselves the same questions:
- Why am I always so impulsive? If you're asking yourself this question, you should move to a style that actually requires impulsive action, such as scalping.
- Why didn't I get in/out when I had to? If you're asking yourself this question, you should move to trading on a longer time frame, where exact entry and exit matters less.
Each of us is capable of making logical decisions in a split second, yet each of us gravitates towards a default method. How we are trained and live our lives will determine what our default is. Therefore, we can choose to change; an impulsive person can become more methodical and vice versa. However, trading should not be used as a method of practice for personality adjustment or self-improvement. Personal change can come without risking your finances.
Traders should make sure that the decision process used to get into a trade is also dictates the exit strategy; an impulsive entry will require an impulsive exit. A methodical entry requires a methodical exit.
The Bottom Line
Listen to your internal dialog after a trading mistake is made. Is there a recurrent regret after each error? If so, it likely stems from an aspect of your personality that is difficult to alter. Rather than struggling to reform your dispositions, try modifying your trading strategy to work with your mental time frame. A perceived weakness can easily be turned into strength - for example, using an impulsive nature to excel at scalping. Being methodical is not wrong either; it just requires a move to a long-term trading strategy. To make the best use of your expertise in the markets, align your trading with your current decision-making style. (For more on learning how to trade, see Day Trading Strategies For Beginners and Mastering Short-Term Trading.)